Clear Secure, Inc. (YOU) CEO Caryn Seidman-Becker on Q2 2022 Results – Earnings Call Transcript

Clear Secure, Inc. (NYSE:YOU) Q2 2022 Earnings Conference Call August 15, 2022 8:00 AM ET

Company Participants

Caryn Seidman-Becker – Chairman & CEO

Ken Cornick – President & CFO

Conference Call Participants

Dana Telsey – Telsey Advisor Group

Paul Chung – JPMorgan

Michael Turrin – Wells Fargo Securities

Brian Essex – Goldman Sachs

Ananda Baruah – Loop Capital Markets

Operator

Good morning and welcome to the Clear Second Quarter 2022 Earnings Conference Call.

We have with us here — with us today, 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 those projections in our most recent SEC filings. In addition, we’ve included some non-GAAP financial measures in our discussion. Reconciliation 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. Caryn?

Caryn Seidman-Becker

Hello and welcome to our second quarter 2022 earnings call.

We were expecting a very busy summer travel season, which we had at Clear had termed, ‘travel to lose us’. Needless to say the global secular demand for travel, combined with the significant industry challenges have exceeded our already high expectations. This travel environment has highlighted the imperative for future facing innovation and collaboration amongst all stakeholders to ensure travelers have the frictionless experience they rightfully deserve and enjoy in so many other settings. We are laser-focused and deeply committed to accelerating our network expansion, partnerships and innovation around new products to help travelers navigate an increasingly difficult global travel environment.

We at Clear, spend each day envisioning and creating safer and easier travel experiences. When we say transforming the journey from home to gate, we mean it, from stepping out of your front door to reaching your final destination; it is just too hard today. Clear is on the side of the traveler and obsessed with making the journey better.

Our results continue to be fueled by our strong network and are evidence of the power of the network effect we spoke about in our shareholder letter. As we’ve continued to add new nodes, the value proposition increases exponentially. In the second quarter, we experienced strong bookings growth of over 75%. Some of our earliest markets opened over a decade ago are amongst the fastest growing in our network. We were able to fuel our growth in a highly capital efficient manner, reflecting not only the network effect, but the obsession with customer experience yielding both strong word of mouth and a high NPS.

New products and innovation will further our network expansion and the continued increase in our total addressable market. We have just launched our new powered by clear verification SDK available for mobile web experiences or native mobile applications.

This low code integration creates a single app solution for our partners, enabling frictionless experiences for their customers in both digital and physical environment. We are excited to welcome new partners to our network, creating new nodes for our over 13 million existing Clear members and ensuring rapid adoption for our partners.

Since our IPO, I am pleased with the continued obsession and improvement of our member experience, the growth of our network, new product introductions and our solid financial performance and free cash flow generation. What has propelled us at Clear and will continue to fuel our innovation growth and culture is the strong leadership team we have built.

Just this month, we are excited to welcome Nick Peddy as our new Chief Technology Officer. Nick joins us most recently from JPMorgan, where he was the CTO of Payments for consumer and community banking and before that, Nick was part of strong engineering cultures at Uber, Capital One, PayPal and Amazon.

Before I turn it over to Ken, a quick comment on the economic climate. These are still early days at Clear and while there is plenty of discussion in the market about a recession, our business has not experienced any evidence of a travel or economic slowdown. We have an appropriately aggressive plan in front of us as identity holistically speaking and frictionless experiences have never been more important and we are well positioned to lead.

We are also well-equipped to manage through various economic environments as evidenced by Clear financial performance during the pandemic, when travel declined by almost 100%. Our bookings declined by about 10% while our margins and free cash flow expanded. I’m excited about the opportunities in front of us, our strong free cash flow and balance sheet, which positions us incredibly well in this environment.

With that, I will turn the call over to Ken.

Ken Cornick

Thanks Karen. Good morning, everyone. Our financial performance in Q2 was better than we expected with revenue up 86% and bookings up 76%, driven by growth in Clear Plus as well as new platform deals and renewals. As Caryn alluded to, this level of growth is not just about the return to travel post COVID. It’s a reflection of Clear, significant growth opportunity. Our bookings CAGR versus pre-COVID 2019 level is approximately 30% with same-store bookings accounting for roughly 80% of this growth.

As we discussed on the last two earnings calls, our focus remains on growing members, bookings and free cash flow. We generated $41 million of free cash flow this quarter, bringing year-to-date free cash flow to $61 million and last 12 months free cash flow to $114 million. We expect to remit the approximately $65 million payable to American Express in the third quarter related to the very successful first year of our platinum partnership. Even with this outflow, we expect to generate positive free cash flow in the second half of 2022.

Excluding the working capital benefit from American Express over the last 12 months, we generated approximately $50 million of free cash flow, which is up over four times the prior year LTM amount of $11.6 million. Next quarter, once we anniversary the payable to American Express, we’ll be speaking more about LTM free cash flow.

