Clear Secure Inc

NYSE:YOU

Earnings Call Transcript 2021-Q3

[Operator]

Good morning and welcome to the Clear Q3 2021 Earnings Conference Call. We have with us here, Ms. Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer; Ken Cornick, 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 could 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. Reconciliations to the most directly comparable GAAP financial measures can be found in today's 8-K.

With that, I'll turn the call over to Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer of Clear. Caryn?

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Good morning and thank you for joining us. This morning, we released a shareholder letter, along with our third quarter earnings on our website. I hope you've all had the chance to review them. We'll make some brief comments and then we'll get right into Q&A. During this quarter, we've seen the emergence of new and important trends. As businesses and much of the world continue to reopen, consumers have a new set of expectations post lockdown. They're demanding fast and easier experiences or what we at Clear call frictionless. People are now used to having almost everything available at the push of a button, whether it is with seamless and safe airport experiences or helping people return to their office with Health Pass, our products and services help partners not only meet the expectations of the new convenience economy but provide a better and safer experience for their customers.

The Clear Secure identity platform has been creating frictionless experiences for over a decade and we are well positioned. It is the dawning of a new era in travel. As we've said all year, we are bullish on people's desire to travel and we saw this manifest just last Monday when our borders reopened to a flood of international travelers. While some are still waiting for the return of business travel, in our view, business travel is undergoing a fundamental evolution away from the old standard business trip towards something more flexible. Today, we have seen the rise of the digital nomad, people untethered to any specific work location which is now so common that the term is officially included in Webster's dictionary. While the traditional version of business travel, road warriors has not yet fully returned, digital nomad are leveraging their newfound flexibility and taking to the skies.

Health Pass and our digital vaccine card have helped empower users with greater access to and control of their health information and help businesses of all sizes keep their doors open and come back better. From pack stadiums at Raiders games to traveling to Hawaii without quarantine to local restaurants with Resi and OpenTable, millions of people have used Health Pass to securely and easily connect identity and proof of vaccination. Not only are consumers and partners choosing our trusted brand and products but cities such as LA, Seattle, San Francisco and New York have all recognized Clear as an accepted solution for vaccine validation. From digital nomad to the convenience economy and the rapid return to travel, Clear is delivering safer, frictionless and predictable experiences that people want and need now more than ever.

Now, over to Ken.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Thanks, Caryn. Good morning, everyone. Our revenue and bookings exceeded our guidance, driven by strong growth in CLEAR Plus and over 100 new B2B partners signed in the quarter.

As Caryn noted, we're seeing a strong return to travel. Approximately 40% of our markets have verification levels above 2019 levels and 60% of our markets have higher enrollments compared to 2019. We expect travel to continue ramping as we head into the holiday season, starting this coming week with Thanksgiving. AAA's 2021 Thanksgiving travel forecast noted that 53.4 million people plan to travel this Thanksgiving, up 13% versus 2020 and within 5% of 2019. During the IPO roadshow, Caryn and I highlighted our focus on bookings and cash flow metrics which is how we've always run the business.

In Q3, we generated strong free cash flow of $28.1 million, highlighting that we can show both strong top line growth and cash flow generation. This was due to our strong booking's performance, high incremental margins and the successful launch of the American Express partnership which has positive cash flow dynamics. As a reminder, when we are growing, our GAAP metrics tend to understate the underlying strength in our business. This quarter is a great example of this.

Before we go to Q&A, I want to comment on Q4 guidance. We're seeing continued strength in both CLEAR Plus and the platform sides of the business. We expect GAAP revenues in the range of $77.5 million to $78.5 million and total bookings of $98 million to $102 million. This guidance excludes any contribution from TSA PreCheck which we now believe will launch in the first several months of 2022.

We'll now go to Q&A.

[Operator]

[Operator Instructions] Our first question today is coming from Paul Chung from JPMorgan. Your line is now live.

[Paul Chung, JPMorgan]

Hi, thanks for taking my questions. Nice momentum in the business here. So first off, can you expand on the AmEx contribution? What percent of bookings, enrollments kind of in the quarter? And if you could remind us of the TAM of members and where we sit today on penetration? Where you expect that number to go to in the near term and longer term?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Sure. So I'll answer in a couple of ways. One is that we had a really strong launch starting in July 1 with the AmEx partnership. It exceeded our expectations and continues to remain strong in terms of new growth and renewals of existing members that have the Platinum card. You'll see in the Q, there's about a $17 million accrual. And so as a reminder of how this partnership work is someone would join Clear or pay for Clear with their Platinum card and it's a statement credit, so that gets reimbursed to the -- to our member. We collect the cash upfront and then we would accrue for what we owe back to American Express at the end of each contract year which is June 30. And so the best way I can answer it is you'll see a $17 million accrual which is netted against our gross bookings.

