Description

Summary

Short Clear Secure (“CLEAR” or the “Company”), a glorified labor-intensive airport concessionaire. CLEAR faced the perfect storm in 2022 with the rebound in travel and launch of their American Express partnership in July 2021. We estimate that Amex made up ~70% FY22 bookings growth and 66% penetrated. As such, we believe net adds are going to fall off a cliff in FY23. Furthermore, Amex-fueled growth obfuscates the deceleration in organic bookings growth under the hood. As such, we are 15% below Street on FY24 revenue and see 51% downside in our base case. Borrow is available at GC.

Business Overview

CLEAR is an airport concessionaire that expedites the security screening process. The Company uses biometrics to confirm traveler identities. It is worth noting that given CLEAR is not a federal agency, they do not get travelers out of the full-body screen that pre-Check does. There is a partnership with Pre-Check that is starting to ramp in Q422, but we will detail below why this is not material to the stock. The primary (and quickly diminishing) value proposition of CLEAR is the expedited security check given security lanes exclusively for CLEAR members. 

CLEAR is already present in 43 airports (90% domestic), up from 27 airports in Q319. So, they have seen meaningful growth in distribution points and growth in overall value-proposition of the product (given wider network) driving greater subscriptions. 

The Company also has a security screening offering for sports games similar to the airport offering. This is a nascent business, and we are not seeing it gain much traction from our checks, so it will not be the focus of the writeup.  

Why Now? 

CLEAR is a unique tech-enabled asset, which makes it attractive to growthier funds looking to gain travel exposure. Furthermore, the Company’s beat/raise cadence into a bad tape for unprofitable tech made it attractive to own. However, we think this is set to reverse as the Company has exhausted most growth levers and will start to miss Street Bookings expectations. It would not surprise us to see CLEAR become an orphaned stock like other 2021 unprofitable tech IPOs when bookings growth fails to accelerate in FY24 and decelerates to MSD % by FY25.  

Thesis Overview

• Partnership-induced bookings growth is coming to a halt as CLEAR exhausts TAM

• CLEAR has hit a penetration-wall that is obfuscated by aforementioned partnerships

• Terminal Value risk as airports/airlines begin to offer Biometric screening themselves (delta, American hates clear, surely others look at Star Alliance)

• TSA Pre-Check business is non-material portion of revenue and Platform business is a failure

• Lack of Disclosure and misleading unit economics challenge Management’s credibility

Partnership TAM Exhaustion

Amex: 

CLEAR started a partnership w/Amex in July 2021 where Amex paid for a Platinum Card holders’ membership. Amex paid CLEAR a discounted rate, which we ballpark to be 40% off.  While the Company's disclosure with regards to the partnership is horrible, we took triangulate to Amex subscribers with balance sheet disclosure, transcripts, and expert calls. Per earnings transcripts, CLEAR’s Amex partnership is structured in a way where they recognize bookings at the full $189 list price, and then at the end of Q2 every year, reimburse American Express for the differential between the list rate and discounted rate. The accrued liability to Amex is broken out in their Ks and Qs and is defined as: 

“The Company has estimated accrued partnership liabilities related to a portion of merchant credit card benefits that it expects to fund in the third quarter of 2023.”

The accrued liability to Amex is equal to the discount that Amex receives on CLEAR members they are paying for. We use this number for Q321 as well as earnings call commentary for that quarter saying Amex is “10-15%” penetrated to estimate the discounted rate for Amex being ~40%. We have confirmed in discussions with formers that this math is accurate to a large degree. 

Given the 40% discount and the fact that we have the accrued liability number for every quarter, we estimate total Amex subscribers as follows: 

Q321: 240k 

Q421: 440k

1Q22: 660k 

2Q22: 890k 

3Q22e: 1.11mm 

As of YE22, we estimate that CLEAR will have 1.33mm Amex Platinum members using the platform. We expect the explosive Amex growth to decelerate hard in ’23 and fall off a cliff by ’25 as they run up against a penetration wall. 

