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Operator
I don't see any monocular things in here that, like, does not belong. Like, you are wherever life takes you.
Karen
Good morning and welcome to Clear's Fiscal First Quarter 2023 Conference Call. We have with us today Karen Seidenbecker, Co-Founder, Chairman, and Chief Executive Officer, and Ken Kornick, 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 debt to non-GAAP financial measures is provided in today's shareholder letter and the most recently filed annual report on Form 10Q. These items can be found on the Investor Relations section of CLIR's website. With that, I would like to turn the call over to Karen.
Operator
Good morning, and thank you for joining us for our first quarter 2023 earnings call. At Clear, we believe identity is the key to transforming customer experiences, both physically and digitally. We also believe trust is the oxygen the digital world needs to thrive. As the world has moved online, anonymity is the new norm. The opposite of anonymity is authenticated identity. The acceleration of the digital world has increased the sense of urgency to get identity rights. When Clear, LinkedIn, and its parent company, Microsoft, came together to explore how we could join forces to enhance digital trust and safety at scale, we aligned on a shared vision to strengthen and democratize trust across the world's largest professional network through stronger connections, better conversations, and improved outcomes. Through our recently launched partnership, we are empowering LinkedIn's over 200 million US users to verify their identity on their profile using CLEAR for free. Together, we are making it safer and easier for people to find jobs, connect, and build community. Verified profiles provide a holistic understanding of those users' professional identities. It's not just about who you are. It's about all the things that make you you. This partnership isn't about driving CLEARplus memberships. It's about furthering Powered by CLEAR our identity as a service platform, to expand our connected identity ecosystem. It's about bringing the trusted, predictable, friction-free experiences you've come to expect in airports to the digital world. We remain intent on providing American travelers with the experiences they rightfully deserve. Travel is absolutely booming. In March, we saw our highest average daily verification numbers, And in the first quarter, over 10% of checkpoint traffic in our airports came through a clear lane. Travel is hard and getting harder. As we continue to stress, clear is on the side of the American traveler. We hear our members when they say they are always looking for clear and more airports. And we hear them when they say they want the joyful journey we provide in more places. Clear gives our members predictability and control over their time and their experiences. This is now the expectation. With 52 Clear Plus and 17 Reserve airports, we are expanding our network across the country and around the world. Our expanded network is of course good for our members, and it also allows us to launch new products like TSA PreCheck enrollment and Reserve with strength across a larger footprint. We are focused on building products for all travelers, whether you travel once a year or once a week. I would be remiss not to mention our newly revamped Clear app with an awesome new home-to-gate feature driving predictability and friction-free day-of-travel experience. I highly recommend everyone on the call uses it. As always, we remain focused on growing members, bookings, and free cash flow. I want to thank the Clear team for their continued great work this quarter. With that, I will turn the call over to Ken.