[Paul Chung, JPMorgan]

Great.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

And I'll take -- Sorry, go ahead.

[Paul Chung, JPMorgan]

No, go ahead.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

I was going to say I'll take the TAM part of the question. So what we talked about on the roadshow from a CLEAR Plus perspective was 35 million travelers who take 5-plus trips a year and then looking at PreCheck expanding to $90 million for 2-plus, on the platform side of the business, considering there's such a broad distribution network from people who are going to restaurants to sports stadiums to offices, obviously, we think that's a disproportionate amount of the country. And so when you look at the Clear members that we had at the end of the quarter of 8.1 million members and that's both platform and CLEAR Plus, we think these are very early days from a penetration perspective, still less than 5% penetrated.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Maybe you're asking specifically, Paul, on the penetration of AmEx and we think we're somewhere between 10% and 15% penetrated.

[Paul Chung, JPMorgan]

Got you. And then, as we think about the Health Pass enrollments and kind of upsell the Clear Pass, what strategies are you using to kind of convert those members? Can you quantify kind of the actual number of conversions? And if you could confirm the split between Health Pass and kind of Clear Pass in the quarter, it would be great.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

So we're not going to break those out as we do look at it as a platform business. I will say that the platform side of the business is a B2B SaaS model where enterprises are paying Clear. You are seeing some people naturally migrate over because the brand is really resonating with them and they understand the experience and they're already on the platform.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

So right now, it's an organic strategy. We're not actually pursuing marketing strategies to upgrade.

[Paul Chung, JPMorgan]

Got you. And then last question, just on free cash flow, very nice record quarterly cash. How should we think about kind of seasonal dynamics there? Is this more of a function of the start of the AmEx contract or how should we think about free cash as we exit the year and move into fiscal year '22? And now with the IPO proceeds and pretty favorable free cash flow trends, what investments will kind of take priority over the next year?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Sure, a lot of questions in there. So from a cash flow perspective, I think important to note that we generated strong growth and free cash flow and certainly, the American Express partnership contributed to the free cash flow but it wasn't all of it. So, we still would have generated free cash flow even without the free cash flow dynamics of the AmEx partnership. And so we should -- it's less about seasonality and more about our gross bookings as we talk about, there's a disconnect sometimes when we're in growth mode. Our GAAP metrics would understate the strong underlying dynamics of the business. And so we do believe that we can generate growth and free cash flow on a go-forward basis. And as I mentioned, the American Express partnership will continue to have positive free cash flow dynamics. In Q3 of next year, we would expect that to reverse for a quarter but the underlying build will continue.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

In terms of your question on investments, there's investments on the product, on the mobile side of the product. And there's -- as we talked about on the road show, organic and inorganic opportunities to continue to accelerate the growth.

[Paul Chung, JPMorgan]

Great. Thank you so much.

[Operator]

Thank you. Our next question today is coming from Dana Telsey from Telsey Advisory Group. Your line is now live.

[Dana Telsey, Telsey Advisory Group]

Hi, everyone. Congratulations on the progress. You mentioned 100 new partnerships that occurred this quarter. Can you expand a little bit on those and what you see the runways for those? What that translates into, maybe what type, going forward? And then secondly, is there a regional trend in airport usage? Which markets are now above 2019? How are you just looking at the market progress?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

So I'll start with your second question first. So we do see regional variability. I'm not going to break out specific markets. But as I mentioned, we have about 40% of the markets that are now above from a verification standpoint. But interestingly enough, we're outperforming on enrollment. So even if a specific market is down versus 2019 from a volume perspective, we are executing well from a growth perspective and are able to convert a higher percentage of those travelers into Clear members.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Dana, I think it's safe to assume that those markets that might have higher percentage of international travel or historic business travel would be the ones that have yet to come back fully. And so we see that opportunity in front of us. In terms of Health Pass, you're seeing partnerships across a broad spectrum of industries. So partnerships like OpenTable and Resi is sort of a point to multi-point, right? There's tens of thousands, if not hundreds of thousands of restaurants on those platforms. And so the adoption there has a long tail. You're seeing it in music festivals and sporting events and great customer experience in those customers, our partners and their customers bring on other customers, right? And so again, we think these are very early days as we go from epidemic to endemic to ensuring that businesses stay open and stay safe. And then really look at the platform for long-term frictionless experiences. And once you have consumers, fans, customers on the platform, it really does create long-term opportunities or optionality with these partners. So these are very early days and still domestic. We obviously think that these are global issues.