Amex does not publicly disclose Platinum members, but you can guesstimate this based on their Departures magazine Media kit. As of 2021, we estimate Amex Platinum card holders to be ~1.65-2mm. This reconciles with conversations with formers that the Amex partnership reached 50% penetration fairly quickly. As such, our Amex penetration build is as follows: 

The math above points to Amex net adds in Fy24 of 200k vs 750k in Fy22. Furthermore, Amex made up ~70% of gross new bookings, and an even higher share of net new bookings in FY21 & FY22. We believe the Street is asleep at the wheel when it comes to analyzing the Amex partnership. None of the 3 Street models we have gone through attempt to break Amex out, and GS dropped coverage in August 2022. Management was not particularly helpful in walking through the Amex math as well, as they started to dodge questions on it starting Q421:

“There is obviously a large overlap with Amex and CLEAR customers. In terms of exact penetration numbers, I think that question may be better asked to Amex.”

While they were happy to share penetration numbers in Q321, the fact that they stopped in Q421 makes us believe that they don’t want investors to run that math that we have shown above, as it will be evident that Amex is the last straw of growth for this business. 

Delta & United:

Much of CLEAR’s growth over the last five years has been partnership-driven. In 2016, CLEAR partnered with Delta where they effectively gave a 5% stake and discounted pricing for Delta members. This leapfrogged CLEAR’s distribution as they began to up lanes in Delta terminals at major hubs across the country and saw a massive jump in members based on their discounted pricing. The discounts were staggered, with Diamond members (~70,000) getting CLEAR for free, and remaining members getting a discount proportionate to their level. We think the economics of this contract were not great, but it was a dire move to grow airports and drive and inflection in member base. Given the Company’s financials only go back to 2019, and they disclose little to no details on their partnerships, we can evaluate the economics of the partnership on two front: speaking to formers and reading any press releases. We spoke w/ a SVP who was at CLEAR when the partnership was struck, and he said it was a dire move to gain more distribution points quickly: 

“Delta brought them into Austin, JFK, Atlanta, Detroit, Minneapolis, Los Angeles, Salt Lake, and a few more. However, they were giving away all these memberships. So, the membership numbers grew significantly, but a lot of them were free. And they probably went from 200,000 to 500,000 in a period of about a year, but none of that was significant revenue that made a difference.”

Diamond memberships ran at a loss while Gold, Platinum, and General members were profitable to varying degrees. We believe this TAM has been fully exhausted, and in a dire move to find new avenues for growth, CLEAR is reducing the discounts on this partnership. In early Jan 2023, the Delta partnership discounts were adjusted as follows: 

• General Membership: $179 from $129 (mere $10 discount)

• SkyMiles Amex, Gold, Platinum: $149 from $119

• Diamond: Remains free
  
  

We think this a move by CLEAR to shill strong growth (given they don’t bother breaking out Clear + member vs pricing growth) in H123 and kick the can down the road for when they inevitably must signal to investors that they have exhausted most avenues for growth and put out a disappointing bookings guide. Furthermore, this will inevitably lead to churn as people might no longer find the higher price to be worth it. 

In 2019, CLEAR entered a partnership with United (similar to Delta) where members get discounted pricing and United helps Delta further grow distribution and helps drive member sign-ups by incorporating CLEAR links into their app for example. The discounted memberships can be viewed as a customer acquisition cost. The free partnerships in this program were the United 1K members (~40,000). This partnership is likely fully penetrated by now and should not be a major source of incremental growth. 

According to survey data, the airline and Amex partnerships make up ~78% of CLEAR’s subscriber base, and growth on this front is screeching to a halt. 

