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Clear Secure Inc
Earnings Call Analysis
Q3-2023 Analysis
Clear Secure Inc
Clear has reported significant progress in their third quarter of fiscal 2023, revealing substantial top line growth, margin expansion, and strategic acquisitions. This demonstration of steady growth was accentuated by a notable increase in revenues, up by 38%, and bookings, which rose by 32% year-over-year. These increases highlight Clear's resilience and agility as they maintained performance even as travel patterns normalized post-pandemic. A particular triumph was their impressive 40% incremental EBITDA margins, which translated into a formidable cash flow growth and yielded positive operating income for the quarter.
Clear's astute capital allocation decisions were underscored by their acquisition of Sora ID, bolstering their Know Your Customer (KYC) capabilities, and the repurchase of 1.1 million shares. Furthermore, the company displayed its commitment to shareholder returns through an increased quarterly dividend of 29% to $0.09 from $0.07 and the announcement of a $0.55 special dividend. This approach underscores a belief in balancing growth with profitability and responsible shareholder value creation.
Clear's introduction of their 'NextGen Identity' stands to redefine digital identity standards, employing face recognition as the main biometric, which would facilitate seamless and more agile experiences both on mobile and at the airport. The 'Lane of the Future' concept aims to enhance and scale customer experiences and efficiency as travel volumes grow. Expansion in airport infrastructure, exemplified by new lanes in pivotal locations like Minneapolis and Atlanta, is also in motion to cope with the expected surge in travelers.
Concurrently, Clear remains vigilant about economic efficiency, having carried out organizational streamlining in October which simplifies engineering, product, and corporate functions. This move, expected to save approximately $20 million annually, reflects a relentless pursuit of optimizing cost structures to align with future growth.
An awaited rollout of TSA PreCheck enrollment services by Clear, is poised to manifest within the year, opening up new avenues for revenue with high incremental margins. Meanwhile, the Sora ID acquisition is anticipated to unlock potential in the vast financial services identity market. Integration of Sora's technology onto Clear's platform should take place over the next few months, signaling an imminent and significant market play in an industry grappling with KYC challenges and fraud.
Clear's international strategy is evidently selective, focusing on following their partners to scale their operations. The company has ventured into international offerings such as RESERVE lanes and the LinkedIn partnership and is geared up to capitalize on the universal demand for smoother and transparent travel and digital identity solutions.
Looking ahead, Clear projects more significant top line contributions in Q1 and 2024, including year-over-year free cash flow growth in Q4. The company’s compound annual growth rate (CAGR) has remained consistently at or above 30%, even into Q4, despite little contribution from TSA PreCheck thus far. With plans to scale CLEAR Plus, roll out TSA PreCheck enrollments, and gain traction on the Verified side, Clear's future trajectory appears robust, though specific guidance on growth rates for 2024 is not provided at this time.
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Good morning, and welcome to CLEAR's Fiscal Third Quarter 2023 Conference Call. We have with us today Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer; and Ken Cornick, Co-Founder, President, 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 Caryn.
Good morning. The third quarter reflects our continued ability to drive strong top line growth, generate high incremental margins and allocate capital. Revenues grew by 38% and bookings grew by 32%, a reflection of CLEAR's continued strength, even as seasonal travel patterns returned to pre-pandemic norms.
40% incremental EBITDA margins in the quarter yielded strong cash flow growth and positive operating margins. We bought Sora ID, acquiring important KYC capabilities and a great team. In addition, we repurchased 1.1 million shares since last quarter, increased our quarterly dividend 29% to $0.09 from $0.07, and today announced a $0.55 special dividend.
As we have said since the beginning, we believe, in the end, growth and profitability, investments and returning cash to shareholders. Importantly, our repurchase program actually shrinks our shares outstanding. In the last 2 years, our share count is down around 2%, excluding pre-IPO warrants.