[Dana Telsey, Telsey Advisory Group]

Got it. And then, just one follow-up. TSA PreCheck, any reason for the shift in timing?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Look, we're seeing really encouraging trends in the business. We're expecting a strong Q4 even without PreCheck. We're actively working in partnership with TSA to bring Clear's brand to the TSA pre-check product as soon as possible. I think everyone is involved, is motivated to bring this to the traveling public. And in the meantime, we're preparing internally to launch with strength.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

Thank you. Our next question today is coming from Michael Turrin from Wells Fargo. Your line is now live.

[Unidentified Analyst]

Good morning. This is David [ph] on for Michael Turrin. Just one question for me. Can you guys talk about the progress you're seeing in terms of member acquisition metrics as it relates to the dynamics of the airport ambassador efficiency rate that we would see versus mobile sign-ups for this quarter?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Sure. I think if you look at our sales and marketing line, you'll see some really strong efficiency from a customer acquisition or a member acquisition standpoint. So we are extremely pleased with the performance of our field team. We talk about our over 1,500 ambassadors in our physical footprint which really drives economic efficiency from a member acquisition standpoint and I think you saw that this quarter.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

To get a little more granular, as people are returning to the airport, I think the brand and our expanded footprint is resonating. So not only are you seeing ambassador efficiency strength, you are also seeing training programs that we've put in place over the last year bear fruit, you're seeing attach rates on the family side and you're seeing marketing channels that either people join through our partner channels or learn more about Clear. And so it's really hard to separate all. I think it works altogether as a system but it's a really economically efficient system.

[Unidentified Analyst]

Excellent detail. Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question today is coming from Brian Essex from Goldman Sachs. Your line is now live.

[Brian Essex, Goldman Sachs]

Hi, good morning and thank you for taking the question. Maybe, Caryn, if we could touch on the platform business. As we see all these different partnership agreements come across and we know there's been kind of a mix shift last year from event management to Health Pass, I would imagine you're starting to see a greater mix of event management and then there's a potential with obviously the new integration with Azure AD enterprise access platforms. How do you view this platform business evolving given where the mix was historically and given all the new initiatives, what do you think some of the primary drivers of growth are you going to be? Is it going to be primarily access management recovery? Or is it going to be enterprise access? Just wondering how you view the business? And then I have a follow-up after that.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Yes. I wish I could give you a specific answer. I think here's my foundational answer which is identity is foundational, right? And not digital ID but secure identity and our platform not only comes with an embedded base of members that what you saw at the end of the quarter is 8.1 million members who trust our brand and could be automatically opted in, if they choose to opt in but -- right, a very easy onboarding process, to our partners' use cases. And so you're seeing -- we've really talked about the flywheel and the IPO and that's what you're seeing come to life which is an embedded base of members and use cases and functionality. So whether it be identity in the cloud, identity on the handset face, fingerprint, eyes, QR codes.

We solve partners' problems to make experiences safer and easier both online and in the physical world. And so it is a unique moment because never has the need for a secure identity platform been greater. Identity drives trust. Identity -- or trusted identity drives better experiences. And so it's hard to disaggregate because these are such early days. And you're seeing, as you pointed out, right, OpenTable to Azure, is like these are very different things to the readers. And it's really become foundational. We're walking into restaurants here in New York City and having to show who we are. That did not happen two years ago; so too early to say what will be the lead. I think that, this is a long-term secular trend.

[Brian Essex, Goldman Sachs]

Got it, that's helpful. Maybe, Ken, to follow up on that, how do you think about the unit economics for these deals as you're developing all of these partnerships? Is there a range of kind of unit economics or price per attendee or price per seat and if it were an enterprise agreement that we can kind of wrap our heads around? Maybe I'll just kind of leave it open and in terms of how can we kind of understand what the unit economics to the model are as you sign these agreements and disclose how many kind of incremental users are on the platform?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Yes. I mean, like anything, there's a range based on volume and type of agreement. Generally speaking, these are annual agreements that are either upfront based on the number of members or based on variable usage. From a unit economic standpoint, there is an upfront enrollment cost which we've talked about. And that upfront enrollment cost is one and done, you enroll once and you use everywhere. That's our philosophy and it's a platform business. And so the incremental margins are very, very high once you onboard a member onto the platform because then they can use it in a lot of different places. And that member is good anywhere. So, we think that this high incremental margin unit economics based on sitting on a platform that's already built.

