Clear Secure Inc
NYSE:YOU
Earnings Call Analysis
Q4-2023 Analysis
Clear Secure Inc
CLEAR's recent earnings call opened with the milestone announcement of surpassing 20 million members, underscoring the company's continued expansion and the value delivered to partners and customers. The focus on delivering a friction-free experience has been central to CLEAR's value proposition, driving growth in memberships, bookings, and, ultimately, its financials, despite challenges in consistently delivering the quality of experience expected by members. In response, CLEAR introduced the NextGen Identity system in December to further enhance and standardize the identity verification process.
CLEAR's financial achievements in 2023 included an impressive 40% growth in revenue and a significant expansion of operating margins by over 1,300 basis points. These results are indicative of a strong business model and operational efficiency, with the fourth quarter reflecting a 33% revenue climb. Additionally, the company maintained a 30% compound annual growth rate (CAGR) in bookings and reported an increase in operating cash flow to $225 million and free cash flow to $200 million, up 46% from the previous year. Shareholders benefited from capital returns totaling $210 million through the year as CLEAR continues to prioritize shareholder value.
CLEAR has continued to innovate within its product offerings, such as the recent pilot launch of TSA PreCheck enrollment. The clear enthusiasm for these initiatives, evidenced by the quick uptake by the first enrollee at Newark, demonstrates the potential for national expansion. CLEAR Verified is also gaining traction as it addresses the growing need for trusted digital identities in various sectors, including health care, by providing solutions that cut costs and improve customer satisfaction, positioning CLEAR as a contender to become the internet's identity layer.
Operational execution remains a core focus, with CLEAR upgrading a significant portion of its member base to the NextGen Identity system and investing in enhanced enrollment processes. These efforts are expected to lead to operational leverage as the year progresses. While some streamlining actions resulted in severance expenses of about $3.8 million, the company anticipates a normalized expense level post Q1. This streamlining, alongside declining normalized stock compensation costs and reduced operating expenses, helps advance CLEAR towards stronger incremental operating margins.
CLEAR experienced a solid annual net member retention rate of 86.3% despite pricing changes, including significant increases for airline family and standard members. Additional tweaks in pricing for frequent flyers resulted in retention largely remaining steady with a slight increase in dollar retention to around 90%. CLEAR Plus membership climbed to 6.7 million, a 23% uptick, although there was a marginal decline in usage, attributed to the differential between airline and non-airline partner channels. CLEAR continues to prioritize retaining members while also nurturing bookings and free cash flow growth, offering an average value proposition to its members of less than $10 per month.
For the first quarter of 2024, CLEAR anticipates revenues between $172 million and $174 million, marking a 31% year-over-year growth. Moreover, the company projects for the full year 2024, strong growth in both revenues and total bookings, expanding margins, and a minimum of 30% growth in free cash flow. These projections reflect CLEAR's confidence in the scalability of its business model and the long-term trajectory of its growth initiatives.
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Good morning, and welcome to CLEAR's Fiscal Fourth 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 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 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-K. 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. CLEAR's fourth quarter and full year 2023 financial results reflect our continued focus on growth in members, bookings and free cash flow. This quarter, we exceeded 20 million members on the platform, an important milestone. More members joining the CLEAR platform means more value for our partners who are focused on creating friction-free experience as their customers.
In 2023, revenues grew 40% and operating margins expanded by over 1,300 basis points. [indiscernible] and in 2023, we did not consistently deliver the inland experience that our members have come to expect. As you read in our [indiscernible] experience they know, love and rely on. In December, we launched [indiscernible] NextGen Identity. And with that, CLEAR is operationalizing the first and only at-scale standardized digital identity, the absolute unlock for the Lane of The Future. [indiscernible] to win it, CLEAR leaders span out across the country working side by side with our ambassadors and saw firsthand the passion our members have for both CLEAR and our ambassadors as well as the excitement they have for the lane of the future. Travel continues to be strong and travelers are creating predictable [indiscernible] series of new technologies rolling out this year to deliver the great experience that our members have come to expect from CLEAR. Bringing TSA PreCheck enrollment provided by CLEAR to Life has been an incredible labor of love. We think every traveler should have it. It is such a great program and at $1.30 per month, which is less than a cup of coffee, who doesn't want to keep their coat and shoes on [indiscernible] and their laptop in the bag. The key here is making enrollment easy and accessible to others. We are working hand in hand with our partners to make this happen. Today, consumer experiences are One Touch, and that is the customer expectation [indiscernible] necessary.
