Q3 2024 Clear Secure Inc Earnings Call

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Speaker Change: Good morning and welcome to CLEAR's Fiscal Year 3rd Quarter 2024 Conference Call. We have with us today Caryn Seidman Becker, Co-Founder, Chair, and Chief Executive Officer, and Kenneth Cornick, Co-Founder, President, and Chief Financial Officer.

Speaker Change: 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 documents the company has filed and furnished with the SEC, including today's shareholder letter.

Speaker Change: The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. And 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 Clear's website. With that, I'll turn the call over to Caryn. Caryn?

Good morning, and thank you for joining us.

Act clear. Identity is foundational.

Speaker Change: Whether you're getting on a plane or logging into your bank account, people expect frictionless, trusted, and secure experiences now more than ever.

Speaker Change: This year, we have focused on three core areas, improving the member experience, scaling TSA PreCheck, and scaling ClearVerified. We are making strong progress across the board, and I am excited for the foundational partnerships announced this quarter, laying the groundwork for future growth and opportunities.

Our expanding nationwide network offers more products helping travelers win the day of travel from home to gate and back again.

Speaker Change: Improving the member experience and travel starts with the lane of the future and we have begun rolling out our new Phase First NV which stands for enrollment and verification hardware with strong early results. Verification is three times faster with significantly less steps for members and ambassadors.

Speaker Change: Moving to face-in-the-lane brings us standardization across all of our platforms and improves the member experience, always privacy first.

Speaker Change: As travel volumes continue to rise, we anticipate another million travelers crowding airports every day by 2030. Innovation is table stakes, and travelers rightfully expect predictable and frictionless experiences.

Speaker Change: Ambassador Assist is now live in three airports with Orlando launching today. As one of the most popular airports for first-time travelers, who doesn't want help from a beloved Clear Ambassador navigating a busy airport on family vacation?

Speaker Change: We introduced four new clear perks since the second quarter with strong early engagement.

Speaker Change: TSA PreCheck enrollment provided by Clear is scaling and we are now live in 62 locations. Today that is 52 airports and 10 Staples locations.

Speaker Change: We are meeting travelers where they are whether at the airport or a convenient retail location at just $1.30 a month We think the value of TSA PreCheck is a no-brainer

Speaker Change: For the 90 million people that travel at least two times a year, there are no more appointments, no hassle, just seamless access to TSA PreCheck.

Speaker Change: Today, we have over 27 million members on the CLEAR platform, and enterprise partners are relying on CLEAR Secure Identity products for both their customers and their employees.

Speaker Change: We're also expanding our channel partnership, such as Okta, as companies are eager to implement full end-to-end identity solutions that are easy to integrate and deploy. With cybersecurity threats on the rise, securing employee access and identity is as crucial as securing consumer identities.

With Okta, we offer a turnkey biometric factor authentication solution.

Speaker Change: The lines between physical and digital interactions continue to blur. A verified identity isn't just a checkmark. It's the foundation for everything we do in a high-stakes digital world.

Ken: These are exciting times, and we remain focused on innovation and growth, driving members, bookings, and free cash flow. Now over to Ken.

Ken: Thanks, Karen. Third quarter bookings growth accelerated, driven by improvements in the airport channel, pricing, strong retention, as well as increased contribution from pre-check and clear verifying.

Ken: We demonstrated significant operating leverage with incremental operating income margins of 63% and incremental EBITDA margins of 50%.

Ken: Active Clear Plus members grew by 55,000 in the quarter. As is typical in Q3, net ads were down sequentially versus Q2. The August price increase had a modest impact on family gross additions and family member retention rates, while positively impacting dollar retention rates.

Ken: We see continued opportunity to grow clear plus members and expect q4 net ads to be up sequentially from q3

Ken: In Q3, gross dollar retention was 89%, up 100 basis points year over year. We are encouraged by the performance of our recent price increases, which has been better than expected and reflects the increased value we are delivering through our expanded network, value adds such as perks, and our improving member experience.

Ken: Our emerging businesses, PreCheck and ClearVerified, are contributing to our bookings and gross profit dollar growth. Over the coming year, we expect to ramp PreChecks in-airport, out-of-airport, and online footprint, which will provide further growth tailwinds. We see out-of-airport locations driving incremental enrollments, expanding the market with strong margins.

Ken: Our ambassadors, and especially our tenured ambassadors, make a huge difference in the member experience and our metrics.

Ken: We want Clear to be the employer of choice, attracting and retaining the highest quality talent. So we recently implemented a new ambassador compensation structure.

Ken: The new structure increases base wages while reducing commissions, which will shift dollars out of sales and marketing into direct salaries over the next few quarters. We expect this to be fairly dollar neutral, but outcome accretive. Early data is encouraging with improved employee retention and increased sales per labor hour.

