Clear Secure, Inc. quarterly report, Q3 FY2023

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Clear Secure, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are USD unless noted. CLEAR operates a secure identity platform, led by its CLEAR Plus airport subscription service, alongside CLEAR Verified and its consumer app.

Financial performance and liquidity

  • Q3 revenue: $160.4 million, up 38% year over year; nine-month revenue was $442.6 million, up 43%. Growth was primarily attributed to more CLEAR Plus members. Total Bookings rose 32% in Q3 to $191.7 million and 37% for nine months to $516.5 million.
  • Profitability: Q3 operating income was $19.3 million versus an operating loss of $65.7 million in Q3 2022; consolidated net income was $26.9 million versus a $65.6 million loss. Net income attributable to Clear Secure was $15.3 million, or $0.17 per diluted share, versus a $36.8 million loss, or $0.44 per share. Nine-month operating income was $4.4 million and consolidated net income was $26.6 million, compared with losses of $97.1 million and $96.7 million, respectively, in 2022.
  • Margins and adjusted results: Q3 operating margin was about 12% and consolidated net margin about 17%; nine-month operating margin was about 1%. Adjusted EBITDA was $29.6 million in Q3 (18% margin) and $60.2 million for nine months (14% margin), versus $11.9 million (10%) and $14.7 million (5%) in 2022. These are non-GAAP measures.
  • Cash flow: Nine-month operating cash flow was $130.9 million versus $89.0 million in the cash flow statement; reported non-GAAP free cash flow was $109.1 million versus $60.6 million. Q3 operating cash flow was negative $4.9 million and free cash flow negative $8.9 million.
  • Liquidity and debt: At September 30, cash and cash equivalents were $63.5 million and marketable securities $673.0 million. Current assets were $781.0 million versus current liabilities of $478.3 million. The company had no borrowings, $74.0 million of remaining revolver capacity net of letters of credit, and a $100 million facility maturing June 2026.
  • Other balance-sheet items: Deferred revenue was $351.9 million, up from $283.5 million at year-end 2022. Total liabilities were $603.6 million and stockholders’ equity $458.4 million. The company repurchased 2.33 million Class A shares for $56.1 million during the first nine months and paid regular and special dividends.

Material changes versus the prior comparable period

  • Revenue and bookings expanded, and active CLEAR Plus members rose 31% year over year to 6.374 million. Cumulative enrollments increased 31% to 18.594 million and cumulative platform uses increased 42% to 167.417 million.
  • Annual CLEAR Plus net member retention declined to 88.5% from 92.2%, which management attributed to cancellation and winback activity normalizing to pre-pandemic levels. Annual member usage edged down to 8.5x from 8.6x.
  • Q3 general and administrative expense fell 48%, mainly because Q3 2022 included a $58.8 million United Airlines warrant charge. For nine months, general and administrative expense declined 16%; however, direct salaries and benefits and revenue-share fees increased with airport expansion, member growth and travel volumes.
  • Net interest income increased to $7.7 million in Q3 and $21.5 million for nine months, primarily due to higher interest rates and average investment balances.
  • Operating cash flow increased year over year, while financing cash outflows rose, reflecting share repurchases, dividends and member tax distributions.

Outlook, commentary, risks and unusual items

  • No quantitative financial guidance is provided. Management said it expected CLEAR to progress toward public TSA PreCheck enrollment at select locations in 2023, subject to completing TSA requirements and a trial period.
  • Management cited member acquisition and conversion, retention, partnerships, product and location launch timing, expense timing, and macroeconomic conditions as important performance factors. Risks include travel demand changes, checkpoint processes and TSA policies, member experience, and the ability to sustain retention and unit economics.
  • In October 2023, the company streamlined engineering, product and certain corporate functions and estimated about $2.2 million of one-time cash severance and termination costs for Q4.
  • The September 2023 Sora ID asset acquisition had $5.25 million of purchase consideration, including deferred consideration; it added $3.95 million of goodwill and $1.30 million of intangible assets. The company also disclosed potential retention and performance-based compensation of up to $13 million, subject to service and performance conditions.
  • The company recorded $3.7 million of asset impairment for the first nine months, including $1.5 million related to a subleased right-of-use asset. It had not recognized the deferred tax asset or a related Tax Receivable Agreement liability; the filing estimates the unrecorded TRA liability, if recognized, at approximately $74.6 million.
  • Subsequent to quarter-end, the board declared a $0.09 quarterly dividend and a $0.55 special dividend, and authorized a $100 million increase to the repurchase program. In Q4 through the filing date, the company repurchased 625,000 shares for $10.5 million.
  • The company reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. It said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Reconcile the 2022 nine-month operating cash flow comparison: the cash flow statement and MD&A report approximately $89.0 million, while the non-GAAP free-cash-flow reconciliation uses $75.9 million.
  • Assess whether member growth can offset the decline in annual net retention and keep bookings and revenue growth durable.
  • Review the sustainability of reported profitability and adjusted results, including the effect of stock-based compensation, forfeitures, warrant charges and acquisition-related costs.
  • Track cash deployment through dividends and repurchases, and the potential cash implications of tax distributions, airport commitments, leases and the TRA.
  • Monitor TSA PreCheck enrollment approval and launch timing, Sora ID performance milestones and related compensation conditions, and the company’s execution of its organizational changes.