Clear Secure, Inc.

Q3 2022 Earnings Conference Call

11/14/2022

spk05: Good morning and welcome to Clear Quarter 3 2022 Earnings Conference Call. We have with us here Ms. Karen Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer, and Ken Kornick, Co-Founder, President and Chief Financial Officer. Please be advised that today's conference is being recorded. I would also like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that cause the company's actual results to differ materially from these projections in our most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliation for the most directly comparable GAAP financial measures can be found in today's 8K. With that, I'll turn the call over to Karen Seidenbecker, co-founder, chairman, and chief executive officer of Clear. Karen?
spk06: Hello. Hello. Thank you and welcome to our third quarter 2022 earnings call. Our third quarter was strong. Clear's beloved frictionless experiences were more important than ever as travelers look to Clear to navigate an extraordinarily challenging travel season. Our platform expansion to enterprise partners with our Powered by Clear product suite contributed to our results this quarter. Clear Plus experienced robust enrollment and verification trends. Same-store in-airport enrollments were up 65% year-over-year, which represents a CAGR from 2019 pre-COVID levels of 26%. In addition, over half of the Clear Plus members who verified in the quarter visited multiple locations, which further demonstrates the power of the Clear Network. In recent years, we have seen an expanded total addressable market for more predictable and friction-free travel experiences. At Clear, we want to serve all travelers and are creating products for people who travel one time per year to one time per week. In addition to our 46 Clear Plus airports, as we welcome San Juan, Puerto Rico to our network today, we now operate 14 reserve lanes, including recent launches in Canada, Germany, and the Netherlands. Reserve is free to travelers where they can make a reservation for airport security, just as they do for restaurants. While always thoughtful about extrapolating recent trends, we have seen several data points indicating that there has been a structural shift in demand for travel, where the lines between business and leisure have been blurred. Between hybrid work patterns to shift to the experience economy and increased capacity created by the global shared rental market, we believe the secular demand for travel has shifted up and to the right. In this morning's earnings release, we thought it was important to share our original pitch slide from 2010, which stated Clear's vision to start and travel and grow into the preeminent identity platform obsessed with the customer experience. We believe in the power of platforms and have built a clear identity platform to be interoperable. In our view, this is an important part of being obsessed with the customer experience, as it allows consumers to enroll once and affirm their identity anywhere. Powered by Clear allows our partners to deliver friction-free experiences to their customers, driving adoption with our over 14 million members and easy enrollment for new users. This ability to connect you to all the things that make you you is a here and now moment. The friction-free future we dreamt of in 2010 is now the expectation. We remain thoughtful of the economic environment, yet we continue to believe the demand for experiences, including travel, will sustain. We also believe that identity is foundational, and our growing network in travel and beyond enables safer, easier, and more economically efficient experiences, both physically and digitally. It's early days for the deployment of these technologies. We remain focused on growing members, bookings, and free cash flow. As Clear has demonstrated historically, we have a nimble business model and can rapidly adjust to changing market conditions as necessary. I want to thank the amazing Clear team who has done incredible work to continue to bring the Clear vision to reality. With that, I'll turn the call over to Ken.
