Clear Secure Inc

NYSE:YOU

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to CLEAR's Fiscal Year Third Quarter 2024 Conference Call. We have with us today, Caryn Seidman-Becker, Co-Founder, Chair 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 documents the company has filed and furnished 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. And 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. Caryn?

[Caryn Seidman-Becker, executive]

Good morning, and thank you for joining us. At CLEAR, identity is foundational. Whether you're getting on a plane or logging into your bank account, people expect frictionless, trusted and secure experiences now more than ever. This year, we have focused on 3 core areas: improving the member experience, scaling TSA PreCheck and scaling CLEAR Verified. We are making strong progress across the board, and I am excited for the foundational partnerships announced this quarter, laying the groundwork for future growth and opportunities. Our expanding nationwide network offers more products helping travelers win the day of travel from home to gate and back again. Improving the member experience in travel starts with the lane of the future, and we have begun rolling out our new face-first NV, which stands for enrollment and verification hardware with strong early results. Verification is 3x faster with significantly less steps for members and ambassadors. Moving to face in the lane brings us standardization across all of our platforms and improves the member experience, always privacy first. As travel volumes continue to rise, we anticipate another 1 million travelers crowding airports every day by 2030. Innovation is table stakes, and travelers rightfully expect predictable and frictionless experiences. Ambassador Assist is now live in 3 airports with Orlando launching today. As one of the most popular airports for first-time travelers who doesn't want help from a beloved CLEAR ambassador navigating a busy airport on family vacation. We introduced 4 new CLEAR perks since the second quarter with strong early engagement. TSA PreCheck enrollment provided by CLEAR is scaling, and we are now live in 62 locations. Today, that is 52 airports and 10 staples locations. We are meeting travelers where they are, whether at the airport or a convenient retail location. At just $1.30 a month, we think the value of TSA PreCheck is a no-brainer. For the 90 million people that travel at least 2 times a year, there are no more appointments, no hassle, just seamless access to TSA PreCheck. Today, we have over 27 million members on the CLEAR platform and enterprise partners are relying on CLEAR secure identity products for both their customers and their employees. Our embedded Instanton member base is driving adoption and conversion for our partners. Some partners experience 1/3 of day 1 verifications coming from existing CLEAR members. Direct integrations with companies like Home Depot and LinkedIn prevent fraud, build trust and maximize efficiency. We're also expanding our channel partnerships, such as Okta, as companies are eager to implement full end-to-end identity solutions that are easy to integrate and deploy. With cybersecurity threats on the rise, securing employee access and identity is as crucial as securing consumer identities. With Okta, we offer a turnkey biometric factor authentication solution. The lines between physical and digital interactions continue to blur. A verified identity isn't just a checkmark. It's the foundation for everything we do in a high-stakes digital world. Sensitive information is transiting across global networks, and there is increased risk of fraud, account takeovers and synthetic identities. Authenticating and credentialing the person is paramount and CLEAR secure identity is critical. These are exciting times, and we remain focused on innovation and growth, driving members, bookings and free cash flow. Now over to Ken.

[Kenneth Cornick, executive]