Ken
Thanks, Karen. The first quarter finished strong, with revenue up 46% and bookings up 39%. We see continued momentum into the second quarter. ClearPlus bookings growth came through a variety of channels, word of mouth, in-airport sales, digital marketing, and our partners. The in-airport channel represented over 60% of new bookings, while partner channels, which include United, Delta, and American Express, represented less than 20% combined. We've never been traditional marketers. No one wakes up and Googles, how do I get through airport security using biometrics? With 52 airports, 139 lanes, and our great ambassadors, our physical footprint is unique and drives efficient growth. It's why such a large percentage of our bookings come from our in-airport channels. For the 2.5 million passengers who come through an airport on any given day, they can't miss our pods, our people, or our experience in action. We will continue leveraging this physical footprint while incorporating our partner channels. If you think about the top 100 million travelers in the U.S., they belong to many different loyalty programs. Most belong to an airline program, a car rental or a hotel loyalty program, and or have an American Express card. These partners are excited to bring the clear experience to their customers and align with our brand and our products. Let's look at our Amex partnership, for example, as we near the second anniversary. This is a three-year deal with two one-year renewal options. It's a true win-win for Clear, Amex, and our shared customers. This partnership has driven steady membership growth and expanded our TAM, indexing to a younger demographic. Platinum members use Clear at similar rates with similar NPS scores to our overall base. From a margin perspective, we saw 1,250 basis points of operating leverage in the quarter, with total expense growth of 31% versus revenue growth of 46%. This excludes the non-cash, non-operational items called out in the release. We achieved this operating leverage while opening 12 new airports and expanding four markets subsequent to Q122, our largest number of new launches in a 12-month period. As discussed in our letter, newer airports tend to be margin dilutive in the near term. In fact, the new launches and expansions impacted operating margins by about 350 basis points this quarter. We expect these markets to follow historical margin improvement trends as we have seen in dozens of airports in the last 13 years operating this business. Today we spoke about our newest Powered by Clear partners, LinkedIn and Health Gorilla. I will add that we see exciting traction on the platform side. As platform bookings scale, this is another driver of operating leverage as we have made significant investments in the platform over the past several years. Free cash flow in the quarter was $51 million, up 165%. I want to reiterate last quarter's comment on equity-based compensation. We absolutely view this as a real expense. Free cash flow after employee and founder stock comp was $36 million, up 470%. We continue to expect full-year growth in free cash flow before and after stock comp. Total cash and marketable securities as of March 31st was $779 million and reflects approximately $6.5 million invested in share purchase at an average price of $22.94, as well as $2.4 million used to net settle RSUs. In addition, we made a $6 million minority equity investment in Landline, a company well-positioned to help securely scale off-airport screening. In addition to repurchases, today we announced a 20-cent special dividend. This dividend is a result of CLEAR's advantageous corporate structure put in place when we went public. through the utilization of favorable tax attributes, actual taxes owed were minimized, enabling the return of capital to our owners. Our bookings guidance of $158 to $160 million implies year-over-year growth of approximately 30% and excludes any contribution from pre-check. We continue to expect operating leverage and free cash flow growth on a full year basis. As owner-operators, capital allocation and optionality are cornerstones of our strategy. Whether it's share repurchase, dividends, organic growth, or acquisitions, we are focused on driving long-term value. We will now go to Q&A.
Karen
Thank you. We'll now 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 your lines in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset for pressing the start keys. Our first question comes from Dana Telsey with Telsey Group. Please go ahead.
Dana Telsey
Good morning. Nice to see the progress. As you think about the soft launch of TSA in mid-2023, are you talking second quarter or third quarter and any update on how you expect revenues to build from that? and then also on the net member retention, anything marketing-wise that you can do to win back previously canceled members or anything you're seeing there, and then just any adjustments that you're seeing in the new airports being added of how that performance trends. Thank you.
Ken
Hi, Dana. Good morning. Hi. You've got three in there, so that's good. We'll start with PreCheck. Look, we're really excited to launch this program. No one wants to get it launched more than us to the traveling public. And as we mentioned last time, we got our ATO, which is the authority to operate, in December. Our teams continue to work together with TSA. to make progress. There's a process to follow. We're following it. And we don't include any pre-check revenue in the Q2 guidance. We would expect it to be a back half. And it would build, you know, as we roll it out from airport to airport, renewals would happen faster.
Operator
So, Dana, don't forget that there's two parts to the business. There's the renewal part for the existing member base, and then there's the new member additions. And we're excited about both. One's more digital, and one would happen more in person. Got it. Your next question. The next question was on retention.
