Q2 2023 Clear Secure Inc Earnings Call
Good morning, and welcome to clears.
Quarter 2023 conference call.
We have with us today, Karen Becker.
Founder Chairman and Chief Executive Officer.
Ken.
Co founder President and Chief Financial Officer.
As a reminder, before we begin today's discussion contains forward looking statements about the company's future business and financial performance.
These are based on management's current expectations and are subject to risks and uncertainties factors that could cause actual results to differ materially from these statements are included in the company's reports on file with the SEC, including today's shareholder letter.
The company disclaims any obligation to update any forward looking statements that may be discussed during this call.
During this call the company will discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter and the most recently filed annual report on Form 10-Q.
These items can be found on the Investor Relations section of <unk> website with that I'll turn the call over to Karen.
Good morning, the second quarter was a strong quarter for clear our bookings accelerated while margins expanded we generated strong free cash flow and returned cash to shareholders, while initiating a new quarterly dividend, we are making good progress on pre check testing and launch timelines on the platform.
<unk> side, we are rebranding to clear verified to better represent the power of our platform.
We're working with Linkedin to expand to other markets. Later this year and we were excited to hear Microsoft's CEO Satya Nadella highlight their commitment to identity on their recent earnings call.
Eight quarters post IPO I am incredibly proud of the results our team delivered this quarter.
Our growing suite of products the partners that we support and members that we serve are a reflection of the power of the clear platform.
Identity is foundational it is here and now clear has been leading an identity for 13 years and today you are seeing that in travel and beyond.
Clear, we believe actions speak louder than words, and our philosophy has always been to put our members first focus on innovation and leave our mission of enhancing security and delighting travelers, but I want to set the record straight after some inaccurate media reporting.
There are four key points I want to make first clear enhances homeland security with a stellar security track record, we have biometric Lee verified over 130 million passengers since our founding in 2010.
We have a remarkable industry, leading track record of which we are incredibly proud of.
Enrollment and verification processes are certified as qualified anti terrorism technology by the department of Homeland Security, both our tech and our team members our force multipliers for airports TSA and travelers.
Second of July 2022 incident had been mischaracterized. It was the unfortunate result of a human error, having nothing to do with our biometric verification technology to conflate. The two is just wrong.
For context back in 2020, we proactively implemented one to one face matching technology digitally comparing the enrollee to the picture on their I'd.
As added security to our multilayer enrollment process. This went above and beyond our regulatory requirements. There can be rare instances of false negatives and safe match technology, which can be caused by lighting document quality or damaged Ids and prevent someone who is who they say they are from completing enrollment.
To safeguard against this we had a manager review process to compare the IV with the live enrollees standing in front of them. There was a human error and a July 2022 manager review, we discontinued the manager review policy last year and the small pool of members enrolled through this process have been required to re enroll.
To reiterate this has nothing to do with our technology and to characterize this as a security vulnerability is absolutely false.
Third clear members have been subject to varying randomization rates since 2017 randomization as a tool employed across the entire checkpoint not just to clear we cant disclose the actual percentages as it's deemed sensitive security information, but in 2023 alone TSA has randomly reverified millions of clear passenger.
<unk>.
Finally, as we talked about in our letter we have been working on digital identity integrations. Since 2020. This is a win win bringing the government's future vision to life faster and at scale, while creating an even more seamless experience for travelers. We're in continued conversation to make sure that this transition is smooth for all travelers.
Travel is booming, but the experience is challenging with 1 million more travelers coming through airports every day within the next few years clearly focused on security obsessed with the customer experience and delivering on state of the art technology that strengthens airport security and enhances travel for millions of passengers.
That is exactly what we will continue to do and it is now more important than ever I will turn it over to Ken to discuss financials.
Thanks, Karen this quarter was strong from a top line and operating leverage perspective revenue grew 46% bookings growth accelerated to 43%, while operating expenses increased 28% margins increased by over 4500 basis points.
Already lapped the easier Kobe comps. So the growth we are experiencing reflects the structural shift in travel demand that we talked about in our letter as well as travelers demanding more seamless experiences.
When we went public we said we would evaluate our kpis over time, we are adding two new quarterly kpis after its clear plus members and annual clear plus member usage.
We included quarterly history on these metrics back to 2021 for reference.
Active clear plus members ended the quarter at $6 2 million up 41% driven by same store growth as well as new airport launches.
Clear plus growth continues to be driven by diversity of channels and markets. Our partner channels credit card in the airline partners drove less than 20% of our new bookings in Q2 and was down slightly as a percentage of total versus Q1 levels.