Penetration Wall in Underlying Business 

CLEAR’s non-Amex business has been decelerating hard but is not evident ostensibly. We estimate that this business grew 22% in FY21 with $72mm net new bookings. FY22 had net new of $75mm and grew 17%. FY22 benefitted from a wave of subscribers returning as travel normalized to pre-covid levels. This tailwind goes away in ’23, and distribution growth (# of airports) continues to decelerate. Going airport by airport and dissecting the United, Delta, and American (who do everything they can to block CLEAR) hubs suggests that CLEAR already covers ~85% of domestic air traffic. As such, we believe net new is likely to decline sequentially from ’22 to ’23, and more pronounced in ’23 thru ’25. 

In addition to the one-time recovery tailwind in 2H21 and all of FY22, we believe CLEAR is starting to run into a capacity wall. Given CLEAR’s business nature, as they add more members/airport, the lines get longer, and the value proposition goes down. Although anecdotal, from our field checks at major CLEAR hubs, the length of the CLEAR line is often the same and more often than not longer than the TSA pre-check line. If that is the case, there’s basically no value for the CLEAR product, given pre-check costs ~$80 for 5 years as compared to $189/year for CLEAR. Furthermore, while most CLEAR members also have Pre-check, it is important to keep in mind that Pre-check also gets you out of the full-body scanner and potential pat-downs at the airport, which is a far superior value proposition than CLEAR. If CLEAR wait times being at parity with pre-check are indeed broad-based, net new bookings will fall off a cliff. Web traffic data is already showing first cracks of growth decelerating: 

It is interesting to note that the inflection in site visits perfectly lines up with the signing of the Amex partnership, although it is hard to draw meaningful conclusions beyond this given it also coincides with the travel recovery post Omicron. 

Given CLEAR’s S-1 disclosure only goes back to 2019 and that it is hard to draw meaningful insights from 2020 – 2022 data, we looked for any data available from 2015-18 to analyze CLEARs LT opportunity. Given that CLEAR operates in airports, their presentations and emails to airport representatives must be made publicly available under FOIA. We went through several emails to Sea-Tac, Chicago O’Hare, and LAX, within which we found two presentations in particular that can be used at guideposts for assessing CLEAR’s TAM. 

In a June 2018 presentation to Chicago, CLEAR was targeting ~150k members by YE21 translating to ~$30mm of Revenue. If the 4th most trafficked airport in the country is only expected to drive $30mm in revenue, we find it hard to believe there is a path for this business to achieve membership levels anywhere close to what their bogus TAM analysis in the S1 implies. 

In the S1, CLEAR basically stated that they have penetrated 11% of the Denver MSAs, which compares to 4% penetration in their remaining markets, so there is a long runway for growth. We take issue with this analysis for several reasons: 

• Denver MSA has a population of 2.97mm compared to 20mm for NY, 8.95mm for Chicago, and 7.75mm for the Bay Area. Airports are capacity constrained and CLEAR is likely not getting significantly more lanes based on what city they are operating in. We spot check this given our field work shows tons of CLEAR congestion in NYC and the Bay Area as well as in Denver, despite large disparities in penetration of MSAs.

• Denver is a popular ski destination making the airports particularly congested during peak travel season. Additionally, the mix of wealthy people as a % of the MSA is higher in Denver than the average airport CLEAR is targeting

• Denver is United’s most popular hub, so penetration will naturally be higher given several people are availing of the United discount

• 11% of 2.97mm people is 300k, which compares to them undershooting 150k targets for Chicago, making us think Denver is an outlier that the management team is trying to extrapolate to their entire airport base.

• In the bottom 25-30% of airports, you probably don’t need CLEAR as there is little to no congestion in the security checks, so MSA penetration will be close to 0%

Furthermore, there is a large disparity between O&D traffic penetration vs MSA penetration. It does not make sense why CLEAR sizes their TAM based on MSA penetration vs O&D which is clearly a better metric. The MSA penetration analysis vastly overstates the TAM, here is a snippet from their 2018 ORD presentation comparing MSA vs O&D: 

Putting things together, we think 11% MSA penetration is a bogus target that will never be hit. The $25-30mm Chicago revenue target leads us to believe there is at most a $750mm revenue potential for the underlying business (we simply divide 30mm by 4%, which is Chicago’s share of overall air traffic). We think this is a rough ballpark and not a cornerstone of our analysis but illustrates how unrealistic it is for CLEAR to achieve multiple billion in revenue being embedded into the stock. 