Ken: We expect 2024 free cash flow of at least $280 million, up 40% year-over-year, including this quarter's outflow of $182 million for the annual payment to our credit card partner.

Ken: Given our cash position and strong free cash flow profile, we have increased our regular quarterly dividend by 25% to 12.5 cents. We remain opportunistic with respect to capital allocation with the goal of maximizing long-term shareholder value.

Ken: In Q4, we expect revenue of $202 to $204 million and total bookings of $224 to $226 million. With that, let's go to Q&A.

Speaker Change: We will now begin the question and answer session. If you'd like to ask a question, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw your question, press star 1 again. Thank you.

Speaker Change: And your first question comes from the line of Joshua Raleigh with NEDAV. Joshua, your line is now open.

Joshua Raleigh: Alright, thanks for taking my questions. How do we think about the impact of the price increases that took effect August 1st and the rolling impact of the family price increase that was already going to impact the numbers to key metrics like net member ads and net retention in the quarter?

Speaker Change: Hey Josh, I'll take that one. Look, let me start by saying we're really pleased with the performance of the pricing. There's been, you know, a significant ARPU gap across our member base due to historical free or deeply discounted pricing and our strategy has been to reduce the discounting and drive ARPU higher.

Speaker Change: So, we're really focused on dollar retention, and that was up 100 basis points year-over-year. And we've seen very little retention impact, but it's really centered around that $70 family members. $70 was the prior year price, where the pricing's up 70% year-over-year to $119. Obviously, this is very highly accretive to bookings.

Look, and I think overall...

Speaker Change: We feel like our value proposition has continued to strengthen. You know, we've expanded our network. We have a larger network today than we did last year. An improved experience, and Karen and I will talk about that on the call, I'm sure. And benefits like perks, where the implied value is over $300 in terms of the value of those perks to a clear member. So really, the clear membership pays for itself today.

Speaker Change: So, that's, you know, that's the pricing impact. And in terms of, you know, net ads, you know, Q3 is typically down sequentially from Q2. We expect Q4 to be up sequentially from here. And I think you have to break it into gross ads, you know, and retention, which drive the net ads.

Speaker Change: From a gross ad perspective, you know, modest impact from pricing specifically on family, on the family attach rate. We think we can recover those ads with post-enrollment marketing initiatives.

Speaker Change: And, you know, while retention was definitely better than we expected, it had a modest impact on, you know, on the net as well. So, you know, we see continued member growth opportunities, you know, if we look at member penetration, MSA penetration across our entire network, it's less than half of the top five markets. So, you know, we think that there's a lot of opportunity there to drive net ads over time.

Speaker Change: Got it. The Uber partnership, you know, that's obviously a pretty impressive logo to add on the verified side. Can you just discuss, is there a commercial relationship associated with the partnership? And

Speaker Change: How much could this increase total cumulative enrollments as Uber riders kind of gain awareness of the broader Clear app? Thanks, guys.

Speaker Change: Now, I think Uber is a great example of identity being foundational and trust and safety being paramount to so many right now.

Speaker Change: Obviously, Uber has many parts of their business, and so we think it's a really exciting partnership because trust and safety matters to riders, it matters to drivers, it matters on so many different parts of the business.

Speaker Change: and so signals are very positive for all stakeholders and there's a lot that we can do together. And again, going back to utilization, utilization today isn't just about the airport. It's about where you can use Clear outside the airport. And the ability to go from multiple times a year to multiple times a day is the power of Clear being a secure identity network. So I think it is great for members. I think it's great for Uber. And I think it is great for growth. Over the long term.

Speaker Change: And your next question comes from the line of Ben Miller with Goldman Sachs. Ben, please go ahead.

Ben Miller: Great. Thanks for taking the questions. I guess just on the pricing side from here, should investors expect a more regular way cadence of annual price increases over the next few years or will it continue to be more, I guess, tactical on a tier or channel basis to close that gap?

Ben Miller: And then second, as you've taken price, have you seen any noticeable shift in what the crossover point is in terms of in-airport uses per year, where a member still finds value versus one where they might churn? Any insights there would be helpful.

Speaker Change: So let me start by talking about pricing and strategies and thoughts there and then Ken will take utilization and the expansion of the TAM that we're seeing because we used to be in sort of the front of the plane when we started and now we're throughout the plane so you're seeing the travel TAM grow enormously.

Speaker Change: You know, in terms of pricing, and I think we said this, we started 14 years ago with one airport at $179, and that was very unscientific, it was kind of Ken and I sticking our finger in the air and saying, you know, what should we price and what was the old product priced at when it had 16 airports.

Speaker Change: I also think that there are opportunities over, you know, the next few years to stratify and create different tiers. So pricing is definitely part of our ongoing strategy, but first it starts with creating an unbelievable member experience.