Retention remains strong at approximately 91% above our long term expectations. The most significant driver of retention is utilization.
Clear plus member usage was eight seven times annually or one use every six weeks up 4% year over year.
As travel is booming our overall service levels remain strong.
We are addressing certain capacity constrained locations during peak periods. There are a number of solutions in process, including additional equipment, we engineering lanes and real estate expansion. Our team is all over it and this remains an operational priority.
As discussed in our letter we remain committed to the long term, 35% adjusted EBITDA margin target, we laid out in our IPO roadshow.
This quarter was a good start and we expect high incremental margins in the future as pre check launches platform bookings ramp while growth in these investments slow materially.
This quarter adjusted EBITDA was $20 million and our incremental EBITDA margin was approximately 35%.
In addition, Q2 marked the first time since going public where we reported positive operating income.
Free cash flow of $67 million grew 62% year over year after normalized stock comp free cash flow was $52 million up 81%.
We finished the quarter with $773 million of cash after using $39 million for share repurchase and $18 million for special dividends.
In the quarter repurchased one 5 million shares at an average price of $25 19, representing approximately 1% of shares outstanding.
Given our cash flow performance and our cash position, we have established a regular quarterly dividend policy and declared a <unk> <unk> quarterly dividend to holders of class a and class B common stock, we will use the regular quarterly dividend opportunistic share repurchase and special dividends as levers to return cash to shareholders.
With a goal of increasing total cash returned on an annual basis.
In the prior 12 months, we've returned about $120 million to shareholders.
For Q3, we are guiding to revenue of $152 million to $154 million and bookings of $178 million to $180 million.
Third quarter guidance does not include any contribution from TSA pre check we continue to work collaboratively with our partners at TSA as we make progress towards soft launch in public launch. This year, we will announce the launch dates when we have certainty.
For fiscal year 2023, we expect to demonstrate continued operating leverage and growth in free cash flow as compared to fiscal year 2022.
Now go to Q&A.
Thank you at this time, we will conduct a question and answer session. If you have a question. Please press Star then the number one on your telephone keypad.
Once again to ask a question at this time. Please press Star then the number one on your telephone keypad.
Your first question comes from Josh Reilly of Needham Your call is open.
Hi, there thanks for taking my questions nice job on the quarter here.
Maybe just starting on the topic of randomization our work in your discussion here indicate that the rate of random I E. Checks are up can you just give us a sense.
Is this something that could increase further.
From current levels given a recent press article that alludes to a 100% checks beginning in August here and is there anything you can do to ultimately get that back to more historical levels.
Yeah. Thanks, Josh in terms of the randomization question in the future state when we talk about digital identity integration all members credentials would be transmitted to the TSA hardware. So there'll be no need to show a physical I'd.
In the meantime, physical idea re verification as you said is not new it has been in place since 2017 and the rates are varied over the years and so we can't talk about specific percentages. Unfortunately, but what we can say is we've absolutely been able to deliver a great customer experience throughout the year as again this has been a.
Security theme for over six years, and this is evidenced by our growth retention and MTS, but to your point I think what you're really asking about is what the future of the checkpoint looks like so let me take a step back to take a step forward. We launched in 2010 with smart cards, which took weeks to enroll than we went to the cloud and you could enroll and use it immediately so we have a.
All of our system for over 13 years, and digital identity Standalone and fully integrated into partners is the next phase and so we did speak about the clear lane of the future in our shareholder letter when you enter the lane youre going to use your face for identity well electronically transmit your idea to TSA as nextgen biometric hardware without the need to show a fit.
Nickel I'd.
So we're really excited that this will be a better and faster process and an altogether better customer experience and with travel surging and as Ken talked about.
Wayne lanes in the call.
This is going to be the next step of driving throughput and importantly, we've been working on this since 2020, and so with Nextgen TSA hardware starting to rollout a new digital identity standard is being finalized by the industry. This is a good thing that's going to make the experience more seamless for all travelers.
Got it that's helpful and then in terms of the operating expenses.
As a step up in Q1, a little bit less out here in Q2, you alluded to the cost of getting pre check going in the shareholder letter how do we think about the spend on pre tax versus the investment in the platform to get those use cases up and running what's the bigger factor in the increase in overall operating expenses.
I think the platform expenses has definitely been more material in the pre check experience pre tax investments however, they're both material.