Assuming that $200mm of Amex is purely incremental, which is generous, we think the business will likely go ex-growth upon reaching ~$950mm in revenue. The market is pricing CLEAR to perfection at 4.2x mature revenue (or 17x “look-through” FCF assuming 25% terminal FCF margins).  

High Disaggregation Risk by Airlines/Airports 

CLEAR does not have a reason to exist in the long run. They do not own any particularly proprietary technology, but simply have biometric booths that eliminate the need for an agent scanning your passport and verifying your identity. This job can be done by the airlines during the Check-in over time, eliminating the need for CLEAR to exist. We are already seeing early signs of this, and CLEAR formers often highlighted this risk in our discussions. 

American Airlines is effectively blocking CLEAR in terminals they control. For example, Charlotte, a big American Hub, does not have Clear. In 2018, American stated it was because they wanted to speed up security by directly working with TSA on technological innovation: 

We heard from formers that the rumor was American building or backing a CLEAR competitor, but that died down in Covid. Regardless, we think it is only a matter of time before TSA and airlines partner to integrate biometrics into the check in process. 

Delta’s exclusivity with CLEAR ended in 2020, and they immediate started working with TSA themselves to develop a speedy security check process. In their Atlanta hub, Delta is already testing a face-ID technology where if you have a passport on-file, you can go from curb-to-door simply with Face-ID. You can check-in, verify your identity at TSA, and check-in to the lounge, all with Face-ID. We have heard from formers that TSA is very encouraging of this technology, as it can simply be bundled into TSA pre-check. Once such technology gains meaningful traction, CLEAR will simply not have a reason to exist. 

Additionally, TSA is not only working with Delta to establish a biometric solution. The Star Alliance is a group of 27 leading airlines globally. We heard from CLEAR formers of a Star Alliance biometric hub, which stores the biometrics of all travelers across the 27 airlines in a central repository hosted in the cloud. So, the biometric data is already aggregated, there just needs to be a front-end technology universally adopted by airlines to match a person’s identity with the biometrics stored in the hub. CLEAR does not seem to be in the picture for the development of this solution. 

We understand that the evolution of biometric technology from airports/TSA is likely several years away, but for a business where bulk of the value lies in the terminal value, it is a key risk understated by bulls.  

TSA is Non-Material & Platform is a Bust

CLEAR makes ~$23 per new TSA signup and $39 per renewal. We estimate the mix between the to be 50/50. TSA Pre-Check has the incumbent Idemia vendor who has an established footprint, regulatory framework, and staffing. Telos and CLEAR won approval to also become Pre-Check vendors. We estimate the 10mm TSA Pre-Check member base growing to 12mm by 2025, and of that we ascribe 10% share to CLEAR. This drives $37mm of incremental revenue. If CLEAR were to achieve 20% share, that would still only be $74mm of revenue which capitalized at 3x comprises only 5% of the current Enterprise Value.

CLEAR’s platform business is hoping to drive biometric usage at sporting or entertainment events. For example, if you are a season pass holder, you are willing to pay an extra $100 a year to skip the security line. Or, in the Mets stadium, they piloted biometric scanning to get self-serve beer. None of these pilots have taken off. Furthermore, our checks with formers indicated that the CLEAR TAM at stadiums is small, and the minimum annual guarantees that CLEAR had to give stadiums killed a lot of deals. The CLEAR pilot at Citi field didn’t really take off as well. Furthermore, unlike airports, there is not real network effect from stadium-to-stadium, so the biometric technology is one that can be developed and implemented in-house directly into sports teams’ apps, and there is no need for CLEAR. Platform is a $12mm run-rate business right now and we don’t see it being a material contributor to blended go-forward growth. 