We are excited to be launching a new industry-leading identity standard, NextGen Identity. With CLEAR's NextGen Identity, we will be the first and only company to operationalize an at-scale standardized digital identity. Not only will NextGen Identity set a new unified standard, but it enables face as the primary biometric, both on mobile and at the airport. Led by face, we are designing a CLEAR Lane experience at the airport, which means you will not have to break stride. In addition, members can soon expect a similar authentication experience physically and digitally, whether on their phone, in the lane or through a partner's app. We are focused on innovation and expansion to address the structural growth in travel volumes.
Travel has been a mess and the onus is on us to continue to drive member experience. One of our key themes is 1 million more. By 2030, there will be another 1 million travelers coming through airports every day. NextGen Identity and Lane of The Future will help scale and enhance the member experience. We are also expanding our footprint with added capacity. This quarter, we expanded Minneapolis and will be adding a new and much-needed lane in Atlanta as well as streamlining existing lanes like we did in Chicago this quarter. Expect to see additional lane expansions in the coming quarters.
So far this year, we have added 6 CLEAR Plus airports and 7 RESERVE airports, both domestically and internationally, and we expect to finally launch TSA PreCheck enrollment provided by CLEAR this year, as we continue to complete key milestones in the soft launch trial period. The CLEAR Verified platform improved customer experience, increases conversion, reduces fraud and lowers cost for our partners. We are seeing how Digital Identity is improving online outcomes, which, in this moment, for both trust online and the economy is incredibly important.
Our LinkedIn partnership continues to build momentum in the U.S., and we have expanded to Canada and Mexico. Recently, LinkedIn added a verification badge to member profiles. In the digital world, this badge is meaningful. We acquired Sora ID this quarter, adding configurable and compliant KYC capabilities to our platform. Not surprisingly, identity matters in financial services, and we're creating a digital fast lane. There is a large unmet need in this industry for lower friction and enhanced security, so the power of Sora KYC is higher conversion and lower fraud for partners. Growth can sometimes be inefficient. And at CLEAR, we are always measuring investments, returns and outcomes to ensure we are optimized for both today and the future. We need to maximize agility and innovation while continuing to drive economic efficiency. We completed an organizational streamlining in October by removing layers across engineering, product and certain corporate functions. It is important that teams are easily connected top to bottom and cross functionally to ensure connectivity and alignment. We'll continue to focus on costs and operational efficiencies to ensure significant revenue flow through to the bottom line.
Before I turn it over to Ken to discuss financials, I want to thank our team, who is incredibly fired up for the opportunities in front of us and who make it happen every day on behalf of our members.
Good morning, everyone. We had a strong quarter, and I'm excited to take everyone through the numbers. In Q3, we successfully grew our top line while generating meaningful margin expansion. Not only did we report positive operating income, our incremental EBITDA margins were 40%, demonstrating operating leverage across the board. This quarter, we settled the accrued liability to our credit card partner for contract year 2 ending on June 30, representing around $133 million of cash outflow. With this large outflow, our free cash flow was negative $9 million. Excluding the net outflow this year and last year, our free cash flow was up 150%.
On a trailing 12-month basis, we generated $180 million of free cash flow, up 97% year-over-year. Excluding the $10 million net working capital benefit from the partnership, LTM free cash flow was up 150% year-over-year. After deducting normalized stock comp expense, which is a real economic expense, LTM free cash flow was $123 million, up 228%.
In September, we acquired Sora ID. The acquisition adds a strong founder-led team of engineers, great technology and an exciting revenue pipeline in financial services, which we think we can accelerate in 2024 given the integration with our robust platform, go-to-market resources and brand. The acquisition consists of an upfront cash payment of $5.25 million, of which $3.75 million was paid in Q3. Further details of the deal terms are available in the 10-Q released this morning, which include retention bonuses and earnouts based on revenue targets.
Active CLEAR Plus members were 6.4 million as of September 30, up 31% year-over-year. As Caryn mentioned, we saw a return to pre-COVID travel patterns this year with a slower end of summer through back-to-school period and a reacceleration in the back half of September into October. This quarter's net adds carried higher ARPU as we benefited from a mix shift from partner channels and family to full-price standard members. Additionally, we saw the positive impact of the year-to-date price increases we took through both our partner channels and our family channel.