So I think as we go forward and as pre check revenues and bookings scale as b to b revenues and bookings scale.
That's where we expect significant operating leverage because we've been making those investments since 2020.
So they are both important factors in the future operating leverage of the business.
Got it and then maybe just one quick question on pretax.
Obviously, we know you can't give us an update on the exact timing of the launch but.
On day, one of the lines are you going to have a combined bundle.
Pre check in clear or are you going to be selling those.
Kind of separately at first and then are there any synergies on pretax renewals to more easily sign up remember potential members for clear given that their information is already going to be in the system for the pre check renewal.
Okay.
From a timing perspective look we're working collaboratively with TSA, we're making really good progress this year event.
No need to footfall to the finish line with the exact date, but to your point to your question on what happens on day, one we start with renewables on day, one and then we rollout the physical footprint after that and so thats a near term event. We don't have any revenue in the guidance for Q3 and not but it's certainly possible.
And Josh if I can just add to that why we've been so incredibly excited to be a pre check.
Enrollment partner FERC TSA is because this is what we do every day, we have a large nationwide footprint open at $4 30 in the morning till 10 <unk> at night staffed by thousands of friendly and beloved clear Ambassador who are excited to help make travel more predictable and friction free for travelers. This is.
Exactly what we do and so we are ready and it's been a long journey and we're incredibly excited to bring it out on both a standalone basis on a bundled basis.
Your next question comes from Dana Telsey of Telsey Group. Your line is open.
Good morning, everyone and congratulations on the results and also very helpful. With the two new Kpis that you've provided as you think about health care, which you had talked about a while ago expanding the Tam and the letter I think theres another new industry that looks.
Looks like an opportunity in terms of financial services, where are you in these new industries, what could it mean and how much investment spend goes in there and the operating leverage you had you had this quarter.
<unk> is sustainable that can keep going as we move through or does the top line need to hit certain growth rates in order to achieve that leverage. Thank you.
So I'll start that will start backwards on the operating leverage.
We reiterated our commitment to the 35% long term EBITDA margins that we've talked about in the IPO Roadshow. This quarter, we obviously had 35% incremental margins and so in order to get to 35%, we would expect higher incremental margins going forward and thats really a function of the investments that we've made the growth rates slowing material.
<unk>, which we cited in the letter and then the bookings ramping there, but we also think we have a lot of upside from a margin perspective in the core aviation business. So there's sort of multiple ways to achieve that which we expect going forward.
And I'll turn the health care question over to Karen sure. So on health care, we continue to see progress there with new partners and with the cares Act and fines around the Cures Act.
For lack of compliance really starting to come to fruition companies are extremely focused on identity being part of their platform because that is an important piece of compliance. There. So I think thats been a real catalyst in the marketplace, even though that cares act has been in place for seven years.
And the activity is is the here and now a moment I think as well as the consumers of health care and literally every company you talk to you in health care. So they've been trying to solve identity for 20 years and connecting people to their health care data, having access to it and then I do think there is an AI piece.
Here as well that when people have access and control of their health care information that compute on top of that can really drive better outcomes. So again, I think identity is more important than ever and healthcare and youre seeing that team sign more partners and the partners that we sign come to come to life, which then allows people to talk about their experiences which is why we include.
<unk>.
A clip in our letter about one of our partners talking about clear as a health care partners. So I encourage you to listen to it in terms of financial services look identity is incredibly important and we think about that broadly right. So it's not just banking right it could be gaming and things of that nature.
Identity, where <unk> matter. So I would just say stay tuned on that front from a product perspective.
Thank you.
Your next question comes from Scott Devitt of Wedbush. Your line is open.
Thank you I had three.
First one Karen you mentioned 1 million more travelers in the airports by 2030 and.
Evolving traveler preferences post pandemic.
Preferences seamless experiences drivers for.
For continued growth and I would assume airports.
As a driver as well more recently, Alaska southwest and Jetblue.
Noted some weakness in domestic travel in the short term I was wondering if you could just kind of marry up those longer term dynamics.
The end points that <unk> mentioned in the short term going up or down influences the ability to add subs.
Question, one question too Kevin in the fourth quarter you.
You referenced.
Same store sales bookings number it was relative to I think the same quarter in 19, I don't know if thats something that we keep up quarterly but if so.
What the same store sales number is relative to whatever you think the comparable year is now.
And then third at the IPO you had 38 airports I think that was 57%.
Employment coverage and now Youre at 53 do you have a sense of the coverage that youre at now thank you.