spk01: Thanks, Karen. Good morning, everyone. Our third quarter financial performance exceeded our guidance as the clear network and value proposition continues to expand. Business travel actually accelerated post Labor Day as folks returned to work and hit the road. We expect the return of business travel from deeply depressed levels to complement the strong leisure trends we've been experiencing, providing added strength to our travel business. Overall third quarter booking growth of 47% represents a 31% CAGR from 2019 pre-COVID levels. Of this 31%, approximately 80% in same-store growth. Reflecting the strength of the CLEAR experience and network, net member retention in the quarter was 92.2%. We are encouraged by the unit economics of CLEAR+, including low CPA, high incremental margins, and impressive retention across cohorts. Retention continues to remain above our long-term expectations of the upper 80s. Free cash flow for the quarter was positive $5.3 million, bringing trailing 12-month free cash flow to $92 million. The $92 million includes a complete annual cycle for our American Express Platinum contract. This quarter's free cash flow, as well as trailing 12-month free cash flow, include the approximately $65 million payment to American Express for the year one Platinum contract. We expect continued growth in free cash flow as our growth in bookings and our culture of efficient and effective spend yield significant operating leverage. In Q3, OPEX, excluding the United Warrant Expense, grew 23% year-over-year, roughly one-third of our revenue growth rate. Adjusted EBITDA more than doubled sequentially and adjusted net income is positive in the third quarter and on a year-to-date basis. In October, United Airlines vested in exercise warrants representing 2.1 million Class A shares. These warrants were issued in 2019 and have been reflected in our SEC filings as outstanding warrants. Our partnership with United continues to be focused on bringing new innovation and friction-free travel experiences to their customers. Total cash and equivalents as of September 30th was $701 million and reflects approximately $5 million invested in share purchase at an average price of $22.98, as well as cash used for net settled RSUs. Today we announce a $0.25 special cash dividend. As we noted in our IPO prospectus letter, we are fervent believers in the ANDs, growth, free cash flow, and economic capital allocation to maximize long-term returns. In addition to our opportunistic share purchase program, the special cash dividend is another tool to return capital to shareholders. We will continue investing in organic growth, pursue inorganic growth opportunities, and opportunistically return capital to shareholders. In this uncertain economic environment, we have good visibility into our business underpinned by our recurring revenue subscription model. Our fourth quarter guidance expects gap revenues of $123 to $125 million and total bookings of $142 to $146 million. With an expected Q4 soft launch of TSA PreCheck, We expect revenues from this program to build throughout 2023. We'll now go to Q&A.
spk05: Operator, Q&A. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove a question from a queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start for any questions. One moment, please, while we poll for questions. Our first question comes from Dana Teasley with Teasley Group. Please proceed with your question.
spk04: Good morning, everyone, and congratulations on the very nice results. Nice to see business travel recovering along with leisure travel. It's the travel palooza, Karen, that you had mentioned, I think, last quarter. Two things. On the TSA PreCheck launch, How do you envision that rolling out? How is it planned? How do you see the revenues building there? Any update on American Express and what you're seeing there? And lastly, is there seasonality that we should be mindful of for the retention rate that is excellent but ticked down just a slight bit from last quarter? Thank you.
spk06: Hi, Dana. Let me start with a little bit on seasonality in general. I'll let Ken talk to the retention, and then I'll also give some insights into the pre-stack launch. There's a little static, so hopefully you can hear me okay, Dana. Can you hear me okay?
spk04: I hear you great.
spk06: Okay, great. And then I'll turn it over to Ken. You know, historical seasonality is not showing up right now, and I do think in general, sort of separate from retention, but just a general observation The historical travel trends that you saw are being turned upside down a little bit. So whether it be people coming to the office Tuesday through Thursday and then traveling Friday through Monday, that's just very different than you used to see. Thanksgiving starts earlier. And so I would just say, You know, in general, cross-travel, historical seasonal patterns, you are not seeing. Historically, we saw a pretty big drop-off after Labor Day. And as kids go back to school and people are getting geared up, that just didn't happen this year. So it will be interesting to watch as, you know, this following year shakes out any new trends that appear to seasonality. history is not a reflection of what's going on right now. Ken, do you want to comment on retention?
spk01: From a retention perspective, there's not really seasonality to retention. As we said, I think a couple quarters ago, we started talking about how our current levels of net retention are above our long-term expectations and that we would expect the retention to migrate back to the upper 80s. It's happening slower, quite frankly, than we would have thought, so the retention has been stronger. than we expected, but there's not a seasonal impact to that. It's more of a function of the, you know, that win-back rule we've been talking about.
spk06: And in terms of pre-check, and as we get closer to launch, we'll be bringing more details, but I think it's safe to say that we've always been focused on bringing a value-based and customer-centric offer to consumers. And I think we started to talk about that today, whether you travel one time per year with Reserve, one time per week with Clear Plus, pre-check standalone, pre-check together with Clear Plus, pre-check with the other tools like Home to Gate. There's so much we can be doing. to make the travel experience safer and easier on behalf of the American traveler, so we are incredibly excited to bring this product to market. Again, I would just focus on our culture of value-based and customer-centricity, being obsessed with the customer experience, whether that be enrollment, communication, or pricing. Certainly in a post-COVID environment, you can read online. It's harder to enroll, so we want to be accessible. We want to live our brand with our ambassadors, and so we're really excited to be bringing this product to market, and we'll be bringing more details as we get closer to launch.