Speaker Change: from home to gate and back again in the lane and and you're seeing today we launched our Envy space first at JFK in San Francisco so if you're in those airports you can see them they're in test phase as we roll them out across the country.

Speaker Change: We are absolutely transforming travel. This is an incredibly exciting time. And when you create value for your customers, they will pay for it. Yeah, and in terms of the break point, if you will, on...

Speaker Change: verification volumes. I mean, look, that verification volume or frequency is definitely the most important driver of retention. We see a very low breakpoint. We're well above, you know, the level where we would see any impact on retention. It's obviously correlated, but there's really a step function like it and it's well below the average utilization today. But that being said, you know, we're looking at perks and things of that nature to deliver incremental value to potentially lower frequency users to drive retention higher. Clear mobile lanes, which, you know, are the the QR code based lanes that we've talked about in the past, those drive utilization and increase frequency in our network as well. And then things such as Uber and sports, those are types of transactions.

presidency.

Speaker Change: This question comes from the line of Corey Carpenter with JPMorgan. Corey, please go ahead.

Speaker Change: Hey, this is Danny on for Corey. For the first question, as you think about GSA pre-check expansion, can you maybe talk about your priorities for increasing geography footprint and what the out-of-airport expansion could look like outside of the Staples locations? Then I have a follow-up. Thanks.

Absolutely.

Speaker Change: So PreCheck continues to gain momentum. Metrics doubled sequentially. That's number of average locations, pre-enrollment pipeline more than doubled quarter over quarter, and revenue doubled quarter over quarter. So as we said, today we're in 52 airports and 10 Staples locations. You will continue to see a scale out of airport locations. So this quarter we're going to launch the Oculus in New York, again, meeting travelers where they are. So if you're downtown New York City or happen to be in that area, you can go enroll in PreCheck at the Oculus or Mall of America. As we've said, given the price point of $1.30 a month and numerous credit cards that reimbursed for TSA PreCheck, we continue to believe that the TAM is over 90 million travelers. If you travel two or more times a year, we will continue to expand our Staples location.

locations.

Speaker Change: Moment, so going, you know, to whether it be conferences or two companies.

Speaker Change: And so, again, happy to come to J.P. Morgan Goldman Sachs or anyone else on the call and enroll. Always be selling here. But there are enormous opportunities, universities, meeting people where they are. This is a very portable asset. The pods, you know, move very easily and are structured to be that. So we just have huge opportunities. And this is so important. If everybody could be in pre-check, our airports would be even better. One thing to add, we're also adding locations post-security in our existing airports to really

Speaker Change: Oncentration of locations within our footprint as well and I also just to add to that the beauty of pre check holistically not only as a great for travelers, but today, we have over a 90% marketing opt in rate. So that's really powerful when you look at the whole flywheel here.

Speaker Change: Got you that's helpful. And then on clear verified that Caesars has been a bunch of new customer announcements. This past quarter is there any way to think about how material. This business could be to the P&L in 2025, or maybe timeline of when it could be more material.

Speaker Change: Gotcha, that's helpful. And then on Clear Verified, it seems there's been a bunch of new customers since this past quarter. Is there any way to think about how material this business could be to T&L in 2025 or maybe timeline of when it could be more material? Thanks.

Speaker Change: So I think that is a really fair question and what we've said is first come the members and then come the revenues all that being said pre check and clear verified are contributing to gross profit dollar growth today and so we expect to continue to scale that materially in 2025 with <unk>.

Speaker Change: Channel partners like Okta going point to multi point and having seamless integration means the ability for customers to turn it on goes a lot faster and Youll see more channel partnerships. So a few things have happened. This year not only have we signed material partners like home depot, we obviously already had linked in.

Speaker Change: Our next question comes from the line of Dana Tulsi with Tulsi Group. Dana, please go ahead.

Parangora: Hey, good morning guys. Parangora for Dana. You know, my question is on the airport experience. You know, we were at Salt Lake City Airport recently and, you know, it seems such a better experience than we typically go through it in New York, especially those handheld devices.

Speaker Change: were able to transfer data to the TSA and like no photo, no stop, no ID. It was very seamless.

Dana Tulsi: Thanks for asking that and thanks for noticing. Obviously, improving the member experience has been and remains a key priority, and we have seen steady improvements since February. So just to put some numbers on what you're talking about, the NVs that we're rolling out starting today are three times faster than the existing experiences, combining fewer steps for members and ambassadors.

Speaker Change: Today, we are about 55 to 60 percent through our digital identity integration. We expect to close this year closer to 90 percent.

Speaker Change: So we'll be the majority way through. So you think of the great work that the team has done on next-gen identity starting since last November-December, and how we rolled that out over the first quarter of 2024, and then integrated with digital identity and face-first through this year. So we should be significantly through what you're referring to by the end of this year, and then you'll see the envies rolling out the end of this year and the beginning of next year. So we're really excited by what we're seeing in the member experience.