Okay, Let me start with the travel trends and then I'll turn it over to Ken.
So I think we all agree travels incredibly strong right now and Youre continuing to see People's desire to travel.
Airlines, who have reported last week talked about capacity is still expected to be up 10% to 15% in the second half of this year and U S passenger growth accelerated in July up 13% from 12% in June and up 11% in may and the second quarter over 11% of checkpoint traffic in our airports came through a clear lane and we experienced restaurant.
As Monterrey Airport Verifications in June So I think when you look ahead.
Anytime someone talking about domestic or international or first class or.
Premium economy.
I think that there are more people coming through airport holistically and that that trend will continue I think there's a lot of puts and takes when you go into cohort in any quarter or any year, but we continue to see an incredibly strong desire to travel and for the travelers. So again, we're at 11% today, we could still double that.
Even in a flat travel environment, which we absolutely don't expect that we have lots of room to grow. These are early days and not just right not just the network the product and the partners. So you saw us announce our partnership with Alaska.
Then it's also the people who are traveling expect a better experience from home to gate and so not only could we add more people at the checkpoint, but new services and you see our home to gate up I do a plug every quarter. If you haven't used it you said it gets better every quarter right, but with traffic.
<unk> ultimately could you have a reserved parking spot how can we do better with rental cars. What can you do with bags and if you have 1 million more people and we're trying to come up with that.
Act number here is at 800000 more bags with 40% of people at bags and each of them have to what are you going to do with those and so it's the whole.
Experience from bag to concessions.
Two security that we're looking to drive in a holistic way we are on the side of the American traveler, they deserve better predictable friction free experiences, we expect more of them and we expect more of them wanting better experiences.
And so on the same store piece.
We put to work about 42% top line from a bookings perspective around $35 to 36% would be the same store portion and the way to think about it is we have very large.
Existing base of the airports of large airports and so you can't have a topline over 40% without significant same store growth driving that and we've seen a very long tail of growth.
Orlando in Denver, we opened in 2010, those are still growing strong double digits. So we see a very long tail.
Growth from a same store perspective, and then in terms of the coverage. We estimate were in the low to mid <unk> in terms of employment coverage domestically.
Estimate, but it's around there okay. Thank you.
Your next question comes from Michael <unk> of Wells Fargo. Your line is open.
Great. Thank you.
Hi, This is David on for Michael.
First question I would say is I appreciate any color you can give on amex great to see the momentum building in here too would just love to understand how investors can think about incremental cardholder awareness of the offering to drive even more adoption looking into year three of the partnership and potentially beyond.
Sure look it's been a great partnership we think it's a win win we have very strong adoption, obviously from a uptake perspective, I think that they continue to do a great job growing their card member base and we get our fair share of that so I think the growth will come from a combination of additional pen.
<unk> and then continuing to execute on their growth strategy. So I think it's a win win and both parties are excited about the partnership.
Okay, Great and then the member usage stats are clearly strong demonstrate the value of the product.
How do you think we can draw in terms of pricing power going forward given these facts.
Look I think that I think that we have pricing power we've exercised some of it we've taken a little bit of price in the family plan, we took price on standard.
Earlier this year. So we have pricing power, we think that we have high retention.
And it's something that we can look at in the future.
I'll just add to that that I think you always want to be adding value to your to your consumers and being that we started at 179 with one airport and Ken and I were always like why aren't they all joining for one airport at 179, but some of them did.
And now we have 53 and 142 lanes I think.
And it's $189 and.
We've taken some price and family. It's a very popular feature for clear going back to my point before on travel, whether your business or leisure family or.
Alone people want better experiences and predictable experiences, but I do think there is also a good better best rate and we're really working on that from a product innovation perspective. So as we continue to grow again on the product side at home to gate capabilities. I think it gives you many different ways to think of.
Pricing.
I appreciate the detail. Thank you.
Your next question comes from Mark Kelley with Stifel. Your line is open.
Great. Thank you good morning, everyone.
I wanted to go back to the newer TSA machines that you talked about.
I saw the cat two hardware, it's rolling out now I think I saw Denver was one of the first at the end of last year.
Is the right way to think about that.
It's going to take some time for those machines to get deployed across all of the airports.
Access to.
And once they're deployed your technology will already communicate with those machines or is that not the right way to think about it.
And then I guess within that.
The machines are all kind of in place.
It sounds very frictionless.
People would probably for some period of time like they still carry credit cards, even though they have a digital wallet would have the idea if needed, but it's a purely digital world.
