LegalZoom.com, Inc. (LZ) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by and welcome to LegalZoom Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers presentation, there'll be a question and answer session. Please be advised that today's call may be recorded. I'll now like to hand the call over to Danny Vivier, Head of Investor Relations. Please go ahead. Danny Vivier: Thank you, operator. Hello, and welcome to LegalZoom's second quarter 2021 earnings conference call. Joining me today is Dan Wernikoff, our Chief Executive Officer; and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of word such as "believe," "expect," "plan," "anticipate," "will," "intent," "confident" and similar expressions, and they're not and should not be relied upon as a guarantee of future performance or results. Results could different materially from those contemplated by our forward-looking statements. We caution you to review the risk factor section of our reports the filings with the Securities and Exchange Commission for a discussion of all the factors that could cause the results to differ materially. The forward-looking statements we make on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relation section of our website at investors.legalzoom.com. The non-GAAP financial measures are not intended to be considered an isolation or as a substitute for results prepared in accordance with GAAP. Now, I'll turn the call over to Dan. Dan Wernikoff: Thanks, Danny. And welcome, everyone. Thank you for joining us today for our first earnings call as a public company. Noel and I enjoyed meeting many of you in the weeks leading up to our IPO and appreciated all the support along the journey. Before we discuss our second quarter results and review our priorities for the duration of the year, I want to take a moment to reflect on our mission here are LegalZoom and so I remind everyone of the significant opportunity ahead of us. A little over 20 years ago, LegalZoom started with a vision to disrupt legal services by leveraging technology. We believe then as we do today that legal services need to be democratized so everyone can access and afford them. We take our responsibility very seriously, knowing that as we empower small businesses with the tools they need to thrive, we are in turn covering the success of the U.S. economy; a purpose all the more inspiring as these small businesses continue to navigate a global pandemic. Our journey to democratize law, brings with it a compelling economic opportunity. Despite the digital transformations we've seen across many other large and highly regulated end markets like tax prep, financial services or healthcare. The $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation. In that, last year just 8% of legal services in the United States were provided online. The majority of legal services are still conducted through with offline attorney, many of whom do not have a functioning website let alone software to automate routine tasks enabling lower cost of service. In a system plagued by inefficiencies, small business owners are left holding the bag or just spend their limited resources on services very difficult to navigate at a price they often cannot afford. Ultimately, most of all choose to avoid accessing legal protection altogether, leaving small business owners and their families vulnerable to significant financial risk. LegalZoom is very well-positioned to serve this huge need in the market. First, we are relentlessly focused on the customer experience and have built differentiated product that makes business formation and legal compliance simple. The LegalZoom product is still complex government forms and to easy to follow questionnaires that can be completed efficiently with little to know human involvement. Our products' ease of use and affordability has resulted in a net promoter's score of 65, more than double of that of traditional attorneys. Second, we have a clear brand advantage with our unaided awareness really eight times higher than our closest competitor. The strength of our brand has been built over two decades of study investment and cannot be quickly nor easily replicated. This gives us a meaningful head start. Third, we have a proven ability to navigate a complexity of the U.S. legal and compliant system across all 50 states and over 3000 counties. We've a broad network of independent attorneys that are available to provide our customers with high quality legal and compliance support when they need it. These attorneys have deep expertise in our SMBs specific matter and geography which creates a superior experience for our customers reflected in our promoter scores three times higher than a typical offline attorney interaction. Well, we operate within an attractive market that is both resilience and poised for growth. The rise of the big economy and proliferation of SMB enabling tools are making it easier to start a business than ever before. We believe we are well-positioned to benefit from these macro tailwinds which should lead to accelerated share gains as the leading digital formations provider. And finally, we've methodically built a best-in-class leadership team within attractive mix of SMB domain expertise and experience leading high growth technology companies at scale. I'd like to now highlight our results for the second quarter of 2021. In the second consecutive quarter, revenue growth accelerated ending the period at a $150 million up 36% year-over-year. Components was driven by the transactional side of our business with revenue up 45% with our mix shift towards business formations which help drive higher average order values in the period. This shift is a positive signal that our efforts to reposition the legals in brand are resonation with small businesses. The topline strength flow through to our profitability metrics with adjusted EBITDA ending the period at approximately $22 million or 15% of revenue. I'll let Noel unpack the quarterly results in more detail. It is important to remember that quarterly growth rates since 2021 are and will continue to be impacted by the effect COVID-19 had our business formation since 2020. In summary, we are very pleased by our second quarter results and believe we're entering this new chapter as a public company with momentum on our side. It's important to remember that we're building LegalZoom into next great category leader. The executive team is focused on making the right investments today to support durable topline growth into the future. I'd like to spend the remainder of my time for writing an overview of our three key growth factors with an emphasis on areas of focus for the latter half of the year. The first factor is