Last week in Newark, we opened before sunrise, and less than 2 minutes later, our first enrollee walked right up. The team was excited to serve them, and they were thrilled to enroll on the spot. As I often say, travel is hard and getting harder. And our job is to make it safer and easier for all travelers. I am proud of the work that our team has done, and we cannot wait to bring this nationwide.
CLEAR Verified continues to gain momentum. You cannot pick up the paper today or go online without reading about challenges that trusted identity can solve, whether it's the need for age verification on social media, the problems caused by online anonymity and entire systems going down because of fraud or marketplaces where stolen goods are sold, a universal digital identity is the solution.
In health care, hospital systems finding significant value in our identity platform. Our password reset, account creation and check-in products reduce operating costs, increase conversion and delight customers. CLEAR is uniquely positioned to become the trusted identity layer of the Internet.
This year or continue our [indiscernible] discussion of financials.
Thanks, Caryn. In Q4, revenue grew 33%, and we maintained a long-term 30% bookings CAGR while generating strong incremental margins. Cash flow from operations was $94.1 million, and free cash flow was $90.4 million, up 27% year-over-year. For the full year, we generated $225 million of operating cash flow and $200 million of free cash flow, up 46%. Pro forma after deducting normalized stock comp, free cash flow grew 42% in the quarter and 80% for the full year. We returned $110 million of capital to shareholders in Q4 and $210 million in the full year, while shrinking our share count.
Active CLEAR Plus members were 6.7 million, up 23%. We have seen continued ARPU growth sequentially [indiscernible] and CLEAR Plus member usage was 8.1x, down 0.5% versus last year. Mix matters. And as we've expanded our non-airline partner channels, there is a utilization difference which is driving the decline. Airline channel members have about 2x the usage of non-airline numbers.
In Q4, our results include some items I want to highlight. We incurred a cash severance expense of $2.9 million related to the streamlining actions we announced last quarter. That impacted R&D by $1.5 million, G&A by $1.1 million and sales and marketing by $200,000. We expect to incur additional severance expense of $900,000 in Q1, primarily hitting R&D as we completed some additional streamlining this month. We also incurred $2.9 million of expenses related to the NextGen Identity upgrade, consisting of $2 million of surge ambassador hours and $900,000 of enrollment expenses. In Q1, we expect a similar amount of NextGen expense, which will normalize by April. To put NextGen in perspective, we have already upgraded millions of members, representing around 85% of our verification volume, consuming 100,000 incremental labor hours since December. We should see strong operating leverage on the direct salaries line as we progress through this year.
In the quarter, we also benefited from a reversal of $9.6 million of previously expensed stock comp relating to departed team members and the expiration of the pre-IPO Performance Award units. Normalized stock comp was $11.8 million, down 25% year-over-year. Excluding these items, our OpEx was down around 1,300 basis points as a percentage of revenue, and we achieved 46% incremental operating margins.
Annual CLEAR plus net member retention was 86.3% in the quarter. We look at both member retention and dollar retention. This is particularly important in 2023 when after taking almost no pricing for the first 12 years, we took significant pricing for airline family and standard members. For the airline channel specifically, where we reduced the discount available to frequent flyers, pricing was up between 35% and 50%. And we are pleased that given these increases, we experienced only a modest impact on member retention and our dollar retention was up mid-single digits year-over-year to around 90%. Our net member retention metric is impacted by reactivations or win-back activity. Typically, around 2/3 of our reactivations happen organically in the Lane with all the focus and prioritization of NextGen upgrade, reactivations in the Lane are temporarily below trend. Net member retention settling in the remains our expectation. Over the next several quarters, we expect the cumulative impact of pricing, member mix and NextGen will bring us below those levels before rebounding. On average, CLEAR members are paying less than $10 per month, which is an incredibly compelling value. We will continue to focus on member retention and dollar retention as we drive bookings and free cash flow growth.
In Q1, we expect revenue of $172 million to $174 million, which at the midpoint represents 31% year-over-year growth. We also expect total bookings of $178 million to $183 million, which at the midpoint represents 21% year-over-year growth and a 29% long-term CAGR. Consistent with prior years, Q1 bookings are down sequentially versus Q4, reflecting a larger renewal pool in Q4 versus Q1, and this year, a lower sequential pricing benefit.