Ken
So from a retention perspective, retention is definitely stronger than we anticipated. It continues to be. And part of that is the win back strategy. So we have a lot of organic win back. So people just show up at the airport who maybe their credit card didn't charge properly So when they come through the lane, they would just swipe their credit card and win back. That's about two thirds of our win back activity. So that continues strong. We have ongoing programs to win back people. That's a regular part of our business. And overall, I would say that continues with strength. And retention in general is higher than where we expect it to wind up long term in the upper 80s. And as far as new airports, we talked a bunch about new airports in our letter. The new airports are, you know, very fast break-even, cash break-even, usually within a year. And, you know, costs from a, you know, direct cost perspective are definitely higher in the beginning. Their margins, they tend to be margin dilutive. And then over time, as we increase penetration in those airports, you know, the margins expand. We have very high incremental margins. And so what I would say is we, you know, opened more airports in the last 12 months than, than we ever have as a record, and so there is some margin impact from that. But as we've seen operating the business since 2010, we see a regular path of margin expansion as we scale penetration. And we mentioned in the letter, we have 2% MSA or CSA penetration from a population perspective in the 47 airports, and then our top five are at 5%, so we think there's a long runway for growth.
Operator
And Dana, just to add to that, when you talk about the power of the network effect, when we open a new airport, hundreds of people show up on day one to verify, right? So those are people who already have Clear and wouldn't have been able to use it in that airport. But that extra utilization is so powerful from a retention, growth ad, all those good things. And so you are seeing new airports ramp much faster than they did years ago because, right, it's number 52 to the network, not number 20.
Dana Telsey
Terrific. Thank you.
Karen
Next question comes from Josh Riley with Needham & Company. Please go ahead.
Josh Riley
Hey, guys. Thanks for taking my questions. Congrats on the strong results and the bookings guidance here for Q2. I guess the question I'm getting a lot is, and you highlight this in the shareholder letter, but the The penetration for airports you operate still remains very low. However, offsetting that is the impact of the slowing growth in TSA boarded passengers over the next couple quarters. How do you maintain this kind of strong growth trajectory even if TSA passenger growth continues to slow near term just simply due to the tough year-over-year comps?
Ken
Thanks for the question. Travel will continue to grow. We have capacity growth in the back half that we've seen from airlines. But our growth is diversified. It comes from a number of different channels. So we have in-airport growth, which we said in letters, 60% of our growth. We have partner channels. And so we think that our ability to growth is not necessarily impacted on any given quarter by the delta in the TSA. volume growth. So we think we have a lot of opportunity.
Operator
Look, I would add to that if you specifically look on a city like New York. New York had record first quarter, this is Port Authority data, record first quarter in travel, 33 million. That was up a million from pre-pandemic 2019. So you see airlines that have said capacity is still expected to be up 10 to 15 percent in the second half of the year. In March, we saw our highest average daily verifications. And so when you talk about that 2% penetration on average, right, in most of our airports, there is a ways to go. As clear as still, pretty new to a lot of these travelers, right? I think we talked about a third of our airports are less than three years old. This is still a pretty new concept overall. And so when you talk about the sort of vintage, if you will, of our airports, the power of word of mouth, the ambassadors on the ground, our partners, which Ken talked about, United, Delta, and American Express, you know, being also growth engines and introducing Clear to a expanded TAM. Ken can talk a little bit to American Express if you want and sort of the expanded demographics there. And so there are many ways for Clear to grow, not to mention new products, bundles, and things of that nature. So we continue to believe that these are early days, but I will also say We just are incredibly bullish on travel, and it's hard and getting harder. And so the fact that there is growth, the fact that people are looking for the experiences they have outside the airport, in the airport, the fact that we have low penetration, a stronger network and offering, and great partners, early days.