We’re also focused on operating leverage. Since inception, we have been methodical about expense growth and we embody a scrapping at scale culture. As previewed in our Q4 ’21 earnings letter, year-over-year operating expense growth will continue to moderate as we progress through 2022. In the quarter, total OpEx grew less than 25%, roughly a third our revenue growth rate, driving significant margin expansion. Adjusted EBITDA turned positive in Q2 and is now positive on a year-to-date basis. In addition, adjusted net income turned slightly positive in the quarter.

We reported 94.3% net member retention in the quarter, which was higher than our expectations and remains above our long-term expectations of the upper eighties. In our quarterly letter, we included some additional detail on underlying drivers of our net retention metrics.

Specifically, as utilization has grown with our network, retention levels for newer cohorts of members continue to improve. We see that in our retention curves, which have shifted up into the right. This should provide a healthy tailwind, which we now expect to settle above pre-COVID levels. Our cash and equivalents balance as of June 30 was $703 million. As mentioned, we expect to generate additional free cash flow in the back half.

Our Q3 guidance expects GAAP revenue of $111 million to $113 million and total bookings of $128 million to $132 million excluding any contribution from TSA PreCheck. We’re making good progress on our launch timeline, and we do expect a Q4 launch.

We’ll now go to Q&A.

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from the line of Dana Telsey with Telsey Advisor Group. Please proceed with question.

Dana Telsey

Good morning, everyone and congratulations on the nice results. I like your word, Caryn, or Travel Pelusa and can you expand upon how you’re thinking about the Travel Pelusa going forward potentially into the third and fourth quarter and what you’re seeing on the cohorts of membership retention because it certainly seems like the year-one retention is going very nicely. Any other qualitative thoughts on other — the other year’s membership and their retention? And then just lastly, on American Express and on TSA PreCheck, any updates there? Thank you.

Caryn Seidman-Becker

Hi Dana. So I’ll take the Travel Pelusa concept and then I’ll turn it over to Ken on retention and PreCheck timing and Amex. As I said in my words at the beginning, we continue to see very strong travel trends and expect them to continue for Clear because these are still early days. We are opening new airports, right, which drives new enrolment and drives retention and utilization.

We’re launching new products and I think it’s really important, never has a frictionless experience been more valuable to travelers. All you have to do is turn on any TV station or online streaming to see how challenged the travel experience is and how people expect the predictable experience they have in other settings to happen in airports or in travel in general and that’s what we’re really focused on.

So whether it be home to gate, whether it be our announced partnership with Uber, whether it be our reserve products, whether it be what, some new products that we’re testing in the market that have been written about or on the side of the traveler and really obsessed with their experience from the time they leave their house to the time they board their plane and I think that’s deeply valuable. So we continue to see great strength in Clear and the opportunities in front of us.

Ken Cornick

So I’ll start with PreCheck. PreCheck is, we’re progressing on the launch timeline very nicely. We still expect a Q4 launch and we’re gearing up marketing and ops to support that. On the Amex piece, I don’t know if you had a specific question, but as we, sort of alluded to in the commentary, we are very pleased with year-one performance of the Amex partnership. We’ll be remitting the $65 million as we called out in the free cash flow area of letter.

And we think there’s a lot of opportunity on this Amex partnership for continued growth, not only on the platinum side, but, potentially adding other card portfolios within that family. Retention; look, we wanted to give some additional detail in some of the drivers behind the KPI that we report, the net member retention number, and we are very pleased with how the cohorts are progressing.

Typically, you see most companies would see a degradation over time in the quality of the joins. We see the opposite, and we’re really focused on the LTV and the LTV/CAC and the younger, the younger cohorts are actually performing better than our older cohorts and that’s really attributable, we think to the network effect and utilization.

Operator

Thank you. Our next question comes from line of Paul Chung with JPMorgan. Please proceed with your question.

Paul Chung

Hi thanks for taking my questions. So just on booking, booking strength, could you kind of expand on any pricing uplifts there? I know you did some price increases and where are you seeing, new enrolment momentum, any comments on particular regions? And then are there any kind of card programs or airline partnerships we should be thinking about over the next six or 12 months and I have one follow up.

Ken Cornick

Sure. So in terms of the booking strength, it really is fairly broad based and certainly the pricing that we took in Q2 went through successfully and is a contributor to the growth, but if you recall, we raised prices for new members only, not existing. We grandfathered existing members in and so, it is a small contributor to the bookings growth, but not all of it. It’s fairly broad based. From a geography perspective. I would echo that comment. It’s really broad based as well.

Caryn Seidman-Becker

The only thing I would add to that, Paul, is that you are starting to see strength on the coasts and so that’s something we had commented on earlier in the year was coastal weakness if you will, between international travel and business travel and you are starting to see strength there. So I think that’s important to think about as travel comes back, both on the leisure side, but then as well as the business and international side, which have obviously been very slow to rebound.