While guidance includes incremental PreCheck revenue, keep in mind, we just began online renewals in January and our first in-person enrollment location opened just last week at Newark. As new businesses like PreCheck and CLEAR Verified continue to ramp, we are widening our guidance range as they are early stage relative to CLEAR Plus, as small timing differences can move bookings from 1 quarter to another.
For the full year 2024, we expect to deliver strong revenue and total bookings growth, expanding margins and free cash flow growth of at least 30%. With that, let's go to Q&A.
[Operator Instructions] Our first question comes from the line of Joshua Reilly from Needham.
Maybe can start with finishing up the year here. Maybe just starting on net member retention. Can you just discuss maybe in some more detail, some of the nuances in terms of the calculation since it's based on people versus dollars and how the normalization of travel trends is impacting this figure versus the NextGen ID upgrade that you mentioned also impacting it. Maybe just give a sense of the magnitude of each of those items.
Sure. Thanks, Josh. So a couple of things going on. One is I would just highlight that we're focused both on the public retention metric is based on members, right? We're also focused on dollars. As I mentioned in the opening, our dollar retention was up mid-single digits year-over-year to around 90%. So we're really pleased with the performance there. The public metric, as you mentioned, is a trailing 12-month metric. And so the trend of growth matters there. And there's also 2 components, there's gross and net. So the gross retention is the year-over-year performance of how many members are retained. And then the difference between gross and net would be the win back activity or reactivations. About 2/3 of our reactivations happen in the Lane, and we are definitely running a low trend due to the NextGen upgrade process on the reactivation piece. And so as we cycle through the next few quarters as we lap pricing and as we lap mix, mix is also a factor. We had a much larger percentage of year 1 renewals in 2023 versus 2022. And just like every subscription business, those tend to carry lower retentions than the more mature cohorts. So as we cycle through those, it will be a more normalized rate. We expect it to be in the upper 80s over the next few quarters. And -- so net-net, very happy with the performance there. And that's probably what I would say there.
Got it. And then we've all seen the press articles on the changing competitive landscape within the security lane. How do you see the changing landscape playing out here with airlines and the TSA working to develop their own more efficient processes based on biometric data as well?
Yes. Josh, it's Caryn. Look, with 1 million more travelers coming through airports by 2030, technology is the most important solution for airports, for airlines for the TSA to do the and the safer and the easier, and it's consistently been brought to the checkpoint since we started in 2010, right? There was PreCheck AIT, CT scanners. And we always believe that biometrics were going mainstream because they make it safer and easier. So biometrics coming to the checkpoint has been expected. And I think it's a good thing for American travelers and for security. At CLEAR, biometrics aren't the product, right? They are a feature. And so what we're really focused on is about delivering an experience that is frictionless and predictable from home to gate meeting travelers where they are, whether they travel once a year or once a week, and you're going to continue to see more products from us to make sure that we can deliver to all travelers. It's also the reason that we've been talking about NextGen Identity. We started talking about it publicly last quarter. But as you guys know, we've been working on it since 2020. I would have loved to have rolled it out last year, but it's going to have a great impact on the travel experience this year. So what we're focused on is interoperable, universal, digital identity because travelers use multiple airports and airlines. So no matter which airport you show up to, which airline you're flying on or your status, using CLEAR's NextGen Identity to get through quickly and predictably and then adding services on either side of the checkpoint is the unbelievable customer experience. But we expect, over the next few years, the entire checkpoint should be biometrics, right? It's safer and it's easier. But again, it's the experience that you're delivering off that holistically.
Our next question comes from the line of Cory Carpenter with JPMorgan.
I wanted to ask what you're seeing with travel demand this year. We've heard some mixed messages from some of the travel companies. So curious what you all are seeing and then how that is impacting your 1Q bookings outlook?