Thanks, Caryn. Third quarter bookings growth accelerated, driven by improvements in the airport channel, pricing, strong retention as well as increased contribution from PreCheck and ClearVerifi. We demonstrated significant operating leverage with incremental operating income margins of 63% and incremental EBITDA margins of 50%. Total cumulative enrollments are now over 27 million, up $2.2 million in the quarter. We expect to end this year with around 30 million members. And as we add new partners, we expect continued growth into next year. Active CLEAR Plus members grew by 55,000 in the quarter. As is typical in Q3, net adds were down sequentially versus Q2. The August price increase had a modest impact on family gross additions and family member retention rates, while positively impacting dollar retention rates. We see continued opportunity to grow CLEAR Plus members and expect Q4 net adds to be up sequentially from Q3. Retention is an important driver, and we continue to optimize for dollar retention as we focus on increasing ARPU through various pricing initiatives. In Q3, gross dollar retention was 89%, up 100 basis points year-over-year. We are encouraged by the performance of our recent price increases, which has been better than expected and reflects the increased value we are delivering through our expanded network, value adds such as Perks and our improving member experience. Our emerging businesses, PreCheck and CLEAR Verified are contributing to our bookings and gross profit dollar growth. Over the coming year, we expect to ramp PreCheck in airport, out-of-airport and online footprint, which will provide further growth tailwinds. We see out-of-airport locations driving incremental enrollments, expanding the market with strong margins. Our ambassadors and especially our tenured ambassadors make a huge difference in the member experience and our metrics. We want CLEAR to be the employer of choice, attracting and retaining the highest quality talent. So we recently implemented a new ambassador compensation structure. The new structure increases base wages while reducing commissions, which will shift dollars out of sales and marketing into direct salaries over the next few quarters. We expect this to be fairly dollar neutral but outcome accretive. Early data is encouraging with improved employee retention and increased sales per labor hour. We expect 2024 free cash flow of at least $280 million, up 40% year-over-year, including this quarter's outflow of $182 million for the annual payment to our credit card partner. Given our cash position and strong free cash flow profile, we have increased our regular quarterly dividend by 25% to $0.125. We remain opportunistic with respect to capital allocation with the goal of maximizing long-term shareholder value. In Q4, we expect revenue of $202 million to $204 million and total bookings of $224 million to $226 million. With that, let's go to Q&A.

[Operator]

[Operator Instructions]. And your first question comes from the line of Joshua Reilly with Needham

[Joshua Reilly, analyst]

How do we think about the impact of the price increases that took effect August 1 and the rolling impact of the family price increase that was already going to impact the numbers to key metrics like net member adds and net retention in the quarter?

[Kenneth Cornick, executive]

Josh, I'll take that one. Look, let me start by saying we're really pleased with the performance of the pricing. There's been a significant ARPU gap across our member base due to historical free or deeply discounted pricing. And our strategy has been to reduce the discounting and drive ARPU higher. So we're really focused on dollar retention, and that was up 100 basis points year-over-year. And we've seen very little retention impact, but it's really centered around that $70 family members, $70 was the prior year price, which -- where the pricing is up 70% year-over-year to $119. Obviously, this is very highly accretive to bookings. Look, and I think overall, we feel like our value proposition has continued to strengthen. We've expanded our network. We have a larger network today than we did last year, an improved experience, and Caryn and I will talk about that on the call, I'm sure. And benefits like perks where the implied value is over $300 in terms of the value of those perks to a CLEAR member. So really, the CLEAR membership pays for itself today. So that's the pricing impact. And in terms of net adds, Q3 is typically down sequentially from Q2. We expect Q4 to be up sequentially from here. And I think you have to break it into gross adds and retention, which drives the net adds. From a gross add perspective, modest impact from pricing, specifically on family, on the family attach rate. We think we can recover those ads with post-enrollment marketing initiatives. And while retention was definitely better than we expected, it had a modest impact on the net as well. So we see continued member growth opportunities. If we look at member penetration, MSA penetration, across our entire network, it's less than half of the top 5 markets. So we think that there's a lot of opportunity there to drive net adds over time.

[Joshua Reilly, analyst]

Got it. The Uber partnership, that's obviously a pretty impressive logo to add on the Verified side. Can you just discuss, is there a commercial relationship associated with the partnership? And how much could this increase total cumulative enrollments as Uber riders kind of gain awareness of the broader CLEAR app?