Net member retention remains strong at 88.5%, consistent with our long-held expectations that retention would settle in the upper 80s. As a reminder, this is a member-based metric, not a dollar retention metric. It does not reflect the positive impact of price and mix on revenues.
Within R&D, there's a $7.7 million benefit from stock comp reversal related to reorganization-related employee departures. On a clean basis, year-over-year R&D was down 240 basis points as a percent of revenue. Most of the R&D savings from the reorganization is already reflected in our Q3 results.
G&A includes $457,000 of deal expenses related to the Sora acquisition. Clean G&A was down almost 800 basis points as a percent of revenue year-over-year. Normalized stock comp expense was $11.8 million, which is down from $14.1 million last quarter. This excludes pre-IPO performance units and reversals. In Q4, the Sora ID equity-related compensation will bring this number back up a bit.
We continue to have a sharp focus on stock compensation expenses. Given where the stock is trading, we've shifted compensation mix towards cash from equity for new hires. Overall, the organizational streamlining efforts will yield approximately $20 million of annual savings, including equity compensation. The third quarter reflects a total of $4 million of benefit, split approximately $3 million in R&D and approximately $1 million in G&A. The balance of the benefit will be fully realized by first quarter 2024 and largely fall into G&A.
In Q4, we expect $2.5 million of onetime cash severance expense falling $1.5 million into R&D and $1 million in G&A. Additionally, we expect R&D to grow sequentially, reflecting the Sora team compensation and near-term retention bonuses.
The NextGen Identity account upgrade will happen over the next few months. Much of the upgrade process occurs in the back end, where we will add to our multifactor authentication enrollment process with data directly from the issuing source. At the airport, members simply need to update their picture as well as confirm their ID. This is an exciting new frontier and the culmination of many years of great work by the CLEAR team.
We expect Q4 revenue of $165 million to $167 million and bookings of $185 million to $187 million. We included a modest contribution from PreCheck in our guidance. As we ramp locations and begin marketing, we expect more significant top line contributions in Q1 and 2024. We expect year-over-year free cash flow growth in Q4.
With that, let's go to Q&A.
[Operator Instructions] Your first question comes from Sarang Vora of Telsey.
This is Sarang Vora on for Dana Telsey from Telsey Advisory Group. My first question is on the NextGen ID. It seems like a big transformation for CLEAR here. Can you help us you did provide some color, but can you help us how the transition will happen over a period of time? Is it like a 1.5-year thing, 2-year thing? And then your relationship at the back end as well with the Department of Homeland Security authentic data sources? And how you are making this NextGen ID, the next ID that we really need from a digital standpoint. Can you help us expand on that one? And then I have one follow-up as well.
Thanks for the question. We'll start on the NextGen ID. So you're right. This is a major initiative. It will be the highest fidelity digital identity at scale and unlocks physical and digital experiences for our members. So this has implications on both the CLEAR Travel and the CLEAR Verified side. And I think it's a great example of a public-private partnership with the Department of Homeland Security because we've been collaborating with them on these standards since 2020. And so it is pulling data directly from the source. So the ability to add to our multifactor authentication process with another piece of deeply authenticated data, so potentially, for example, from the DMV, is a majorly important initiative. So let's talk about, as Ken said, it's going to happen over the next few months in the airports from an upgrade process. And then from there, you'll see Lane of The Future, which this is an important part of, be sort of phased in through 2024 and is really the great unlock for the customer experience to make it so you're not breaking strides and so then also connecting it to a face-first experience.
And I think when you look at both online and off-line, having a very high fidelity multifactor authenticated identity is the unlock that people have been looking for, again, whether you look at Sora and financial services and connecting KYC to NextGen Identity, or connecting health care information to NextGen Identity or being able to use it to have a face-first connected experience in the lane.
And just in terms of timing, a lot happens on the back end, and so that's going to be in process in the very near future. And you'll see member communications going out talking to our members and explaining the process. But it's going to be a very light-touch process in the airport. New photos and, in many cases, confirming IDs in other cases. So it's going to be a fairly light touch. It's going to happen in the near future, and it's going to be in a compressed time frame.