We continue to be very bullish on travel. I sound like a broken record since we went public, but travel and experiences continue to be a bright spot of consumer spend. Airports have been putting out their volume data for last year, and it is records across the board pretty much. And then there's growth cities like in Austin that are just off the charts with the kind of growth over the past few years that you really have never seen in airports. Business travel is rebounding. If I look at our business mix of verification, it was up 300 basis points year-over-year. I would say there's a normalization of leisure, premium remains strong. But what we really focus on or number of people coming through airports. So whether it be pricing in airlines or hotels, unless it's extreme, we really don't see that impacting the volume that we see. Travel has really become part of the and there are so many drivers of it. So we continue to be very bullish on travel and specifically for the CLEAR Plus business, people coming through airport security checkpoints. I also think, again, going back to what I said to Joshua, of biometrics going mainstream, that travelers are showing up at airports with higher expectations. And I think you see a lot of new builds and new launches, Denver launched in new lane. You're seeing new concessions, you're seeing technology. That is really meeting the current customer expectations of what they have outside of airports. And I do think that the easier, the more friction-free [indiscernible] the more you will see people travel.
And just a quick follow-up. Any color you're able to provide on what the TSA enrollment in person cross rollout could look like from here now that you're in New York and you have renewals online?
Oh, you mean PreCheck.
Yes, PreCheck, sorry.
Okay. Do you want to...
Yes. So the rollout plan from here is that we are going to add -- we expect to add a few airports over the next coming weeks. And then roll out to the rest of the country throughout the year, all subject to TSA approval.
I will say on Newark, it's incredibly exciting. We've obviously been talking about our excitement around TSA PreCheck enrollment provided by CLEAR for several years. If you go to Newark, you'll see that we're open 7 days a week, 14 hours a day with multiple pods staffed by friendly CLEAR ambassadors. So when you think of the capacity and the no appointment required and how this is really increasing enrollment accessibility for American travelers, the opportunity over time pending TSA approval to roll this out across the country is incredibly exciting, and we are very encouraged by the early results, both online and at Newark.
Our next question comes from the line of Ben Miller with Goldman Sachs.
Maybe two, if I can. First, just on the retention being a little lower, it implies maybe the gross adds were better. So any color you can share just on particular channel strength to call out either an airport or partner? And then just on the guide, any color to quantify the impact from Easter shift on travel patterns and/or the that's implied in the guide?
So I'll start with the guide. So generally speaking, we have a much higher backlog of retention in Q4 versus Q1. So the sequential decline from Q4 to Q1 is totally typical. Last year, we had a much larger benefit from a pricing perspective sequentially. So if you look at 2023, it was a very big year for pricing. We took price on basically every cohort. And so when you look at Q1 '23 versus Q2 -- Q4 of '22, we had the benefit of family, airline channel and standard renewals. And so if you back out that impact, you really have a much more similar sequential change from Q4 to Q1. So that's what I would say about the guide. I don't think -- I don't have a specific comment on Easter shift there. And then in terms of the channels, I think our teams performed extremely well in Q4 both in airport and some of the marketing channels. You did see a sequential uptick in marketing spend. So we took some opportunities where we saw the ability to accelerate the gross adds from that perspective. So no specific channel of strength, but obviously, just strong execution across the board in Q4.
Our next question comes from Dana Telsey with Telsey Advisory Group.
Nice to see the progress. As you talked about the experience and the enhancements that you're making, what are you doing? What should we see as we go through the year? Obviously, speed definitely one thing, but you also mentioned the new handheld devices. When will those be rolled out? And how are you looking at it? And then just for this year overall, with TSA PreCheck, are there any expenses that we should be mindful of as we go through the year for the model?
Ken can take the PreCheck data, and then I'll talk about the technology rollout this year.
So from a PreCheck perspective, we've talked about, I think, over the last probably 8 quarters that we've been carrying expenses overhead for PreCheck and that's why we're so optimistic on our high incremental margins. One of the reasons for -- in 2024, we are bullish on margin expansion is because we have been carrying a lot of overhead. So the incremental expenses you'd see from PreCheck really would be around staffing, and we have been carrying some extra staffing as well. So I don't -- I wouldn't say that you're going to see anything meaningful, certainly be marketing the product as well. But we do believe that PreCheck should lead to fairly high incremental margins.
And in terms of the technology rollout, Dana, that you should see this year, some of which I can talk about and some of which I can't yet talk about, you will see new pods from CLEAR that are faced first pods. We're calling them Envy, which is a combination of enrollment and verification. And they are faster. They are slimmer, so we can have more and they are face first pods. And so that's really important from a power of the camera, capture, things of that nature. From there, the pods transmit digital identity to these handhelds, and then it is a tap to transmit those digital identities into the TSA system. And so members will be face first, fairly break stride and not have to take any IDs or boarding passes out of their pockets. There will remain always randomization from a security perspective. And so those things will really contribute to not only speed and efficiency, but member experience and security.