[Caryn Seidman-Becker, executive]

I think Uber is a great example of identity being foundational and trust and safety being paramount to so many right now. So we think that there is an enormous amount of potential in our Uber partnership. We've obviously started by enhancing trust on their platform with verifying riders to give drivers peace of mind. Obviously, Uber has many parts of their business. And so, we think it's a really exciting partnership because trust and safety matters to riders, it matters to drivers. It matters on so many different parts of the business. And what we know early days is that CLEAR members who are verifying are having great experiences. And so, signals are very positive for all stakeholders, and there's a lot that we can do together. And again, going back to utilization, utilization today isn't just about the airport. It's about where you can use CLEAR outside the airport. And the ability to go from multiple times a year to multiple times a day is the power of CLEAR being a secure identity network. So I think it is great for members. I think it's great for Uber, and I think it is great for growth over the long term.

[Operator]

And your next question comes from the line of Ben Miller with Goldman Sachs.

[Benjamin Miller, analyst]

I guess just on the pricing side from here. Should investors expect a more regular way cadence of annual price increases over the next few years? Or will it continue to be more, I guess, tactical on a tier channel basis to close that gap? And then second, as you've taken price, have you seen any noticeable shift in what the crossover point is in terms of in-airport uses per year where a member still finds value versus one where they might churn? Any insights there would be helpful.

[Caryn Seidman-Becker, executive]

So let me start by talking about pricing and strategies and thoughts there, and then Ken will take utilization and the expansion of the TAM that we're seeing because we used to be in sort of the front of the plane when we started and now we're throughout the plane. So you're seeing the travel TAM grow enormously. In terms of pricing, and I think we said this, we started 14 years ago with one airport at $179, and that was very unscientific. It was kind of kind of nice sticking our finger in the air and saying, what should we price and what was the old product priced at when it had 16 airports. And we have pricing at that level for a very long time. And then family actually started out, I think, at $50 several years ago. And so, we've added network. We've added value. We are adding a lot through the lane of the future from an experience perspective and really helping travelers win the day of travel from home to gate and back again. And you're seeing that with Assist, you're seeing that with Perks, you're seeing that with Scout. So there is such an enormous amount of opportunity to both serve current members in a more extensive way to really help them win the day of travel. You'll see a lot coming out of the mobile app over the next year. And so we think that there is value to that and you can price for that. I also think that there are opportunities over the next few years to stratify and create different tiers. So pricing is definitely part of our ongoing strategy. But first, it starts with creating an unbelievable member experience from home to gate and back again in the lane. And you're seeing today, we launched our NV space first at JFK in San Francisco. So if you're in those airports, you can see them. They're in test phase as we roll them out across the country. We are absolutely transforming travel. This is an incredibly exciting time. And when you create value for your customers, they will pay for it.

[Kenneth Cornick, executive]

Yes. And in terms of the breakpoint, if you will, on verification volumes. I mean, look, verification volume or frequency is definitely the most important driver of retention. We see a very low breakpoint. We're well above the level where we would see any impact on retention. It's obviously correlated, but there's really a step function like and it's well below the average utilization today. But that being said, we're looking at perks and things of that nature to deliver incremental value to potentially lower frequency users to drive retention higher, clear mobile lanes, which are the QR code-based lanes that we've talked about in the past. Those drive utilization and increase frequency in our network as well. And then things such as Uber and sports, those are types of transactions that also drive utilization and therefore, retention. So we're looking at it holistically.

[Operator]

Question comes from the line of Cory Carpenter with JPMorgan.

[Danny, analyst]

This is Danny on for Cory. For the first question, as you think about TSA PreCheck expansion, can you maybe talk about your priorities for increasing geography footprint and what the out-of-airport expansion could look like outside of the Staples locations?