That's great. Can't wait to try. I feel like we need a secured ID like the NextGen one. So great on that one. One quick question on TSA PreCheck. I know it's been long coming. So happy that it's ready to roll out this year. Can you help us walk through some of the details that you might have internally prepared for TSA PreCheck, like the timing of rollout across airports, or if you had a plan, like a fee plan or something, can you help us walk out some of those details on TSA PreCheck rollout that's coming up in 4Q?
So I'm going to be unfortunately limited on the details. I will say that this is the first time we've included in guidance. So that gives you some idea of our confidence in the timing of the rollout. So I can't really give you any details on the rollout schedule, but we are confident that it's a this year event.
And if I can just add to that, we're incredibly fired up here. We were born to do this, right, to make enrollment frictionless for consumers to be open at 4:30 or 5:00 in the morning at airports with our amazing ambassadors who are there all day, ready to help members or travelers who are still there at 9 or 10:00 at night. We have hundreds, if not thousands of pods at today 54 airports across the country and more coming. So we are incredibly excited. TSA PreCheck is a great program. Millions of travelers are already enjoying it, and we're excited to add to our partnership with TSA and help further this program, we were born to do this, and we have the infrastructure in place today.
Your next question comes from Joshua Reilly with Needham.
Nice job on execution here in the quarter. You announced the $20 million cost savings. Can you help us understand how much of that savings is related to spend on CLEAR Plus versus investments you've been making on the platform? And maybe give us some color on what guided the decision to make these cuts in terms of the timing?
Sure. So Josh, this is really about streamlining the organization, removing layers, making decisions faster. Growth can be really inefficient, as Caryn mentioned in her opener. And as owner operators are -- the onus is on us to really drive the top line, but also ensure that profitability falls to the bottom line. So this is really across the board ferreting out inefficiencies, ferreting out bureaucracy, and this is something you can expect us to do on an ongoing basis. We are really focused on costs while driving revenue. So this is really more across the board than specific to a business line.
Got it. And then net member retention is now down to the range that you kind of previously discussed. I guess a few quick questions around retention. What type of visibility do you have now that you've seen the impact of the price changes to retention? And what cohorts of customers are you seeing a little bit higher churn with? Was it Delta SkyMiles or family customers or maybe those who joined post-COVID and that are now reassessing? Maybe help us understand some of the dynamics there.
Sure. Yes. Look, this is a really incredible business from a visibility perspective. We have years and years of cohort data looking at retention. As you point out, we are to the range where we've been saying since '22 we would wind up coming out of COVID. And so when we look at the retention metric that we report, that is sort of based on a trailing basis on the entire base. When we look cohort by cohort, to your question, gross retention by cohort has been really stable, right? It's actually higher now than pre-COVID levels even as we've increased price. And this speaks to the passion for the brand and the passion for the product. So we've seen a very inelastic demand for CLEAR, and so we're really happy with where retention is and has been.
It's been an upside surprise over the past 6 to 8 quarters. And I would also remind you that this metric doesn't actually give the benefit of the price increases, right? This is a member-based metric. So this doesn't actually speak to the impact on revenues from the pricing.
Your next question comes from Ben Miller with Goldman Sachs.
Just on international, you've now rolled out a few different offerings internationally like RESERVE and the LinkedIn partnership. I'm curious how you think about the broader international opportunity and how some of these offerings in international markets feed into that around potentially building the brand or relationships with airports and regulators?
So thanks for the question. From an aviation or a travel perspective, the travel being challenged is a global phenomenon. And so launching the RESERVE lanes is a great start. And we also think that there's opportunities for pay-per-use on the RESERVE. People want predictability and there's many different ways to get it. So we are seeing a very strong response for RESERVE in countries from Germany to Italy. We just launched Heathrow. And so not only that, but we see ways to tie it together with CLEAR Plus. And so potentially, think of it as a golden ticket, if you will, that there's fast lane opportunities, both on your way out and on your return trip.
So I think that there's a lot of opportunities from home to gate internationally, which may or may not be biometric, right? People want safer and easier experiences and it's our job to deliver it to them in the best way possible.