Questionable Management: Poor Disclosure, Revolving Door of Execs, Misleading Unit Economics 

We think it is no coincidence that CLEAR only gives financials going back to 2019 in their S1. The only datapoint that we have seen thus far going back to 2015 they had $25mm in revenue (vs ~$439mm in FY22) growing 50%, so the Delta partnership really drove an inflection in growth. 

The Company’s member disclosure is also quite bogus. During Covid, CLEAR had a health pass offering where you could upload your Vax Card and add it to your digital wallet. This was offered for free and led to strong “member growth.” CLEAR discloses total platform members, which is absolutely meaningless to investors, but refuses to share Clear + member numbers. Furthermore, they also refuse to break out Amex revenue. These practices seem highly suspect to us. 

In terms of Unit Economics, the Company has shared on several occasions an LTV/CAC ranging from 15-18x, which catches the attention of a lot of bulls. However, we think this disclosure is extremely misleading. A large chunk of CLEAR subscriber adds are basically zero CAC and wont churn (Amex Platinum subs, airline partner subs). True retention, from our analysis, seems to be ~80% compared to the 95% figure used by CLEAR. Furthermore, the analysis seems to be run on a revenue basis for LTV, further inflating the figure. As CAC explodes and Amex is fully penetrated, we expect the Company to stop disclosing this figure. 

Lastly, our checks on CEO Caryn Becker and the level of turnover in senior positions are concerning. We have heard Caryn is “hellacious” to work for. 

“One of the biggest challenges for CLEAR is that CEO Caryn Becker, if you're familiar with the hierarchy, she has been described as a Steve Jobs. So what you're going to see is a lot of her direct reports don’t have a long tenure there. She goes through her senior leadership team quite frequently. I think her average right now is eight months.”

We have also heard that two executives who felt wronged by Caryn left to help build out Delta’s biometrics solution and one left to United to do the same. 

Valuation

In a base case, we model FY24 bookings of $672 mm and 13% below Consensus estimates. The variance comes largely from an accurate modelling of the Amex business that none of the Street breaks out. We give the bulls credit for the margin expansion story and have Adj. EBITDA margins expanding from 5% in FY22 to 17% in FY25. This is unlikely to materialize, as it requires Opex $ growth to halve from ~85mm/year in ’21 & ’22 to a $40mm/year thru FY25. We also believe almost half of that Adj. EBITDA is SBC. Regardless, applying 15x to our FY25e Adj. EBITDA of $110mm gives 51% downside in the stock. It is also worth noting that over the NTM, there is little valuation floor on the stock given the lack of meaningful FCF. Our operating model is as follows: 

In a bull case, we extrapolate FY24 consensus growth estimates into FY25 and are far more generous on margin expansion. This yields $180mm of Adj. EBITDA (67% higher than base case). Capitalizing this at a generous 25x Adj. EBITDA (implies flat revenue multiple from today) gets us to a $34 stock, or 10% upside through YE24. 

The asymmetric skew in our base vs blue-sky bull case gets us to a 5.4x r/r at current prices: 

As such, CLEAR is one of our highest conviction idiosyncratic shorts with any macro deterioration being an added kicker.

Risks

• Clear adds a new Credit Card partner like Chase

  • We think this is unlikely given how congested lines already are and the deterioration of Amex economics. However, given the headline bookings from the launch of such partnership will be strong, we recommend covering the short should such a partnership materialize and look to re-short at higher prices

• Acceleration in Organic Net Adds

  • Unlikely to happen and Amex deceleration will likely overshadow this, but if they are able to add more lanes at airports somehow, we can see a path to net adds accelerating (highly unlikely)

• International Expansion

  • While we have heard talks of international expansion, we doubt there is much upside risk to bookings over next couple of years from it. They will also face similar challenges they did in the US where subscriber adds are bleak until a certain critical mass is reached. We expect the short thesis to play out before international business, if any, is a material driver of growth
    
    

Catalyst

Bookings / Earnings Misses

Amex TAM Exhaustion 

Organic Net New Bookings Deceleration