[Caryn Seidman-Becker, executive]

Then I have a follow-up. Absolutely. So PreCheck continues to gain momentum. Metrics doubled sequentially. That's number of average locations, pre-enrollment pipeline more than doubled quarter-over-quarter and revenue doubled quarter-over-quarter. So as we said today, we're in 52 airports and 10 Staples locations. You will continue to see us scale out of airport locations. So this quarter, we're going to launch the Oculus in New York, again, meeting travelers where they are. So if you're downtown New York City or happen to be in that area, you can go enroll in PreCheck at the Oculus or Mall of America. As we've said, given the price point of $1.30 a month and numerous credit cards that reimburse for TSA PreCheck, we continue to believe that the TAM is over 90 million travelers if you travel 2 or more times a year. We will continue to expand our Staples locations throughout this year and next year. We expect to end this year with over 75 total locations. So you will see that channel continue to grow, and that's off to a strong start. We will be in every one of our airports. So today, that is 58. We should end the year at around 59. So we'll not only be in those airports, but then we will be in other airports as well. So when you look at CLEAR Mobile, and again, you see the stratification, that is a QR code, lower-cost lane, but we will also have PreCheck there. So we will be expanding our airport footprint with TSA PreCheck, we will be looking at other locations beyond Staples. You'll start to see that this year, meeting travelers where they are. We've also done corporate events and enrollments, so going to whether it be conferences or 2 companies. And so again, happy to come to JPMorgan, Goldman Sachs or anyone else on the call and enroll, always be selling here. But there are enormous opportunities, universities, meeting people where they are. This is a very portable asset. The pods move very easily and are structured to be that. So we just have huge opportunities. And this is so important. If everybody could be in PreCheck, our airports would be even better.

[Kenneth Cornick, executive]

One thing to add, we're also adding locations post security in our existing airports to really increase the concentration of locations within our footprint as well.

[Caryn Seidman-Becker, executive]

And I also -- just to add to that, the beauty of PreCheck holistically, not only is it great for travelers, but today, we have over a 90% marketing opt-in rate. So that's really powerful when you look at the whole flywheel here.

[Danny, analyst]

Got you. That's helpful. And then on CLEAR Verified, it seems there's been a bunch of new customer announcements this past quarter. Is there any way to think about how material this business could be to the P&L in 2025 or maybe time line of when it could be more material?

[Caryn Seidman-Becker, executive]

So I think that is a really fair question. And what we've said is first come the members and then come the revenues. All that being said, PreCheck and ClEAR Verified are contributing to gross profit dollar growth today. And so we expect to continue to scale that materially in 2025. With channel partners like Okta going point to multipoint and having seamless integration means the ability for customers to turn it on goes a lot faster, and you'll see more channel partnerships. So a few things have happened this year. Not only have we signed material partners like Home Depot, we obviously already had LinkedIn. But with identity being foundational with the digital world that we live in becoming higher and higher stakes, we are finding new use cases within our customers. Also with Channel, we are able to turn on new customers a lot faster because integration has been -- it's not only the selling cycle, but the integrations. And so, both of those things are speeding up. And with the ability to show product market fit with current customers, that is also accelerating the close rates -- so not only is the pipeline growing, but the close rates are accelerating, and we expect it to be a significant contributor to gross profit dollar growth in 2025.

[Operator]

Our next question comes from the line of Dana Telsey with Telsey Group.

[Sarang Vora, analyst]

Sarang Vora for Dana. My question is on the airport experience. We were at Salt Lake City Airport recently, and it seems such a better experience than we typically go through in New York, especially those handheld devices were able to transfer data to the TSA and like no photo, no stop, no ID was very seamless. So question is, how fast can you roll it out at some of your busy airports? Like can you update us on where you are in terms of rolling this hardware or the experience right now across your 58 airports and how fast do you plan to roll it out over the next few quarters?