scaling our core formations offerings to the marketing and core product experience. As the clear digital leader in a massive vertical with very little tech adoption, we believe now is the time to accelerate our growth and take share from offline competition. We now started ramping our marketing investment in 2020 with customer acquisition spend up 77% annually. We were able to grow spends significantly while maintaining a tight 90-day payback period with most of our acquisition cost covered by the upfront transaction revenue alone. We are confident that there is room to continue scaling our immediate spend particularly as we add new cohorts at higher LCD's driven by additional monetization opportunities and improved customer retention. We are also entering new channels such as digital video and paid social, leveraging media mix model into optimize spend allocation and improve overall returns. In addition to our performance marketing efforts, we are also focused on making the right SEO and brand investments to drive a larger share of organic traffic. Today, despite our brand leadership, the minority of our traffic comes from earned channels. This is both the problem and an opportunity. In the near term, we'll continue to add debt to our in-house team and will put them with the tools they need to build a best-in-class SEO function. The other leverage to drive core share gains is product. When I first arrived at LegalZoom in late 2019, our technology stacks severely constrained our testing capacity. We quickly set in motion our plan to modernize our platform, making the critical investments we needed to scale. Today, the company has a product centric mindset and we are rapidly AB testing our products to drive improvements to conversion, subscription cross sells and customer satisfaction. In the near term, we'll be focused on improving the formation process by refining our questionnaires, streamlining the purchase experience and optimizing our line-up of subscription bundles. Our second key growth factor is building on ecosystem of SMB's subscription services. We note that in 2020, approximately 2/3rds of our customers had not begun upgrading when they formed their businesses through LegalZoom giving us a unique position very early in the SMB lifecycle. As formation, we have an opportunity to earn our customer's trust by introducing them to the right set of products and services they'll need to operate their business. Certain of these services we will deliver ourselves. LZ Tax which launched in October of last year is a good example of how we want to build in-house or expertise within compliance. The most frequent support questions we received at the time of formations relate to tax implications and over 70% of small businesses do not have an existing accountant relationship at the time of forming their business. LZ Tax offers and accounts in bookkeeping bundle in a monthly subscription and in access to CPA that can provide tax advice and complete their annual business tax filings. It's early days here and while we do not expect LZ Tax to be a material revenue driver near term, we remain very bullish on the long-term opportunity and are investing aggressively to accelerate its growth. From the second half of this year, we expect to rollout a tax solution across 100% of LLC formation traffic. With more traffic, we'll be able to accelerate product testing to help fine tune our commercialization strategy. In parallel, we will work to build out our operational infrastructure and scale our CPA's to meet anticipated future demand. We also plan to expand the services we bring to our customers by partnering with best-in-class third-party solutions to offer business checking accounts, payments, website hosting, and other relevant adjacencies. In 2020, we made a significant change in our strategic approach. We’re actively transitioning our existing one-way partnerships with bounty payment structures in favor of two-way strategic and well-integrated partnerships built on recurring revenue share miles. We expect this transition to weigh on our partner revenue line in the near term. That we are confident at this change in approach will lead to a better customer retention and drive higher ARPU over time. Our third and final key growth factor is integrating attorneys into our products so that small businesses can feel confident expert support is just a click away. Delivering this integrated service can help us in three ways. First, we believe it will increase our share of TAM by attracting new customers that never would have considered the digital category without knowing an attorney is available if needed. Second, when we bundle independent attorneys into our core offering, it will increase our AOV as a premium priced digital solution but will still be at a cost lower than existing offline alternatives. And third, we expect it'll drive its higher conversion rates and provide opportunities to cross sell subscription services at the time of formation. Earlier this year, we introduced our first attorney assisted solution as part of our trademarked product, users can now choose to file trademark themselves for $249 or file with the help of attorney for $599. Since launch, we've seen a significant percent of our customers select the attorney let option driving a meaningful uplift in AOV. Late this year, we'll begin testing new ways to integrate attorneys into our customer journey with a focus on a most popular on-ramp LLC formation. So much to our LZ Tax initiative, integrating attorneys is a long-term play and we fully anticipate our go-to market strategy to evolve as we test and learn. Let me end by saying we are incredibly excited for the journey ahead as a public company. I'm very proud of the team for delivering such a strong quarter while also meeting the many demands of an IPO process as well. We believe that the LegalZoom story is just beginning and this company has an incredible growth potential for years to come. We have high conviction that the investments we are making will also achieve that both potential. With that, I'll hand it over to our Chief Financial Officer, Noel Watson. Noel Watson: Thanks, Dan. And good afternoon, everyone. And since this is our first earnings call, I'm going to start with an overview of our financial model. When we review our results for the quarter and wrap up with guidance for Q3, in the full-year 2021. We'll start with our financial model. We were driving a high growth business that scale and we're operating with positive adjusted EBITDA which allows us to reinvest operating leverage to drive durable long-term growth. That's why would also our business starts with a new business formation which we use as an opportunity