Q4 2023 Clear Secure Inc Earnings Call
Participants
Caryn Seidman-Becker; Co-Founder, Chairman, CEO; Clear Secure, Inc.
Ken Cornick; Co-Founder, President; Clear Secure, Inc.
Joshua Reilly; Senior Analyst; Needham & Company LLC
Cory Carpenter; Analyst; JPMorgan Chase & Co
Ben Miller; Analyst; Goldman Sachs Group, Inc.
Dana Telsey; Analyst; Telsey Advisory Group
Mark Kelley; Analyst; Stifel, Nicolaus & Company, Incorporated
David Unger; Analyst; Wells Fargo Securities, LLC
Presentation
Operator
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. (Operator Instructions) 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 in the most recently filed annual report on Form 10-K. These items can be found on the Investor Relations section of clears that play with that, I'll turn the call over to Caryn.
Caryn Seidman-Becker
Good morning. Clears 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 for more members. Joining the clear platform means more value for our partners who are focused on creating friction-free experiences for their customers. In 2023, revenues grew 40% and operating margins expanded by over 1,300 basis points.
We generated $200 million of free cash flow. At clear, we are obsessed with our members' experience. And in 2023, we did not consistently deliver the in-line experience that our members have come to expect as you read in our letter, we are fixing this delivering our members, the clear experience they know love and rely on. In December, we launched next-gen 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. Clear team is doing an amazing job with our next-gen identity upgrades and is in it to win it, clear leaders standout 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 craving, predictable journeys and innovation. Exactly what's clear is known for next-gen identity enables the clear lane of the future, a 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 a $1.30 per month, which is less than a cup of coffee who doesn't want to keep their coat and shoes on their laptop in the bag. The key here is making enrollment easy and accessible to all travelers. 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. We are focused on delivering friction-free enrollment, no appointment necessary. Last week in New York. We opened before Sunrise and less than two 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 can not 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 entire system is going down because of fraud or marketplaces where stolen goods are sold.
A universal digital identity is the solution in health care. Hospital systems are finding significant value in our identity platform, our password reset, account creation and check-in product, reduce operating costs, increase conversion and delight customers. Clear is uniquely positioned to become the trusted identity layer of the Internet this year, our continued focus will be on member experience, bookings growth, margin expansion and free cash flow.
I will now turn it over to Ken for a discussion of financials.
Ken Cornick
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 numbers were $6.7 million, up 23%. We have seen continued RPU growth sequentially and year over year as the impact of pricing rolls into revenue annualized clear Plus member usage was 8.1 times, 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 two times the usage of non-airline members. 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 next-gen identity upgrade, consisting of $2 million of search investor hours and $900,000 of enrollment expenses. In Q1, we expect a similar amount of next-gen expense, which will normalize by April.
To put next gen. 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 unit.
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 margin. Annual Clear plus net member retention was 86.3% in the quarter. We look at both member retention and 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 buyers. 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 two thirds of our reactivations happened organically in line with all the focus and prioritization and next-gen upgrades. We activations in a lane or temporarily below trend. Net member retention settling in the upgrades remains our expectation.
Over the next several quarters, we expect the cumulative impact of pricing, member mix and next-gen will bring us below those levels before rebounding on average here 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 and small timing differences can move bookings from one 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.
Question and Answer Session
Operator
(Operator Instructions) Joshua Reilly, Needham & Company.
Joshua Reilly
All right. Thanks for taking my questions. Nice job of 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 USD dollars, how the normalization of travel trends is impacting this figure versus the next-gen ID upgrade that you mentioned also impacting it?
Maybe just give a sense of the magnitude of each of those items and then Thanks, Josh.
Ken Cornick
Good morning. So there's a couple of things going on. One that 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.
And the public metric, as you mentioned, is a trailing 12 month metric. And so the trend of growth matters there. And there's also two components. There's a 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 two thirds of our reactivations happen in the lane. And we are definitely running the low trend due to the next-gen upgrade process on the reactivation piece. And so as we cycle through the next few quarters as we lap pricing as we lap mix mix is also a factor.
We had a much larger percentage of year one renewals in 2023 versus 2022. And let's just like every subscription business, those tend to carry lower retention rates than the more mature cohorts. So as we cycle through those, it'll be a more normalized rate. We expect it to be in the upper 80s over the next few quarters and some. So net-net, very happy with the performance there. And and that's probably I would say there.
Joshua Reilly
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?
Caryn Seidman-Becker
Yes. Hi, Josh. It's Kevin. Look, with a 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 Check Point since we started in 2010.
Right, there is PreCheck AITCT. scanners. And we always believe that biometrics were going mainstream because they make it safer and easier. So, you know, biometrics coming to the Check Point has been expected and I think it's a good thing for American travelers and for security, it clear biometrics aren't the product Great, 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 once a week and you're going to continue to see more products know from us to make sure that we can deliver to all travelers. It's also the reason that we've been talking about next-gen identity.
We started talking about it publicly last quarter. But as you guys know, we've been working on it since 2020 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 what you report you show up to which airlines are flying on order status using clears next-gen identity to get through quickly and predictably and then adding services on other either side of the Check Point 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.
Operator
Cory Carpenter, JPMorgan.
Cory Carpenter
Hey, good morning. I wanted to ask what you're seeing with travel demand this year, we heard some mixed messages from some of the travel companies. So curious what you are seeing and then how that is impacting your 1Q bookings outlook? Thank you.