[Caryn Seidman-Becker, executive]

Yes. Thanks for asking that, and thanks for noticing. Obviously, improving the member experience has been and remains a key priority. And we have seen steady improvement since February. So just to put some numbers on what you're talking about, the NVs that we're rolling out starting today are 3x faster than the existing experiences, combining fewer steps for members and ambassadors. And you are right, the handhelds, which today, we are about 55% to 60% through our digital identity integration. We expect to close this year closer to 90%. So we'll be the majority way through. So you think of the great work that the team has done on next-gen identity starting since last November, December and how we rolled that out over the first quarter of 2024 and then integrated with digital identity and phase through this year. So we should be significantly through what you're referring to by the end of this year, and then you'll see the NVs rolling out the end of this year and the beginning of next year. So we're really excited by what we're seeing in the member experience. And I also think -- and I think it's important to say this morning that we're really excited about the power of our partnership with TSA, which has also just been great this year. And we've long believed in the power of public-private partnerships. And so, there's enormous alignment not only with what we're doing today with TSA, but with the incoming administration and our vision of safer and easier experiences in airport and beyond. So I think it's a really exciting time in travel and in airports to drive the customer experience and make it competitive with what you're seeing throughout the world in other airports. So what you've seen so far is just the beginning, and it's going to accelerate from here.

[Sarang Vora, analyst]

That's great. I had one more a thoughtful question on the tiered membership. I think you used the word tiered membership. You keep adding a lot of benefits to the membership, including like those Ambassador Assist that can take you from the gate to the -- from the door to the gate and so on. Is there a thought of like rather than price increases, is there a thought of a tiered membership over time?

[Kenneth Cornick, executive]

I mean, certainly, that's something that we've thought about. At this point, we're focused on delivering incremental value through perks, enhancing the member experience. We're taking pricing, as you've seen. But certainly, as we make our offerings more robust, there would be opportunities to potentially tier that. The Ambassador Assist that you just referred to, that's in 3 airports. We just launched in Orlando today. That currently is a paid CLEAR Perk as part of the Perk platform. You can only get that if you are a CLEAR Plus member, and that's paid on a transactional basis, but there's certainly a world where that could be bundled into a higher tier for sure.

[Caryn Seidman-Becker, executive]

Just one other point I want to add, which I should have said before, and I think it's the power of data. The data that we have on the customer experience is better than we've ever had. And so, our ability to make material changes on a lane-by-lane, hour-by-hour basis is really powerful. And so, the investments that we've made in data for the past few years are really starting to pay off. And so, what you see with our data is over 90% of our verifications today are less than 5 minutes, right? So we can measure, we can improve, optimize every day, and that is a really powerful investment that we've made that is yielding great returns.

[Operator]

Our next question comes from the line of Mark Kelley with Stifel.

[Mark Kelley, analyst]

I just had 2 quick ones. One is, can you please remind us, as you change your pricing structure, how that impacts your commercial agreements with someone like an American Express? That's the first one. And then second, maybe can you please give us a little bit more color on the OpEx moving pieces as you change the structure of your ambassador pay?

[Kenneth Cornick, executive]

Sure. Yes. So we think it will be -- I'll take your second one first. It will be a few million dollar shift from sales and marketing, which are the commissions into the base wage, and that will happen really over the next couple of quarters. I would say it will be complete by Q2. We started in a small way this past quarter, and we'll really see the bulk of it in Q4 of this year and Q1 of next year. Some of it might bleed into Q2, but it should be largely done in Q1. From an American Express perspective, the pricing impact doesn't impact the core -- the parent pricing. So the contract is the contract. But to the extent you have a family member, we would get the benefit of that pricing.

[Operator]

Your next question comes from the line of Michael Turrin with Wells Fargo.

[Michael Turrin, analyst]

Just on the series of product and partner announcements we've seen throughout the year, maybe you could spend some more time on just ranking potential time line of contribution from some of those and if there's a framework for how to think about core CLEAR Plus growth versus the incremental growth potential from those newer areas over time would be just a helpful framework for us.

[Kenneth Cornick, executive]

When you say stack rank, you're talking about some of the deals we've announced on the Verified side and how they contribute.

[Michael Turrin, analyst]

Yes. And really from a time line to contribution perspective, I know it's hard to kind of prioritize which could be the biggest on a call. But if there is a sequencing you might expect, that's helpful.