Okay, Alright, perfect and then is there like a rough.
Timeframe for those machines to be.
I'll say fully rolled out I'm sure there'll be some smaller airports that maybe we won't get them until later, but.
I'm sure those machines don't change often so I don't know if there's any you know history that you can draw upon in terms of timing of of that rollout, but that would be helpful.
I think that question is better off to them, but we would love to help accelerate the rollout in in any way possible.
Alright, that's fair and then the quick one on T. S. A project.
I was just curious if there's is there a updated price that you have in mind I think you know since you started talking about that product TSA lowered their own price by about $10. If I remember correctly can we still expect a discounted price from clear once that's up and running.
You can expect that clear, it's always on the side of the traveler and the consumer and so your expectations are accurate.
Okay, alright, thanks, very much I appreciate it.
Your next question comes from a non dump a ruler of loop capital. Your line is open.
Yeah. Thanks, guys. Good morning, and thanks for taking the questions. Just a couple of if I could actually maybe both of you actually Oh, alright sort of those cities to answer this you.
Can going back to your your comments about higher incremental margins going forward is is that to say that we have now entered the boy the companies that you needed the period, where.
You're gonna start.
Slowed the the invest down relative to the to the scale that you're getting off any investment. So so are you in that period now.
And I mean Navy for Cameron It does sound like you know kind of low to mid sixties and claim that coverage sounds like you guys still have a long way to go you know on on coverage and so you just kind of squaring that whole thing.
For us so we can get a sense of how the growth and the leverage maybe Dallas.
Thanks <unk>.
Cost perspective, you're right the seven.
Seven or letter the the investments and the platform.
<unk> and and preach.
<unk> for that matter will.
Slow materially and that's a function of the fact that we've been making the investments and now it's time to harvest those investments.
If I can just add onto Ken's company I it depends at point I'm I'm part of Ken's Company [laughter].
In the letter we talked about the fact that we were owners and we think about the long term and we've invested for the long term, we put those investments in place for the past.
Three to four years right ahead of Ah, our mobile launch, which launched into health Catholics, then launched into the platform and pre check investment.
And were rational economic people and we are responsible team who put the investments in place and are now ready to harvest. The top line. If you will off those investments you couldn't get one without the other in terms of the coverage, it's about network products and partners and and that is consistent.
We have opportunities to grow the network as we talked about 11% of checkpoint volume in our airports on average coming through a clear lane, we have opportunities to drive that we have opportunities to drive new products and new partners I think you've seen that each year and we will continue to do that and I can't emphasize enough and we've been.
Bullish on travel, obviously pre Covid, and then extremely bullish coming out of Covid.
We think that travel has a structural shift in demand and a structural shift and the expectations of travelers and that is absolutely. What we do we leverage innovation to enhance the travel experience to enhance security and delight travelers and would travel growing and travelers.
Expectations shifting because what they are experiencing everyplace else.
It is a huge opportunity for us we have the team we have the products. We have a trusted brand we have a large member base, but still a lot of opportunities to grow them. We have great partners and they are you know we were early and biometric the.
The time is now you need this innovation, it's not an option any more it's a necessity because of how travel is growing and so we are incredibly well positioned to bring these innovations to life and because we felt clear idea to be universal it's interoperable with airlines with airports with.
TSA with hospitals all on behalf of consumers you should only have to enroll one and use it in all these places. So we are incredibly excited by what's happening in travel and what's happening outside of travel as well.
That's all Super helpful contacts guys I really appreciate it.
Quick one more quick one just on the dividend any any early thoughts you can give us on what dividend growth philosophy might be.
And that's it thanks appreciate it.
So we're.
We're gonna be opportunistic and so our goal on an annual basis will be to grow the total cash return.
Right to shareholders, whether it's in the form of the regular cash dividend special dividends or share repurchase. So we're gonna be opportunistic and will flex those three lovers.
Yeah. Thanks.
At this time there are no further questions I'd like to turn the best call back over to Karen for any closing remarks.
Thank you for joining our second quarter of 2023 earnings call I am proud of how the clear team is executing and how we're growing our products and partners as I said several times today identity is foundational. It is here and now and you are seeing that and travel and beyond we're excited about the opportunities in front of us both for our clear travel and clear verified businesses.
As always we remain focused on growing members bookings in free cash flow, while continuing to build a brand that members and partners Love and trust. Thank.
Thank you.
This concludes today's earnings call you may disconnect. Your lines at this time. Thank you for your participation.
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