Caryn Seidman-Becker
We continue to be very bullish on travel. I know 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 and 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 verifications, it was up 300 basis points year over year. I would say there's a normalization of leisure premium remained strong, but what we really focus on are number of people coming through airports.
So whether it be pricing in airlines or hotels, and unless it's extreme, we really don't see that impacting the volume that we see travel has really become part of the zeitgeist 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 Josh 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 a 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 we can make the experience that airlines at airports can make the experience more you'll continue to see people travel.
Cory Carpenter
Thank you. And just a quick follow-up on 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 working, you have renewals online. Thank you.
Caryn Seidman-Becker
So, you mean pretax?
Cory Carpenter
Yes, pretax, sorry.
Ken Cornick
Okay, you're going to. Yes. So the rollout plan from here is that we are going to add, we expect to add on 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.
Caryn Seidman-Becker
I will say on new work, 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 New York, you'll see that we're open seven days a week, 14 hours a day with multiple pods staffed by friendly, clear ambassadors.
So when you think of the capacity and the new appointment required and how this is really increasing enrollment accessibility for American travelers. The opportunity overtime, 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.
Operator
Ben Miller, Goldman Sachs.
Ben Miller
Please proceed with your question and thanks for taking the questions. 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 a particular channel strength to call out from either an airport or partner? And then just on the guide, any color or quantify the impact from Easter shift on travel patterns and or the beer that's implied in the guide.
Ken Cornick
And 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 is totally typical. Last year, we had a much larger benefit from a pricing perspective sequentially. So if you look at 2023 with 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 team has 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 strength. But I would say just strong execution across the board.
Operator
Dana Telsey, Telsey Advisory Group.
Dana Telsey
Hi, Kevin and Ken. 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 you 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. Thank you.
Caryn Seidman-Becker
Can take the project, Dana, and then I'll talk about the technology rollout this year.
Ken Cornick
So from a project perspective, we've talked about, I think over the last probably eight quarters that we've been carrying expenses on 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 because we have been carrying a lot of overhead.
So the incremental expenses you'd see from PreCheck really are would be around staffing and we have been carrying some extra staffing as well. So I don't I wouldn't I wouldn't say that you're going to see anything meaningful We will certainly be marketing and the product as well. But we do I believe that project should lead to fairly high incremental margins.
Caryn Seidman-Becker
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 pod from clear that are faced first pods, we're calling them and the which is the completion of enrollment and verification and they are faster, they are slimmer. So we can have more and they are faced first pods.
And so that's really important from a power of the camera. I capture things of that nature up from there, the pods and 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 faced first barely break stride and not have to take any IDs or boarding passes out of their pockets. There will remain, you know, always randomization from a security perspective. And so those things will really contribute to not only speed and efficiency, but member experience and security.
Dana Telsey
Thank you.
Operator
Mark Kelley, Stifel.
Mark Kelley
Great. Thank you very much and good morning, but I am just expand maybe on the last couple of points you made there, Karen, on the user experience, a lot of the senior controls, like some of the things you just outlined in summer and then maybe you're more reliant on the CAT two emissions and things like that rolling out. I guess what's more important in your mind the things you can control are the things you cannot control directly?
And then the second one is in terms of search staffing around the next-gen ID initiatives, does that does that come out of the P&L starting this quarter or are we going to see a little bit of that and to get to 100% of folks? Okay.
Ken Cornick
Thank you. Yes, in terms of this, 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 on it's not necessarily going to go down sequentially, but we do expect to see strong operating leverage from the direct salaries line throughout the 2024.
Caryn Seidman-Becker
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's 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 that to happen.
Right. Again, I keep going back and I think everyone sees it. There's a 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, you know, help ensure and the outcomes.
Operator
David Unger, Wells Fargo.
David Unger
Thanks for taking my questions. Guys. You talked about the ARPU increase on margins to increase, but you mentioned average members paying less than $10 per month to, let's say, to $115 annually and we know about the pricing increases, but just wondering how we should think about RPU pricing increases over the next couple of years?
Caryn Seidman-Becker
Before Ken talks about the technicals on that. I will say when you think about the value for less than $10 a month for a clear place when you think about the value for PreCheck less than $1.30 a month. These are incredible values. When you think about the time how you 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.
Ken Cornick
Yes. And so when we talk about the average, obviously our retail price points [29], we have family plan for $99 in airline pricing. So there's not a wide variety of men. Our credit card partners of those members or anything from. And so we 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.
Caryn Seidman-Becker
And again, continue to add to either side of the experience from home to date.
David Unger
Okay. Thanks. And then guys, just a follow-up, so we can maybe this is more for you when we when we look at the 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, you know, exiting 2024 versus 2023? Thank you.
Ken Cornick
And so I would say that we manage the business in oh four numbers 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 opportunity that I just mentioned. And so there's there's a lot of ways to optimize the business and we're going to we're going to look at that, not going to specifically talk about what the member growth is going to be.
Caryn Seidman-Becker
We opened opened eight airports in 2023. We expect to launch and grow the you know, the network this year, those airports in, I would call them very immature airports, maybe 2022 and 2023 openings in oh eight. 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, you know, two, three 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 Pixar.
David Unger
Thank you.
Operator
Thank you. And we have reached the end of your question and answer session, and I'll now turn the call back over to Karen Van de Becker for closing.
Caryn Seidman-Becker
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. Thank you. For joining today.
Operator
And this concludes today's earning call. You may disconnect your line at this time. Thank you for your participation.