Josh Riley
Got it. And then just to follow up on the pre-check offering, is there anything going on in the testing phase with the TSA that gives you more confidence around that time frame for the second half launch than maybe a quarter or two ago yeah so after receiving the ato in december there is a process and we continue along with that process and we are making progress got it and i'll just sneak in one last final question for me on the amex green card uh this is the first full quarter i believe with uh that in the market what type of uh adoption trends did you have you seen from that card thus far thanks guys
Ken
Thanks. So I won't speak to any one particular portfolio within the Amex family, but we are getting a lot of questions on Amex, so why don't I just give a little bit of insight into the partnership overall. And what I would say is this continues to be a great partnership. The value of Clear to these members is evident. You know, we see usage trends in NPS scores for the Platinum members and, you know, in line with the rest of our base. So from a value perspective, we're delivering value to those members. It's a great way to introduce CLEAR to the new population and it's expanded our TAM. We talked about Over a third of our markets are still less than three years old, and the penetration is low, as Karen just mentioned. So this is a really great way to introduce Clear to a newer and a younger demographic. It's expanded our TAM. We skew younger with platinum. It indexes to the under 45-year-old demographic. And from an NPV and a lifetime value, this is really exciting. There's a low CAC, obviously. There's high renewal rates. And given the scale of this partnership, you know, the average revenue per member is well below our overall retail price point. So, right, the incremental member growth is, you know, contributing less to our bookings and revenue but more to the expansion of our TAM and to our membership base in general. And, you know, as we mentioned in the letter, 60% of the new bookings are coming from the in-airport channel, and less than 20% overall of the new bookings are coming from the partner channels, including Delta United and Amex combined. But it continues to be a great partnership for us.
Karen
Our next question comes from Michael Turin with Wells Fargo. Please go ahead.
Michael Turin
Hey, thanks very much. It's David Unger from Michael Turner. I had a bunch of Amex, but we don't have to keep going on Amex. So the 2Q bookings guide is pretty strong, actually. At the high end, it's suggesting 30% year-end year growth. Can you guys talk about some of the moving pieces at sustaining that pretty strong growth rate, even more in the cycle? You know, it's above where most of us were originally modeling, so any seasonality to be mindful of there. Thank you.
Ken
I would just say in general, you know, our business is fairly consistent to understand, right? We have renewal of prior year revenues, our bookings. We have multiple channels, as I've been saying in this call, multiple channels that are contributing to our growth. We have an airport. We have ambassadors. We have a physical presence. When we have 2.5 million people coming through the airports on a given day and they can't They can't miss us, right? There's a physical presence. We have ambassadors engaging with them. So there's multiple channels to drive that growth, plus the retention, and plus we've taken a little bit of pricing.
Operator
If I can just jump in, maybe we've done a bad job of explaining that this is a great business and members are passionate about Clear. And so the more airports that we open, the more people join. There's family attach rates. And travel is hard and getting harder. And I do think that the experience that you see outside of airports, whether it be ordering food online compared to what that experience was 10 years ago or, you know, flagging down an Uber, this is the new consumer expectation. And people are looking for that in travel. They're looking for the Home to Gate app to know when to leave their house to get to the airport or to get to their gate with 40 minutes because we've mapped it all out. They're looking for predictability and friction-free experiences. And our brand has now become synonymous with that. And I do think that these, you know, when we talk about early days, there's a bunch of new airports. When you look at the growth, you know, coming out of 2019 or heading in and then sort of screeching to a halt with COVID, we've expanded our airports. We've added 19 now in a little less than two years. So I think it's just a confluence or a convergence of events, of customer expectations, the growth of the network, and new products that we're offering, and then the power of the network to retention, to growth ads, and to partners. And you are seeing our brand show up in more places, whether it be our partnership with LinkedIn or when you use it at a sports stadium or at a hospital. And so this concept of friction-free experiences and a brand that stands for trust And what we did with Health Path and COVID, I think it's a testament to the vision and to the team making it happen.
Michael Turin
That's all awesome. So, obviously, appreciate the special dividend. You guys still have a lot of cash in the balance sheet. You know, Ron and Paul here would love to hear. And free cash flow is still bubbling. Very nice. Just bigger picture. Would love to hear about, you know, the capital management philosophy, if you could share that with us. Thank you.
Ken
Sure. I think philosophically we believe in being opportunistic. And so, you know, we want to maintain maximum flexibility. We're opportunistic. And we're owner-operators, so we're aligned with shareholders in general.