Paul Chung

Got you. And then my follow up, free cash flow has been excellent. It’s already exceeding all of 2021 and it’s mostly on bookings growth, but anything else you want to point out there? You mentioned the $65 million going out in 3Q, but as we look beyond 3Q, how do we think about kind of the normalized pace of free cash? And does that cash outflow kind of occur every year in 3Q or is it kind of more spread out in smaller magnitude as well? Just any comments there as we…

Ken Cornick

With respect to the cash outflow, that’ll be — that’ll be every year in Q3 for platinum. In terms of the free cash flow profiles, the company, a couple things to point out. Number one is as we sort of repeated every quarter, there is a discrepancy between GAAP and bookings. So cash and GAAP, GAAP lags behind bookings as we grow the business. And so that is a main contributor to the free cash flow generation relative to the GAAP financial metrics.

But I would also point out, we are hyper focused on capital efficiency is a very capital efficient business and, we expect that to continue. It’s just a feature of the business.

Caryn Seidman-Becker

I think it’s also a feature of our culture and who we are. So when you look at the IPO letter that we wrote, we talked about it. Its how we’ve grown up. It’s how we’ve built the business that we believe you can have growth and free cash flow and Ken talked about a scrapping at scale culture that’s embedded through now are over 3,000 team members around the world.

And so it’s a great business and I think we have very strong leaders who are focused on economic efficiency, as well as investing appropriately in the business and now 13 years into this, that’s what we’ve done from the beginning.

Operator

Thank you. Our next question comes from line of Michael Turrin with Wells Fargo Securities. Please proceed with your question

Michael Turrin

…where we were modelling, it looks like it calls for continued 30% growth as a baseline. You mentioned the rebound in summer travel you’re seeing. Anything you can add just around how to think about or how we should think about normalized growth for the business. And some of the drivers there as we maybe reach a point where some of the bigger spikes and ebbs and flows we’ve seen over the prior periods, start to settle a bit here.

Ken Cornick

We missed the first part of your question, but I think the gist of it, I think we got the gist of it, which is the normalized growth rate over time and, we’re not guiding to long term growth rates, but we did point out, we wanted to highlight the CAGR of the business since 2019. Just to show you, this is not just about the travel rebound. This is a strong, secular grower and we’re not going to get — give you guidance specifically on the long term growth rate, but we did want to point out the CAGR since 2019 as many companies are doing in this environment.

Michael Turrin

Sure. No, I think the CAGR is helpful just for us in trying to model just some of the settling impacts that could play through, maybe just one more Ken, if you could just remind investors the relation between free cash flow and EBITDA. Clearly we saw the bigger spike to 40% margin on free cash flow this quarter. Anything for us to be mindful of just between in the relation between those two metrics and thinking through the trajectory there?

Ken Cornick

Sure. So as a reminder, so with a subscription business, since we’re an annual biller, we have GAAP revenue, which lags behind our cash receipt. So if a member pays us $189 today, that’s a booking of $189. The GAAP implication of that is it gets amortized or deferred over the 12-month period of the subscription. And so that’s why you see free cash flow exceed the GAAP metrics.

Adjusted EBITDA while not a GAAP metric in and of itself is based off of GAAP revenue, and most — basically all of our costs, cash and GAAP are the same. So we recognize all the costs upfront cash and GAAP while the revenues are deferred and that’s why the adjusted EBITDA again, is based off of GAAP revenue and our free cash flows in excess. And in terms of, CapEx, we are fairly capital efficient business and so over time as GAAP catches up to bookings, those would converge, but since we’re, growing today, that is — there is that lag and therefore free cash flow is higher than the GAAP metrics.

Operator

Thank you. Our next question comes from line of Brian Essex with Goldman Sachs. Please proceed with your question.

Brian Essex

Hi, good morning and thank you for taking the question. Maybe, for Ken or Caryn, can we get a sense of — given the enrolment growth that we’ve seen on the platform, across the company, can you give us a sense what conversion rates might be of the non-airline business and how that’s driving kind of the kind of robust growth we’re seeing in the enrolment volume. So, if you go to a conference or something and you’re downloading the app and you’re getting that, participants information, how are those conversion rates and how do you see the trajectory of paying enrolments going forward based on that trajectory?

Ken Cornick

Yeah, so you’re referring to the upgrade rate from the platform to Clear Plus, and that is an exciting area for us. And I think we mentioned last call, we haven’t done a lot to specifically market to those folks, but we’re getting very strong organic bid rates there. And we think there’s a lot of opportunity. There is a contributor to the growth, but not a major contributor yet.