[Caryn Seidman-Becker, executive]

Well, they've been contributing this year. So the partnerships that we've announced, whether that be Community Health, whether that be Home Depot, whether that be LinkedIn, whether that be Surescripts, I can keep going. Those have all been contributors this year. And so, the channel partnerships that we've announced this year have not yet been contributors this year but will be contributors next year. And as I said, we're very excited about our channel partnerships, which are new for us because that integration -- it's not just distribution, it's integration. And that's one of the things that we saw that materially changed our airport business, and we always say Delta when we partnered with them in 2016, it was not just distribution in airports, but it was integration for the customer experience. And so, we're really excited about those channel partnerships that we've announced this year. So Verado is a channel partnership in health care and Intersystems is a channel partnership in health care. And so, is Okta from a workforce perspective. So some direct partnerships have contributed this year. Channel partnerships will contribute next year. Our current partnerships direct will grow next year because we're finding new use cases, trust and safety and identity are challenging in so many different parts of businesses. And one of the big things we found this year is it's not just customers, but it's workforce. So when we're doing account recovery or password reset for a company, we might start with workforce. That was new for us this year. We always thought we would start on the customer side and then move to customer or we might start with customer and then find workforce. So we really are finding significant TAM expansion with our current customers and then channel partners. So those are the contributors next year in terms of CLEAR Verified.

[Kenneth Cornick, executive]

Yes. And then adding to that, look, we've planted a lot of seeds over the past 2 years, and those are starting to really kick in. Look at within travel, we obviously think we're going to see continued pricing benefit on the CLEAR Plus side. We think we have opportunities to grow CLEAR Plus members. So we have volume and pricing growth there. We have PreCheck continuing to increase contribution on a year-over-year basis. We have Perks and Ambassador Assist, so new products within travel. So there's a number of contributors as we look to 2025, and that's all over a streamlined cost structure. So we see opportunities to grow bookings and revenue and then obviously continue to see margin expansion as well.

[Caryn Seidman-Becker, executive]

And I think if I can just add to this, and this is a huge shout out to the CLEAR team 2024 was a year of enormous change. I think you talked about it as products and partnerships. I would say it was about innovation and integration as well. And so, what you see in the lane to the question before, is really powerful and continuing to drive innovation and automation and customer experience in the airport and then expand beyond the lane drives gross adds, drives retention and drives ARPU, not to mention new services that can be transaction-based. That's incredibly exciting in the travel space. And then this flywheel, as we end the year with over close to 30 million members, you're able to serve those members in an Uber or have an instant-on experience for a Home Depot. And so, that flywheel, I think, really took a step forward this year, and you'll see a lot of benefits from it in 2025.

[Michael Turrin, analyst]

That's all super helpful. Maybe just as a follow-on on the active member and retention metrics, it sounded like there were 2 pieces there, seasonality and the price increase. Is there any way for us to think about the impact split between those 2? Is it still seasonality, the majority? And any early view on how you're expecting holiday travel season to stack up this year versus last is helpful.

[Kenneth Cornick, executive]

Yes. I'm always cautious to use seasonality because we have an annual retention business. And so you have -- we had more backlog or more people coming up for retention -- sorry, for renewal in Q3 versus Q2. But certainly, seasonally, from a growth perspective, that is true, Q3 is typically slower than Q2. So the question the breakdown. No, I mean, I really would think about it as we had more people coming up for renewal. We had a small -- modest impact from a member retention perspective, really focused on the family, a little bit of an impact on the gross adds from family. We see Q4 up sequentially from Q3 in terms of net adds. We see a fairly strong supportive travel environment.

[Operator]

Okay. That concludes our question-and-answer session. I will now turn the call back to Caryn for closing remarks. Caryn?

[Caryn Seidman-Becker, executive]

Thank you so much for joining us today. I am proud of how our team is executing across our focus areas as we continue to improve the member experience, scale TSA PreCheck and scale CLEAR Verified. Have a great day.

[Operator]

That concludes today's call. Thank you all for joining. You may now disconnect.