Josh Riley
Thanks, guys.
Karen
Our next question comes from Paul Chung with JP Morgan. Please go ahead.
Paul Chung
Hi. Thanks for taking my question. You know, just on the LinkedIn partnership, you know, talk about how that deal came about, you know, how to kind of think about, um, you know, monetization in respect to that 200 million sub base. Um, you know, what other kind of social media platforms or other use cases we should be thinking about, um, essentially how, how should we kind of think about platform? through the year and kind of longer term. And I'll follow up.
Operator
Perfect. We're really excited about the LinkedIn partnership because big picture, trust online matters and the acceleration of the digital world has created an absolute sense of urgency to get identity rights. So many things that you're hearing about today in the news, if you sort of strip them back, you realize it's about identity. Identity is foundational. So LinkedIn and Clear and Microsoft definitely came together with a shared vision that trust online matters. Trust and safety for their hundreds of millions of users are core to their brand and to their future. And so it was that alignment. You know, at some level, we always say our best form of BD are Happy Clear members. I think when people go through the experience, they start to realize the other places that you could use Clear. And so having a verified badge on your LinkedIn profile means users are more likely to be considered for a job, to have their in-mail opened, or to build connections. And so when you look at what the future is, it's to have hundreds of millions of LinkedIn members with verified badges on their profile. and then to have reasons or benefits for those badges. So again, in-mail, key parts of job searches, someone more likely to open your request for a connection. And those things create powerful networks in the new age of, I would say, anonymity online, and this is authenticated identity online, the absolute opposite. So I do think that this serves as a model for other online marketplaces and networks, and one that Clear can play an important role in. Also, as I talked about earlier this morning, this is not about selling Clear Plus memberships. This is about our identity as a service platform business, and so you will see that scale on both members and revenues over this year and in the future. It's a core focus for us. The vision that we had 13 years ago was absolutely right, and I think the world has now recognized the need for trust online is crucial, and Clear is a really important partner in that equation.
Paul Chung
Very cool stuff. And then secondly, can you talk about the strength of free cash on the quarter, anything to call out there, so earnings continue to improve? Bookings growth feeding accrued nicely. You know, as we move through the year and think about seasonality, you know, can we expect this kind of quarterly run rate of free cash flow? You know, that kind of builds into 2Q. Payment out in 3Q and accrued and then kind of rebound and pace in 4Q. Is that the right way to kind of think about it? And then given the strong start to the year, you know, do you think we're on track to exceed 22 levels? Thank you.
Ken
So from a free cash flow perspective, generally speaking, we're an asset life business. We are opening airports, but they're generally cash break even in under a year. From a free cash flow perspective, we have said that we expect to grow free cash flow on a full year basis year over year in 2023. And that stems from bookings growth and operating leverage, which we also said we're going to generate operating leverage in 2023 on a full year basis. As far as cadence, You are correct that there would be a cash outflow in Q3 as there was last year. But again, on a full year basis, given the way our business works, we have bookings which generally exceed gap revenue when we're growing. And that's the nature of a subscription-based business. And it flows to the bottom line from a free cash flow perspective as we collect cash up front. So to reiterate,
Paul Chung
yes grow free cash flow on a full year basis versus 2022 both before and after stock comp and demonstrate operating leverage on a full year basis and cash outflow in q3 that's correct great and then just follow up on the leverage how do we think about kind of modeling seasonality investments and overall trends of the year between the kind of opex line items the pace into q and where we can see more leverage in the model. Thank you.
Ken
Without getting into specific quarterly guidance, generally speaking, I would say G&A is the area where you'd see the most operating leverage. R&D is still going to be an area of investment for us, although we should demonstrate operating leverage there as well. From a cost of revenue share fee We expect that to be fairly stable over time. There is some quarterly volatility, as we saw in Q1. And finally, on the labor line, that should now grow in line with opening new airports, number one. Obviously, when we open new airports, we're hiring new people individually at that local level. And there should be some growth along with volume and opportunities to enroll new members. But generally, we expect to see scale operating leverage across the board, mostly, you know, the most in G&A, and then less so in the cost of revenue, which is more of a variable.
