Clear Secure Inc (YOU) 2022 Q2 法說會逐字稿

Good morning, and welcome to the CLEAR Second Quarter 2022 Earnings Conference Call. We have 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 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. Caryn?

Hello, and welcome to our second quarter 2022 earnings call. We were certainly expecting a very busy summer travel season, which we at CLEAR had termed Travel-Palooza. 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 our evidence of the power of the network effect we spoke about in our shareholder letter. As we have 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 environments. 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 Petty 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.

Thanks, Caryn. 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's significant growth opportunity. Our bookings CAGR versus pre-COVID 2019 levels is approximately 30%, with same-store bookings accounting for roughly 80% of this growth.

As we discussed on the last 2 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 4x the prior year LTM amount of $11.6 million. Next quarter, once we anniversary the payable to American Express, we will 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 scraping 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 1/3 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 80s. 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 curve, which have shifted up into the right. This should provide a healthy tailwind to retention over time, 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 will now go to Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions)

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

And congratulations on the nice results.

I like your word, Caryn, of the Travel Palooza. And can you expand upon how you're thinking about the Travel Palooza 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 1 retention is going very nicely. Any other qualitative thoughts on other -- the other years membership and their retention?

And just lastly, on American Express and on TSA PreCheck, any updates there?

Dana. So I'll take the Travel-Palooza 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 enrollment 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. We're 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.

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're very pleased with year 1 performance of the Amex partnership. We'll be remitting the $65 million as we pulled out in the free cash flow area of our 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, but we see the opposite. And we're really focused on the LTV and the LTV to CAC. And the younger cohorts are actually performing better than our older cohorts, and that's really attributable, we think, to the network effect and the utilization.

Our next question comes from the line of Paul Chung with JPMorgan.

So just on booking strength, could you kind of expand on any pricing uplift there? I know you did some price increases. And where are you seeing new enrollment 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 6 to 12 months?

And I have 1 follow-up.

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 and -- 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.

The only thing I would add to that, Paul, is that you are starting to see strength on the coast. 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.

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 flow? 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 (inaudible) modeling.

Yes. With respect to the cash outflow, that will be every year in Q3 for Platinum.

In terms of the free cash flow profile of the company, a couple of 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 lag 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, it's a very capital-efficient business, and we expect that to continue. It's just a feature of the business.

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. It's 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 scraping at scale culture that's embedded through now our 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.

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

(inaudible) where we are modeling, it looks like it calls for continued 30% growth as 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 period start to settle a bit here?

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 in 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 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.

Sure. I mean, 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 spec to 40% margin on free cash flow this quarter. Anything for us to be mindful of just between -- in the relation between those 2 metrics, and thinking through the trajectory there?

Sure. So as a reminder, so with the subscription business since we're an annual biller, we have GAAP revenue which lags behind our cash receipts. 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 flow is in excess. And in terms of CapEx, we're a fairly capital-efficient business.

So over time, as GAAP catches up to bookings, those would converge. But since we're growing today, there is that lag, and therefore, free cash flow is higher than the GAAP metrics.

Our next question comes from the line of Brian Essex with Goldman Sachs.

Maybe for Ken or Caryn. Can we get a sense of -- given the enrollment growth that we've seen on the Platform, I mean, 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 enrollment volume? So if you have 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 enrollments going forward based on that trajectory?

Yes. 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 in last call, we haven't done a lot to specifically market to those folks, but we're getting very strong organic rates there, and we think there's a lot of opportunity there. It is a contributor to the growth, but not a major contributor yet.

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, and how should we think about international opportunities, both on Platform and CLEAR Plus? Is that something that's potentially on horizon, or is that kind of a ways away?

It is not a ways away, I would say, it's today and on the horizon. In that, when we bought Whyline, 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 Americas to going from Canada down through South America as well as some places in Europe.

Western Europe.

Western Europe.

And -- that's super helpful. Is that primarily for Platform business, or is that kind of on the airline side as well?

So you should think about that as the Platform business, but Reserve is aviation-focused. It is sooner on the Platform and the Reserve side than it is on the CLEAR Plus side.

(Operator Instructions)

Our next question comes from the line of Ananda Baruah with Loop Capital Markets.

Yes. Congrats on the consistent good results here.

I guess, yes, a few if I could. Just to start, Caryn, sort of top of your prepared remarks, you mentioned sort of ongoing network expansion of 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 -- some of the ways you're thinking about getting on some of this new stuff?

And then I have a couple of follow-ups.

Sure. So the new Powered by CLEAR SDK that we talked about, the low-code integration for partners to embed CLEAR technology in their user flow, so you should think about 2 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 or Reserve. And then what you think about as the Platform, which you'll see partner announcements over time, is a single app solution so that the CLEAR enrollment and verification experience can be embedded in partners' 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 and 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 2 examples.

Yes, 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 ambassador meet you?

It is a live pilot that we are testing.

Interesting. Okay, cool. That's helpful.

And Ken, 80% -- you said it's 80% same-store sales growth embedded, and the 30% booking to CAGR. I think in the past, you've talked about -- in recent past, that you talked about some of the things that you've done. You guys have done 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 there's anything that you're doing to continue to lend to the consistent same-store sales force?

Yes. 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 yes, we continue -- we're a continuous improvement sort of 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.

Yes, 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?

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

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 enrollment.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Caryn for any final comments.

Thank you, everybody, for joining us today. Thank you.

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