spk01: And your last question was just an Amex update. As you saw in the quarter, you know, we've cycled down five quarters, and so we've completed the first contract year. We reimbursed... for the accrual, and so we're on year two. It's still going strong. We're very pleased with the partnership. It's been, we think, additive to our TAM.
spk04: Thank you.
spk05: Our next question comes from Paul Chung with J.P. Morgan. Please proceed with your question.
spk00: Hi. Thanks for taking my question. So just on the pipeline of airport launches, you know, you're at 46 today, you know, what, what can we kind of expect for count to end the year? And as we think about next year, what are some kind of key airports you're targeting? And then within your install base, you know, where are you seeing opportunities to add more lanes and which airports are seeing kind of highest penetration rates and nice momentum?
spk06: So today we did announce airport number 46, so we're really excited to be bringing this here to San Juan, Puerto Rico. You will see other announcements this week. As you know, we don't announce until we launch And so I think we'll end this year hovering around 50. And when you look at the opportunity to bring CLEAR to the top 60 to 75 airports in the U.S., I think I said before that really is our focus. You see the experience that American travelers are having through CLEAR Plus lanes, and it's meaningful from a predictability. You see it in the NPS. You see how hard travel is. So I think it's safe to say that we are talking to all those airports and we've had a lot of new growth this year in the network and we expect that next year as well. And quite frankly, I think travelers are talking, right? Travelers are speaking up. They want it in their airports and we want to bring it to them.
spk00: Okay, great. Thanks for that. And then just to follow up on the cost of direct salaries and benefits, you know, seeing some improvement as percentage of sales. You know, how should we think about the pace of growth there, you know, with new airport signups that seem kind of steady investments there? And then I guess as we think about the overall op-ed space, you know, where are you seeing cost as a percentage of sales come down in the near term and kind of longer term? And how do we think about that pace and what's driving the most leverage into next year? Thank you.
spk01: Sure. Starting with the airport, the cost of direct salaries, that's something that came from a depressed level. We talked about how we would have to bring that back to a normal level throughout this year, which we did. From here, the growth is going to be a function of those new launches. Certainly, when we open new airports, there'll be additional staffing. We talked about that in the disclosure today. In general, you know, we demonstrated strong operating leverage this quarter and really on a year-to-date basis. I think our expense growth is about a third of our revenue growth rate this quarter. And, you know, we continue to have a strong focus on economic efficiency and margin expansion. Not going to give specific guidance on where, you know, margins will shake out next year, but that is a huge focus of ours.
spk06: I would also just add to that that a lot of investment has been put in place ahead of the growth. So the OPEX at an airport is one piece, but all the back end operating expense is highly leverageable.
spk00: Great, thank you.
spk05: Our next question comes from David Unger with Wells Fargo. Please proceed with your question.
spk03: Great, thank you. Hi, can we double click on the enrollments mix? I'm just trying to get a sense of which channel you're seeing the most success in from 3Q, how family and friends is contributing to the meaningful booking speed, and then just, you know, on to enrollments, you know, the percentage of enrollments that's trending towards mobile versus in person. Yeah, would just love some details there, thank you.
spk01: Sure, so just in general, you know, our cumulative enrollments metric encompasses both Clear Plus as well as platform enrollments, and we don't break it out, but what I will say from a Clear Plus perspective, Really, all of the channels are growing on a year-over-year basis and on a CAGR basis versus 2019. So we're very pleased with all of the channels. The in-airport channel is a particular highlight, as Karen mentioned in her earlier comments, and that's a very strong CAGR on a same-store basis and overall.