From a LinkedIn perspective, Canada and Mexico launching means that we can start to build ecosystems in those countries. But also as we're doing more in CLEAR Verified, digital marketplaces are global, and so we need to be able to serve those customers and those partners. So international, we are set up for it from a privacy perspective and from an infrastructure perspective. And you won't see us in all countries. I think we're pretty selective, but we're going to follow our partners, right? And our partners could be an airline or our partner could be Linkedin.
And then Ken, just on precheck. I know details are limited, but any way to frame or think about the incremental margin path given you talked about a lot of the upfront investments are more behind you. How should that build, I guess, through next year?
Yes. So directionally, we've been investing in this program for several years with 0 revenue. So incremental margins should be high.
[ Upside ] from here.
Yes. We are going to be recognizing the revenues on a net basis. So from that perspective, gross margins will be very, very high. And we think that while there might be some incremental staffing at certain locations to enroll in PreCheck, generally speaking, we have a fairly large infrastructure across the country in our 55 airports. And so a lot of the labor will be absorbed in the existing infrastructure, although there will be pockets of incremental where we see opportunities. But our tech infrastructure has been in place for several years.
Your next question comes from Cory Carpenter with JPMorgan.
I wanted to ask if you could expand a bit on your plans for the Sora ID integration, and then just more broadly the opportunity that you see in financial services?
Sure. So financial services is, I would say, the most developed and largest addressable market for identity today and it's regulatorily driven. And the Sora acquisition is, I would say, small, but very impactful. It opens that market up to us. So integrating Sora's technology into our platform, which is a fairly light lift, it will basically integrated in the next few months, will allow us to go to market. And we've already have pipeline in financial services. We were unable to service that pipeline up until now. And so this is really a big unlock for us.
And I would say there's a real need within financial services to both remove friction from an onboarding perspective, but obviously, fraud is a big problem as well. And the network identity, a reusable identity is sort of the perfect solution for this industry, right? There's significant drop off when your KYC a new client in financial services, and there's significant upside if you can increase conversion. And so bringing the CLEAR brand and the CLEAR infrastructure go-to-market with our existing member base and having this network strategy within financial services, we think is a really, really powerful combination.
If I can just add to that. I think we were impressed by not only Sora's strong team, but their partner dashboard capabilities. And so marrying front end and back end, marrying our both identity capabilities today and then NextGen identity plus Sora's capabilities, makes it an incredibly powerful and importantly, economically efficient because we already have a large user base capability for our partners. I would also just say, there's a lot of focus here at CLEAR, focus on travel, focus on health care, focus on financial services. And there's a lot of structural similarities between those industries, both from a regulated environment, which also creates a sense of urgency, but our obsession with the customer experience.
And so I think this is a very exciting moment, both launching new products like PreCheck we talked about, but Sora, health care, expanding our travel capabilities and leveraging that off a streamlined cost structure. And these are our sweet spots. We have a long track record in regulated industries, driving customer experience and outcomes. And so there is a natural connection to both health care and financial services.
And just a follow-up on the NextGen Identity. What are some of the next steps or technologies you need before launching the CLEAR Lane of The Future kind of now that you have or you're rolling out NextGen Identity? And is there any way to frame just how much this could potentially speed up the check-in process for Clear lanes over time?
So we have the capabilities today, and we'll be rolling them out. You might see some new hardware in the lane, which we're very excited about. But I think it's really important to know when you think about face first and customers not breaking stride when you think about seamlessly integrating into TSA's hardware that it should be materially faster and scalable from where we are today. And we're incredibly focused on that rate. We need to continue to drive our member experience forward in an at-scale way. Travels [ the math ] and volumes are going to continue to grow. So the onus is on us to deploy this kind of technology, right? So face from fingerprint and eyes not breaking stride, seamless digital integration into TSA hardware. And so NextGen Identity and face are the unlock for that. And while I can't give you an exact second, what I can say is it's materially faster as well as scalable because we expect volumes to grow from here going back to our 1 million more everyday theme coming in 2030, which is kind of around the corner.