[Brian Essex, Goldman Sachs]

Got it. Maybe just real quick; you mentioned, I think during the IPO, we saw maybe like a 15x LTV to CAC. As you become more enterprise or platform focused to that mix increases, do you imagine that, that would change materially? Or is there a level that you kind of look towards to maintain like a model efficiency level above that as you develop the platform?

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Yes. I mean, that LTV to CAC is really referring to the B2C CLEAR Plus business. I think the unit economics will be very strong on the platform side. I can't really speak yet to what that ratio will be based on it being a developing business but I think it will be very strong [ph].

[Brian Essex, Goldman Sachs]

Right, fair enough. Got it. Thank you very much.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Thanks.

[Operator]

Thank you. Our next question is coming from Ananda Baruah from Loop Capital. Your line is now live.

[Ananda Baruah, Loop Capital]

Hey, thanks. Good morning, guys. Thanks for taking the question.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Good morning.

[Ananda Baruah, Loop Capital]

Yes, thanks. Yes, a few, if I could. And Caryn, you may have touched on this a couple of questions ago. But you mentioned a bit earlier, you guys are converting at higher rates and sort of how that's even in the -- airport is now back to 2019 levels. Offsetting some of that volume, just in general, what do you think -- what are the things that are occurring that are allowing you to convert it to higher rates? And what are some of the things that you're giving new? And then I have a couple of quick follow-ups.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

So, great question. I think as people are returning to travel, the experience that they've had sitting on their couch ordering tacos at the push of a button and the rest of their life at the push of a button, really what we're calling the convenience economy, the expectation for frictionless experiences, it is making the Clear platform more valuable. I also think that word of mouth, or seeing the brand in more places and using it in more places, breed familiarity and it's more affordable than ever to be a part of, whether you look at our partnerships with United and Delta, American Express, student discounts and rates. So I think it's a very accessible platform that is transformational from an experience perspective and an experience that people have now come to expect over the past 1.5 years. So I think that, that's a big driver.

I also think that from a technology perspective, we're touchless. And so about 80% of our members use their eyes first, the technology and the platform keeps getting more powerful, faster, better. So there's also mobile products; so the home-to-gate feature on the app which tells you when to leave your house to get to your gate with 35 minutes to go connecting traffic plus where the clear lane is and where your gate is and timing the walk to that, right? So, really driving predictable frictionless experiences is massively important, so, we keep adding products to drive the experience. And to me, that would be the ultimate reason why people join and people convert.

[Ananda Baruah, Loop Capital]

Yes, that's super helpful. And second question is, philosophically, if a Jan 4, vaccine mandate goes into place, are you -- would you consider that to be sort of net positive to the business model in a way that would show up?

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

I can't comment on that except to say that Health Pass has been really important to our partners and what we're offering our tools to help people reopen, stay open and make the experiences safer when there's different things that our partners need to comply with, Clear is a very important partner to ensure that compliance. But too early to tell.

[Ananda Baruah, Loop Capital]

TBD. But philosophically, it does -- yes, it's not on the line, it sounds like -- yes. TBD.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Yes. Our mission is to make experiences safer and easier and safety meant one thing after 9/11, it means something different today. And so the platform is leverageable for all of that.

[Ananda Baruah, Loop Capital]

Cool. And then, just one last quick one. Are you guys able to track at all the impact from the digital nomad contribution to travel or to your platform? And then, any way to track sort of the business impact? A bit of a stretch but what, I want to ask.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Well, it's an interesting question. We are seeing different patterns, right? So different days that used to be really busy are slow now and days that were slow are really busy. And so hours of the day, right? So, you are seeing different patterns; holistically, you are seeing travel numbers up and strong and -- but the only thing I couldn't connect it to are different days and hours.

[Ananda Baruah, Loop Capital]

No, that's helpful, interesting. Okay, cool. I'll cede the floor. Thanks a lot.

[Operator]

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

Thank you all for joining us.

[Ken Cornick, Co-Founder, President & Chief Financial Officer]

Thank you so much.

[Caryn Seidman-Becker, Co-Founder, Chairman & Chief Executive Officer]

And see you soon.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.