Brian Essex

Got it. That’s very helpful. And then maybe just from a TAM perspective. As we think about the potential of this platform, the aggregate business together, how should we think about international opportunities, both on platform and Clear Plus, is that something that’s potentially in horizon or is that kind of a ways away?

Caryn Seidman-Becker

It is not a ways away. I would say it’s today and on the horizon, in that when we bought WiLine, it was a business that had revenues in Latin America and so not only are we expanding the reserve product to other international markets, but that is also bringing platform opportunities to those markets as well. And so it is today and on the near horizon not in the distant future and areas that we’re specifically focused on are really the America. So going from Canada down through South America, as well as some places in Europe, Western Europe.

Brian Essex

And is that — that’s super helpful? Is that primarily for platform business or is that kind of on the airline side as well?

Caryn Seidman-Becker

So you should think about that as the platform business, but reserve is aviation focus. It is sooner on the platform and the reserve side than it is on the Clear Plus side.

Brian Essex

Got it. Super helpful. Thank you very much.

Operator

[Operator instructions] Our next question comes from the line of Ananda Baruah with Loop Capital Markets. Please proceed with your question.

Ananda Baruah

Yeah, thanks guys. Good morning. And thanks for taking the questions. Congrats on the consistent good results here. I guess, yeah, few if I could, just start Caryn, sort of top of your prepared remarks, you mentioned ongoing network expansion in new products and features on the horizon. Is there anything there you can share with us or, sort of not specific, maybe give us at least at a higher level some of the things you have — some of the ways you’re thinking about getting it some of this new stuff, and I have a couple follow ups.

Caryn Seidman-Becker

Sure. So the new powered by Clear SDK that we talked about the low code integration for partners who embed Clears Technology in their user flow. So you should think about two parts of the business, right? The travel side of the business and the platform side, I would think of travel as owned and operated what you see at Clear Plus lanes are reserve. And then what you think about is the platform, which you’ll see partner announcements over time is a single app solution. So that’s the clear enrollment and verification experience can be embedded in partner’s apps.

And so that’s really a very powerful product introduction on the platform side and a significant milestone for our company. So that this frictionless experience that people have come to expect, partners can bring to their customers and so that is a huge unlock for us; number one.

And then the other thing that you might have read about right, is a Clear premium pilot going on in Orlando and so that’s us testing different services, connecting our digital assets, like our app or our reserve technology with our physical assets. In this case, it’s our ambassadors in airports to create services, furthering the frictionless experience, where you could go on to the app and ask for an ambassador to come meet you and truly help you go curb to gate.

So those are premium products. We have different assets that we can put together in different ways, whether it be for us or for our partners. So that — those are just two examples.

Ananda Baruah

Yeah. That’s really interesting and helpful. So for the pilot that’s going on in Orlando, is that a live pilot? So you actually in Orlando could do that and have an investor, would you?

Caryn Seidman-Becker

It is a live pilot that we are testing.

Ananda Baruah

Interesting. Okay, cool. That’s helpful. And Ken, 80% you said there’s 80%, same-store sales growth embedded in the 30% booking CAGR. I think in the past, you’ve talked about — in the things past, that you’ve talked about, some of those things that you have done, you guys have to do that, continue to upgrade the talent. I think you talked about moving some of the stronger general managers around the country to replicate performance.

Is there anything incremental that you’ve been doing over the last 90 days or so that could continue to help catalyze this growth? Are you guys sort of, I don’t want to say set with what you’re doing, but is it going to be sort of more of the same? I’m just — I’m wondering if — I’m wondering if there’s anything that you’re doing to continue to lend to the consistent same-store sales volume?

Ken Cornick

Yeah, we’re continuing to refine our hiring practices. We’re continuing to refine our training. We’re continuing to refine the technology that our ambassadors have, in their app, in their hands to track performance. So yeah, we continue — we’re a continuous improvement philosophy and continuing to hire additional training resources and management resources as we grow the business. So I think it’s more of the same, but continuing to refine and improve.

Ananda Baruah

Yeah. Improving it across the board. Okay. Super helpful. And then last one for me, TSA Pre, thanks for the update. Are you guys thinking any differently about the contribution from TSA Pre than you were doing the IPO process? Or should we generally think of it as being relatively similar?

Ken Cornick

Yeah, I think is very consistent with what we’ve communicated in the past. We think there’s a very large opportunity to drive new enrolments for PreCheck as well as renewals and, no change to our thought process.

Caryn Seidman-Becker

The only thing I would add to that is, I think many people have enrolled through global entry historically, and I think that those appointments are even harder to come by these days. And so it might create even a bigger total addressable market for PreCheck enrolment.

Ananda Baruah

Cool. That’s helpful. Awesome. Thanks guys. Appreciate it.

Operator

You, ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Caryn for any final comments.

Caryn Seidman-Becker

Thank everybody for joining us today. Thank you.

Operator

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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