Clear Secure, Inc.

Good morning and welcome to CLEAR's fiscal second quarter 2023 conference call. We have with us today Karen Seidman Becker, co-founder, chairman, and chief executive officer, and Ken Cornick, 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 Clear's 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 side, we are rebranding to Clear Verified to better represent the power of our platform. We are working with LinkedIn to expand to other markets later this year and we were excited to hear Microsoft 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 in identity for 13 years and today you are seeing that in travel and beyond. At Clear, we believe actions speak louder than words, and our philosophy has always been to put our members first, focus on innovation, and live 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 biometrically verified over 130 million passengers since our founding in 2010. We have a remarkable industry-leading track record of which we are incredibly proud. Our enrollment and verification processes are certified as qualified anti-terrorism technology by the Department of Homeland Security. Both our tech and our team members are force multipliers for airports, TSA, and travelers. Second, a July 2022 incident has 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 ID as added security to our multi-layer enrollment process. This went above and beyond our regulatory requirements. There can be rare instances of false negatives in face 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 ID with the live enrollee standing in front of them. There was a human error in 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 is a tool employed across the entire checkpoint, not just to CLEAR. We can't disclose the actual percentages as it's deemed sensitive security information, but in 2023 alone, TSA has randomly re-verified millions of CLEAR passengers. Finally, as we talked about in our letter, we have been working on digital identity integration 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 are in continued conversations to make sure that this transition is smooth for all travelers. Travel is booming, but the experience is challenging. With one million more travelers coming through airports every day within the next few years, Clear is 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 to 46%, bookings growth accelerated to 43%, while operating expenses increased 28%. Margins increased by over 1,400 basis points. We've already lapped the easier COVID 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, active 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 and 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. Annual ClearPlus member usage was 8.7 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 the 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, we purchased 1.5 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 $0.07 quarterly dividend to holders of Class A and Class B common stock. We will use the regular quarterly dividend, opportunistic share purchase, and special dividends as levers to return cash to shareholders with a goal of increasing total cash return on an annual basis. In the prior 12 months, we returned about $120 million to shareholders. For Q3, we are guiding to revenue of $152 to $154 million and bookings of $178 to $180 million. Third quarter guidance does not include any contribution from TSA PreCheck. We continue to work collaboratively with our partners at TSA as we make progress towards soft launch and 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. We'll now go to Q&A.