Speaker Change: And so there's enormous alignment, not only with what we're doing today with TSA, but with the incoming administration and our vision of safer and easier experiences in airport and beyond. So I think it's a really exciting time in travel and in airports to drive the customer experience and make it competitive with what you're seeing throughout the world and other airports. So what you've seen so far is just the beginning, and it's going to accelerate from here.

Speaker Change: That's great. You know, I had one more, a thoughtful question on the tiered membership. I think you used the word tiered membership. You know, you keep adding a lot of benefits to the membership, including like, you know, those ambassador SS that can take you from the gate to the, you know, from the door to the gate and so on. Is there a part of like, rather than price increases, is there a part of a tiered membership over time?

Speaker Change: Thank you. I mean, certainly that's something that we've thought about at this point. We're focused on delivering, you know, incremental value through perks, enhancing member experience. We're taking pricing as you've seen, but certainly as we, you know,

Speaker Change: make our offerings more robust, there would be opportunities to potentially tier that. The Ambassador Assist that you just referred to, that's in three airports. We just launched in

Speaker Change: Just one other point I want to add, which I should have said before, and I think it's the power of data.

Speaker Change: The data that we have on the customer experience is better than we've ever had. And so our ability to make material changes on a lane-by-lane, hour-by-hour basis is really powerful. And so the investments that we've made in data for the past few years are really starting to pay off.

Speaker Change: And so what you see with our data is over 90% of our verifications today are less than five minutes. Right? So we can measure, we can improve, optimize every day, and that is a really powerful investment that we've made that is yielding great returns.

Speaker Change: Our next question comes from the line of Mark Kelly with Stifel. Mark, please go ahead.

Mark Kelly: Great, thank you very much. I just had two quick ones. One is, can you please remind us...

Speaker Change: As you change your pricing structure, how that impacts, you know, your commercial agreements with someone like an American Express? That's the first one. And then second, maybe, can you please give us a little bit more color on the OPEX moving pieces as you change the the structure of your ambassador pay? Thank you.

Speaker Change: Yeah, so we think it'll be, I'll take your second one first, it'll be a few million dollar shift from sales and marketing, which are the commissions, into the base wage and that'll happen really over the next couple quarters. I would say it'll be complete by Q2. We started in a small way this past quarter and you'll really see the bulk of it in Q4.

Speaker Change: of this year and Q1 of next year. Some of it might, you know, bleed into Q2, but it should be largely done in Q1. From an American Express perspective...

Speaker Change: The pricing impact doesn't impact the core, you know, the parent pricing. So the contract is the contract, but to the extent you have a family member, we would get the benefit of that pricing.

All right, perfect. Thank you, Ken.

Bye-bye.

Speaker Change: Your next question comes from the line of Michael Turin with Wells Fargo. Michael, please go ahead.

Michael Turin: Hey, thanks. Good morning. Just on the series of product and partner announcements we've seen throughout the year, maybe you could spend

Michael Turin: some more time on just ranking potential timeline of contribution from some of those. And if there's a framework for how to think about core clear plus growth versus the incremental growth potential from those newer areas over time would be just a helpful framework for us.

Speaker Change: When you say stack rank, you're talking about, you know, some of the deals we've announced on the verified side and how they contribute. Yeah, and really from a timeline to contribution perspective, I know it's hard to kind of prioritize which could be the biggest on a call, but if there is a sequencing you might expect, that's helpful.

Speaker Change: Well, they've been contributing this year, so the partnerships that we've announced, whether that be Community Health, whether that be Home Depot, whether that be LinkedIn, whether that be SureScript, I can keep going, you know, those have all been contributors this year.

Michael Turin: And so the channel partnerships that we've announced this year have not yet been contributors this year, but will be contributors next year. And as I said, we're very excited about our channel partnerships, which are new for us, because that integration, it's not just distribution.

Michael Turin: And so we're really excited about those channel partnerships that we've announced this year. So Virado is a channel partnership in health care and InterSystems is a channel partnership in health care. And so is...

Octa from a workforce perspective.

So, some direct partnerships have contributed this year.

Michael Turin: Our current Partnerships Direct will grow next year because we're finding new use cases. Trust and safety and identity are challenging in so many different parts of businesses. And one of the big things we found this year is it's not just customers, but it's workforce. So when we're doing account recovery or password reset for a company, we might start with workforce. That was new for us this year. We always thought we would start on the customer side and then move to customer, or we might start with customer and then find workforce. So we really are finding significant TAM expansion with our current customers and then channel partners. So those are the contributors next year.

Speaker Change: in terms of clear, verified. Yeah, and then adding to that, look, we've planted a lot of seeds over the past two years and those are, you know, starting to really kick in. Look at, within travel, we obviously think we're gonna see.