Our next question comes from the line of Mark Kelley with Stifel.
If I can just expand maybe on the last couple of points you made there, Caryn, on the user experience. There's a lot that's in your control, like some of the things you just outlined some are -- maybe you're more reliant on the CAT 2 machines and things like that rolling out. I guess what's more important in your mind, the things you can control or the things you cannot control directly? And then the second one is in terms of search staffing around the NextGen ID initiatives, does that come out of the P&L starting this quarter or we can see a little bit of that do you get to 100% of folks upgrading?
Yes. In terms of the -- I'll answer the second question first. The surge staffing, we talked about in Q4, $2 million and a similar amount in Q1. And I would say that, that does come out. Now of course, we're still growing our footprint, right, and we still have verification growth. So it's not necessarily going to go down sequentially, but we do expect to see strong operating leverage from the direct salaries line throughout 2024.
And in terms of your question, and this comes from a control freak, you got to control what you can control. And what I would say is that there is a deep alignment across all partners and stakeholders, airports airlines, the government, most importantly, passengers that they want safer and easier experiences. That technology is the solution that bringing PreCheck to as many people as possible, which is great from a physical screening perspective, that biometrics are going mainstream and that public-private partnerships are powerful. And so it's everybody working together and an alignment around that, that I think does drive timing and that everybody wants this to happen, right? Again, I keep going back, and I think everyone sees it. There's million more travelers coming through airports every single day by 2030, and we're in 2024. So it's just not that far away. You've got to be rolling out these technologies. And so I think the alignment help ensure the outcomes.
And our next question comes from the line of David Unger with Wells Fargo.
Guys, you talked about the ARPU increase. I shouldn't say increase, but -- you mentioned average members paying less than $10 per month. So let's say it's $150 annually, and we know about the pricing increases. But just wondering how we should think about ARPU pricing increases over the next couple of years?
Before Ken talks about the technicals on that, I will say, when you think about the value for less than $10 a month for CLEAR Plus, when you think about the value for PreCheck less than $1.30 a month, these are incredible values when you think about the time to value return as well as the challenges around travel. And I think that creates a lot of opportunity to continue to drive value for customers. And when you do that, over time, there's pricing opportunities.
Yes. And so when we talk about the average, obviously, our retail price point is [ $1.89 ]. We have family planned for now $99 airline pricing. So there's a wide variety of -- and our credit card partners, so those members don't pay anything. And so we'll continue to evaluate opportunities as we see them. We think that we have very modest price elasticity in this business. but we also need to deliver a great customer experience, and that's what we're focused on this year. And as we deliver on that, we will evaluate opportunities to take price appropriately.
And again, continue to add to either side of the experience from home to gate.
Okay. And then, guys, just a follow-up. So Ken, maybe this is more for you. When we look at full year guide and the 3% comment in the shareholder letter on travel increase for 2024. Is there a way for us to think about member growth expectations exiting 2024 versus 2023?
So I would say that we manage the business for members for bookings and for free cash flow. And so there's a lot of levers to pull here. And so what we're really focused on ultimately is driving free cash flow. And obviously, we want to grow our member base, but we want to deliver a great experience. We're going to look at pricing opportunities, as I just mentioned. And so there's a lot of ways to optimize the business, and we're going to look at that and not going to specifically talk about what the member growth is going to be.
We opened 8 airports in 2023. We expect to launch and grow the network this year. Those airports, I would call them very immature airports, maybe 2022 and 2023 openings, still have obviously incredible growth opportunities as well as new airports. And our mature airports continue to comp well. And again, when you talk about mature, 2, 3 years are not necessarily mature. Obviously, 10 is more and continue to have good growth. But as Ken said, we're focused on the overall picture.
And we have reached the end of the question-and-answer session. I'll now turn the call back over to Caryn Seidman-Becker for closing remarks.
Thank you for joining our fourth quarter 2023 earnings call. I want to say a huge thank you to our team, the CLEAR team. I am proud of how we are growing our partners and products and executing on behalf of our members every day. Identity is foundational. It is here and now. You're seeing it in travel and beyond. So thank you for joining today.
This concludes today's earnings call. You may disconnect your lines at this time. Thank you for your participation.