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 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-lane 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 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. The CLEAR team is doing an amazing job with our NextGen Identity upgrades and 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 CLEAR is known for. NextGen 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 $1.30 per month, which is less than a cup of coffee, who doesn't want to keep their coat and shoes on and 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 1 touch, and that is the customer expectation. We are focused on delivering friction-free enrollment, no appointment 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, entire systems going down because of fraud, or marketplaces where stolen goods are sold, a universal digital identity is the solution. In healthcare, hospital systems are 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, 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.
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+ members were 6.7 million, up 23%.
We have seen continued ARPU growth sequentially and year-over-year as the impact of pricing rolls into revenue. Annualized CLEAR+ 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 2 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 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 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 margins. Annual CLEAR+ 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 discounts available to frequent flyers, pricing was up between 35% and 50%. 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 happen organically in the lane, with all the focus and prioritization on NextGen upgrades, reactivations in the lane are temporarily below trend. Net member retention settling in the upper eighties 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-$174 million, which at the midpoint represents 31% year-over-year growth.
We also expect total bookings of $178 million-$183 million, which at the midpoint represents 21% year-over-year growth at 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+, 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.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing these star keys. We do ask that each analyst in the queue to please limit themselves to only two questions. Our first question comes from the line of Joshua Reilly with Needham & Company. Please proceed with your question.
All right, thanks for taking my questions. Nice job, 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. Good morning. So there's a couple of things going on. One is I would just highlight that we're focused both on, you know, 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 twelve-month metric, and so the trend of growth matters there. And there's also two 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 two-thirds of our reactivations happen in the lane, and we are definitely running below trend due to the NextGen upgrade process on the reactivation piece. And so, you know, 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-one renewals in 2023 versus 2022, and 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. So, you know, net, net, very happy with, you know, the, the performance there. And, you know, that's, that's probably what I would say there.
Got it. And then, you know, 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, you know, efficient and processes based on biometric data as well?
Yeah. Hi, 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 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 believed that biometrics were going mainstream because they make it safer and easier. So, you know, 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 free.
They are, whether they travel once a year or once a week, and you're gonna continue to see more products, you know, 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. Would have loved to have rolled it out last year, but it's gonna 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.
Thank you. Our next question comes from the line of Cory Carpenter with J.P. Morgan. Please proceed with your question.
Hi, good morning. 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. Thank you.
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. Then there's growth cities like in Austin, that are just off the charts with, with the kind of, you know, 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 remains strong, but what we really focus on are number of people coming through airports.
So, you know, 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 zeitgeist, and there's so many drivers of it. So we continue to be very bullish on travel, and specifically for the CLEAR+ 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.
I do think that the easier, the more friction-free we can make the experience, that airlines and airports can make the experience, the more you'll continue to see people travel.
Thank you. And just a quick follow-up, any color you're able to provide on what the TSA enrollment in-person process rollout could look like from here now that you're in Newark and you have renewals online? Thank you.
Oh, so you mean PreCheck?
Yes, PreCheck. Sorry.
Okay. Do you wanna?
Yeah. So, the rollout plan from here is that 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 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 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.
Thank you. Our next question comes from the line of Ben Miller with Goldman Sachs. Please proceed with your question.
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 and particular channel strength to call out, either in airport or partner. And then, just on the guide, any color to quantify the impact from Easter shift on travel patterns and/or the beat that's implied in the guide? Thanks.
S o I'll start with the guide. So, you know, 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, it was a very big year for pricing. We took price on basically every cohort. And so when you look at Q1 2023 versus Q2-Q4 of 2022, 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 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 I would say just, you know, strong execution across the board in Q4.
Thank you.
Hello.
Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, Caryn 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 is definitely one thing, but you also mentioned the new handheld devices. When will those be rolled out, and how are you, how are you looking at it? And then just for, 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.
I'll let Ken take the PreCheck, Dana, 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 eight quarters, that we've been carrying expenses, overhead for PreCheck, and that's why, you know, 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 wouldn't say that you're gonna see anything meaningful, you know, certainly be marketing the product as well. But we do believe that, you know, 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 face-first pods. We're calling them EnVe, 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, a capture, things of that nature. From there, the pods transmit digital identities 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, 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.
Thank you.
Thank you. Our next question comes from the line of Mark Kelley with Stifel. Please proceed with your question.
Great. Thank you very much, and good morning. If I can just expand maybe on the last couple of points you made there, Caryn, on the user experience. You know, there's a lot that's in your control, like some of the things you just outlined, some are, you know, maybe you're more reliant on, you know, 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 surge staffing around the NextGen ID initiatives, does that come out of the PNL starting this quarter, or we can see a little bit of that until you get, you know, to 100% of folks upgrading? Thank you.
Yeah, in terms of this, I'll, 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 gonna 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 know, you got to control what you can control. And, 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, you know, physical screening perspective, that biometrics are going mainstream and that public-private partnerships are powerful. And so it's everybody working together and, 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 1 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, and so I think the alignment, you know, helps ensure the outcomes.
Thank you. Our next question comes from the line of Dan Huber with Wells Fargo. Please proceed with your question.
Hey, thanks for taking my questions. 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 $115 annually, and, you know, we know about the pricing increases, but just wondering how we should think about ARPU pricing increases over the next couple of years. Thanks.
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+, when you think about the value for PreCheck, less than $1.30 a month, these are incredible values when you think about the time 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.
Yeah, and so when we talk about the average, obviously our retail price point is $189. We have a family plan for now $99. You have airline pricing, so there's a wide variety. And our credit card partners, so those, those members don't pay anything. And so we will continue to evaluate, you know, opportunities as we see them. We think that we have, you know, 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, you know, opportunities to, to take price appropriately.
Again, continue to add to either side of the experience from home to gate.
Okay, thanks. And then, guys, just to follow up, so Ken, maybe this is more for you. When we look at the full-year guide and, you know, 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.
You know, I would say that we manage the business, you know, 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 wanna grow our member base, but we want to deliver a great experience. We're gonna look at pricing opportunities, as just mentioned. And so there's a lot of ways to, you know, optimize the business, and we're gonna look at that and not gonna specifically talk about what the member growth is gonna be.
We opened eight airports in 2023. We expect to launch and grow the you know, the network this year. Those airports, you know, I would call them very immature airports, maybe 2022 and 2023 openings, you know, 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, 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.
Thank you.
Thank you. 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 wanna 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.