spk06: If I can just add to that, if you look at our partnerships, so whether that be American Express, Delta, United... platform partnerships, it's bringing the clear brand to so many more people than we used to on a standalone basis. So not only are partnerships a powerful channel, but then those people are bringing on family members or participating in guest passes and things of that nature. So the attach rate continues with strengths. The partnership channel continues with strengths. If you use Clear to get into Allegiant Stadium at the Raiders to buy a beer there, if you use Clear at Avis and you're new to the platform, it's now brought you in a different way, higher likelihood to join. So I would just say that flywheel continues to turn across all of these channels. It really is early days.
spk03: That's excellent. And speaking of Avis, you know, in your shareholder letter, you mentioned that it states your early results indicate that almost 40% of users were already existing clear members. So I'm just curious, thinking about the car rental expansion path and the opportunity to grow across airports over the next 12 months, how to think about that. Thank you.
spk06: Yeah. I think you should think about it on a standalone basis and then as part of the broader travel ribbon. If you go from the time you leave your house when you're traveling to when you get on the plane, there are so many different experiences. And the car piece, whether it be parking, whether it be rideshare, or whether it be rental car, both getting there and then on the other side when you arrive, is an important part of that travel experience that creates added friction. And rental car companies are very focused on the customer experience in different ways and so we think that there's a lot that we can do from a partnership perspective in their app or in other parts of the journey to take friction out and to delight their customers in that experience, which is usually connected to an airport, right? We're really excited about the opportunity to expand not only the network there across the country, but more use cases around that. And going back to the point that we made that I really want to drive home, the interoperability, the ability to enroll once and use in multiple places, that really is about being obsessed with the customer experience. So whether it be dropping your bag or getting through airport security or renting your car or dropping it off, you should be able to just always be you. And sometimes you're an Avis preferred customer, and sometimes you're a United frequent flyer, and sometimes you're over 21 to buy a beer. But you shouldn't have to re-enroll multiple times. And so that's what our platform allows us to do. It allows us to create this experience within the Avis environment for their customers.
spk03: That's great. Thank you. Congrats on the great quarter. Thank you.
spk05: As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Ananda with Loop Capitals. Please proceed with your question.
spk02: Hey, good morning, guys, and thanks for taking the questions. I have a few if I could. Is there any way to think about what your inside the airport capacity increase has been year over year?
spk01: In terms of capacity, just in terms of how many lanes we have or how many pieces of equipment?
spk02: Yeah, I'm thinking, Ken, more like lanes and kind of more like, I guess, lanes would begin to get added, but almost like opportunity, you know, capacity, opportunity, something along those lines.
spk01: Yeah, we think about capacity in a number of different ways. You could add lanes. You could add additional lanes. lanes within a particular checkpoint, we can add additional equipment and increase our capacity that way. So we, I don't have a quantity for you, but we have absolutely increased capacity within the existing airports over the last year, even 24 months.
spk02: And I guess really the genesis of the question is trying to get a sense of how much of the growth that you guys have been putting up is folks coming back to the airport, you know, capacity being put on, capacity at all contexts, you know, impact, impact of just word getting out about the company and the company's services, those sorts of things, at least in an anecdotal sense. This is sort of the mental map I'm trying to create for myself.
spk01: Yeah, I mean, so I did do it. From a bookings perspective, we showed 47% bookings growth. And my earlier comment, that's actually a 31% compound annual growth rate from 2019 pre-COVID levels. And roughly 80% is actually same store. So the 27 airports that were open in Q3 of 2019, that same store piece is like 80% of our overall 31% CAGR. So hopefully that gives you a sense.
spk02: Yeah, that's useful. It opens up some other questions, so I'll take it offline with you. And just another quick follow-up is, in your cumulative platform uses metric that you provide, anecdotally, any way to think about how much of those are kind of in-airport versus out-of-airport or sort of other aspects of the platform? And that's it for me. Thanks a lot.
spk01: Thanks. Yeah, so we don't break that out, but we're seeing obviously very strong growth across the board in terms of utilization.
spk02: Okay, great. Thanks a lot, guys.
spk01: Thank you.
spk05: There are no further questions at this time. I would now like to turn the floor back over to management. Thank you for joining us today. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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