Paul Chung
Great. Thank you.
Karen
Our next question comes from Amanda Varoua with Loop Capital. Please go ahead.
Lane
Yeah, good morning, guys. Thanks for taking the questions here. Yeah, two or three if I could. Ken, you mentioned – that I think in response to one of the questions that you have capacity growth in the back half of the year or something along those lines. And I was wondering what that kind of refers to, some context there. That would be great. Thanks.
Ken
Capacity growth? I don't actually know what you're referring to from a capacity.
Lane
It was one of the questions around air travel and – Yeah, we can take it offline. It's just a clarification.
Ken
Oh, from a macro perspective. Yeah, we've seen the airlines talk about capacity growth in the back house.
Lane
I see. Okay, great. Super helpful. And then I guess just sticking kind of with that theme, do you guys have a, like, return to business travel view? in terms of pacing and impact, and whether it's for you guys or for the industry, I would just love to get any context there that you guys might have as an opinion at least.
Operator
My opinion is being on the road for a few conferences, both at the HIMSS Conference for Healthcare in Chicago and the Milking Conference last week in LA, there's overflow rooms that are holding overflow rooms. It's insane. So we continue to have a very bullish outlook on travel on both the leisure side and the business side. We send surveys out to members, which is really the way that we know it, and I think we continue to see a return to business travel staying strong.
Lane
Karen, that's super helpful. Maybe to try to drill down a little bit, do you have any sense or any opinion on what innings whatever normalized travel might look like, business travel might look like ultimately. Do you have any opinion on what inning we might be to the return of that normalized currently?
Operator
Yeah, I do not because we focus more on holistic, right, number of people getting on planes and coming through airports on the travel side of our business. And I would say that holistically, again, and that's why I was talking about the airline capacity going up 10% to 15%. I think most planes are oversold these days. And so we continue to be very positive on the industry as a whole and volume, but I don't have a good feel for you for breakdown of business.
Lane
No, that's all super helpful context. I appreciate it. And I guess the last one for me is any, I guess another one, like what would be, well, what's a good way for us to think about lanes, additional lane expansion opportunity inside of existing airports that you guys have? And that's it for me. Thanks.
Ken
Yeah, so that's a great question, and we're actually very focused on, you know, expanding our capacity. Two recent examples in Dulles, where we've seen a lot of growth in membership, we actually expanded to an additional pre-checked to an additional pre-check loan recently. I think it was last week or the week before. And this summer we'll be launching in the international terminal in Atlanta, which is probably our most constrained market. And so that will increase capacity for our members fairly dramatically.
Operator
And I think last quarter we added a terminal in Newark. So we continue to focus from an obsession with the customer experience perspective on technology, on lanes, on innovation. And so you'll continue to see both new airport expansion, lane expansion within our current airports, and innovation that drives throughput. And then you saw an investment in landline. So we think that there are so many opportunities to continue to transform the customer experience because It's not just today that we're excited by travel. We think by 2030 there's going to be another million people coming through airports on top of the two and a half million that are there today. So when we think about Lane and airport of the future, there's a lot of innovation going on.
Lane
Great context. Thanks so much, guys.
Karen
There are no further questions at this time. I would like to turn the floor back over to Karen Simon-Becker for closing comments.
Operator
Thank you for joining our first quarter 2023 earnings call. I think as you heard us say, identity is foundational in travel and beyond. We're excited with the strong progress of both Clear's B2C and B2B dual growth engines. And as always, I want to thank the Clear team for all of their great work this quarter. Thank you.
Karen
This concludes today's presentation. You may disconnect your lines at this time. Thank you for your participation.
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