Your next question comes from Mark Kelley with Stifel.
I have 2 quick ones. Just on the NextGen Identity, whatever that does completely get up and running and you're kind of at scale there, does that give you an opportunity to maybe have fewer ambassadors per terminal? Or given how fast I'm assuming the whole process will be, maybe you need fewer of those folks at the airports? I guess, what's the right way to think about that?
And then second, just quickly on the Sora ID acquisition. And Ken, maybe you just answered this by saying it will be integrated in the next couple of months. But when there's a change of ownership, do you have to go through like a requalification process given that your industry is highly regulated, or is that not something that happens in your industry?
I will take the Sora one first and put to Caryn. No, there's no issue with change of control and licensing or anything of that nature. The system would be compliant. And so as long as the system is compliant, that's all that matters.
And in terms of automation, let's just start by saying our ambassadors are awesome, and they are doing an unbelievable job every day. But they're doing an unbelievable job at many different things, enrollment, and we see many more enrollment capabilities, adding new products at the airport. And so we intend to drive automation around Lane of the Future. And we believe that our ambassadors can continue to serve higher and better uses for our members, for our airline and airport partners. That could be post TDC where they help with divestment. That could be new services that we start where they're helping members navigate airports more abruptly, not just the CLEAR Lane. That could be enrollment. So we see opportunities for our ambassadors to continue to serve members.
I think about some retailers who have gotten rid of the checkout lane and have their team members out on the floor really serving customers as experts. So I think there's opportunities for us to drive automation and there's good margin from automation, as well as have our ambassadors serving members and partners, and I would say the highest and best use hospitality. Does that make sense?
Yes, that does I appreciate the color.
Your next question comes from David Unger with Wells Fargo.
Ken, I know you're not giving '24 prelim guidance here, but I'm just curious internally how we should think about normalized bookings growth rates as travel normalizes?
Yes. So you're correct. We're not giving '24 guidance. I will say our Q4 guidance, if you look at we always look at CAGR because obviously, coming out of COVID, you had the ups and downs. And so our CAGR has been consistently at or above 30%, and even Q4 top line CAGR is still maintaining that 30% and that's with very little TSA PreCheck contribution, if you will. So we feel good about our prospects. We're not giving guidance to the growth rates, but we think we have a lot of opportunity to continue to drive CLEAR Plus penetration. We're going to be rolling out TSA PreCheck, enrollment provided by CLEAR and as well as continuing to gain traction on the Verified side.
I would think of it as network product and partners, right, when modeling and there's network growth opportunity, there's product growth opportunity, there's partner growth opportunity and still our vintage, if you will, in many airports, I think when we went public...
One of our airports are actually under 2 years old right now.
Right. So penetration of cities differs from Denver, which we've been in for 13 years to an L.A. to a much newer city. And that's before PreCheck and before Clear Verified, which is really gaining traction. So it's exciting.
Okay. That's great. And then obviously, you're in a position in terms of the balance sheet. The share buyback. I just wanted to kind of dig into that, Ken, like the potential for stepping it up in 4Q, given you've guided for year-over-year free cash flow growth in 4Q, and it was meaningful last year. So any color you could give there on share buyback and free cash flow returned to shareholders?
Yes. So look, we're going to continue to be opportunistic. That's our capital allocation philosophy. You've seen us do special dividends. We've increased our quarterly dividend. We have repurchased shares. We repurchased some this quarter already to date. And so we're going to continue to drive opportunistic capital return to shareholders. And we obviously increased our -- we still had some authorization, $38 million. We increased it to now $138 million. So you will continue to see us deploy various methods to return capital to shareholders.
At this time, there are no further questions. I'd like to turn the call back over to Caryn for any closing remarks.
Thank you for joining our third quarter 2023 earnings call. I am proud of how the CLEAR team is executing, really proud of how the CLEAR team is executing and how we're growing our products and our partners. As you've heard us say a lot, identity is foundational. It is here and now, and you're seeing that in travel and beyond. So thank you for your time today.
This concludes today's earnings call. You may disconnect your lines at this time. Thank you for your participation.