to introduce customers to the LegalZoom ecosystem, allowing us to offer ongoing subscription services, enjoy higher customer lifetime values. Our revenues play evenly between transactional and subscription components. In both of our customer acquisition spends, it's covered by the upfront transactional purchase alone leaving behind a growing base at high margin subscription revenue and drive an attractive unit economics. Apart from the 85% of our subscriptions are built upfront on annual returns, providing a favorable working capital dynamic. In the near term, we are laser focused on growing the share overall business formations leveraging our market leading position, brand equity, and superior customer experience to further penetrate the large opportunity in front of us in the legal services vertical. So, half of this call, we are prioritizing growth over profitability and are focused on making the right marketing infrastructure and people investments to drive sustainable topline results. In the long-term, as we achieve our market share objectives, we expect strong possibility in cash flow metrics supported by larger mix of subscription revenue. Now, I'd like to take you through our second quarter financial results. Total GAAP revenue in the period came out at $150 million, up 36% year-over-year. Transaction revenue representing 49% of total revenue was up 45% year-over-year. Total transaction revenue, we will report on three KPI's. The first, is business formations. This includes LLC, Inc., and non-profit formation events. Turning to our share of business formation has been major strategic priority. And the business is formed through LegalZoom's and then able to process our value added products and services for establishing ongoing relationship with the customer driving higher life on values. We completed more than a 123,000 business formations in the second quarter up 34% year-over-year. Our second KPI's transaction units was an in addition to business formations, also includes other transactions involving intellectual property and state planning. In the second quarter, we completed 260,000 transaction units up 12% year-over-year. The strength in business formations was offset by a year-over-year decline in state planning which we expect given the spike we saw last year in demand for those in trust following the onset of COVID-19. When we shift the weight from the state planning and into our business formations, had a positive impact on our third KPI, average order value. Which represents the average revenue contribution for each transaction unit. In the second quarter AOV came in at $280 up 30% year-over-year. And we expect continued strength in AOV as business formations continue to account for a larger share overall transaction unit, we expect AOV growth to take over in the back half of the year. Subscription revenue representing 46% of total revenue was up 29% year-over-year in the second quarter. Average subscription revenue, we will report two KPIs. Apart with subscription units, which includes compliance related solutions, the primary being our registered agent service and adjacent offering such as LZ Tax. Approximately 2/3rds of these subscription before our registered agent service, making us one of the largest registered agent providers for small businesses in the country. As of June 30th, 2021, we had over 1.2 million asset subscription units outstanding, up 69,000 units from the end of the first quarter. On a year-over-year basis, subscription units were up 25% at this second quarter, driving the bulk of our subscription revenue growth. The second subscription KPI is ARPU or the average annual revenue contribution per outstanding subscription unit. Please note, we measure ARPU using the last 12 months subscription revenues giving the vast majority of our subscriptions are built on annual terms. From the second quarter of 2021, ARPU was $230, up 3% at year-over-year. Our final revenue line item, representing 5% of total revenue comes from our partnership channel which was up 14% year-over-year in the second quarter. In the near-term, we do expect a lower sequential performance in our partner revenue line as we transition away from legacy partners that you're not aligned with our strategic direction. As Dan described earlier, we are focused on the long-term opportunity to build an ecosystem of multi-brand partners complete with recurring revenue structures. Now turning to expenses and margins, where all of the following metrics are on a non-GAAP basis unless otherwise stated. Cost of revenue, which includes government filing fees and other fulfilment and share cost was $48 million in the period up 41% versus last year. Gross margin came in at 68% of revenue, down from 70% of Q2 of last year as our revenue mix shifted towards transaction which carries a lower gross margin profile. And in our operating expenses, the largest line item is sales and marketing, representing just over 70% of spend. Sales and marketing cost came in at $59 million in the second quarter were 39% of revenue. Within our customer acquisition spend a $45 million was up 61% year-over-year as we continue to aggressively scale our media spend to grow business formations volume and to build on our digital and brand leadership. Our strategy is governed by a performance based approach that is ROI driven and can be quickly dialled up or down as market conditions were. In parallel, a portion of spend is allocated to brand owning initiatives and new channel testing which we view as ongoing investments that will improve overall efficiency over the long-term. Technology and development spend was $10 million in second quarter or 7% of revenue. In a future period, we expect this line item to grow as fast in the revenue as we invest to build out a best-in-class product and technology organization. General administrative cost were $12 million in the quarter or 8% of revenue. We have approximately $2 million of one-time cost that we do not expect to return in the third quarter. In the long-term, we expect G&A to grow but at a slower pace than our other OpEx line ins. In total, non-GAAP expenses were about 42% annual in the second quarter of 2021, slightly below our transaction revenue growth of 45%. Adjusted EBITDA was $22 million in the quarter or 15% of revenue. We continue to build a growing base of differed revenue as cash from our subscriptions offerings which collected upfront and recognized as revenue rateably over the term of the subscription. From the second quarter, we grew our base into differed revenue by $5 million. Free cash flow was $6 million in Q2, down from $25 million in the same period last year. The decrease in free cash flow was primarily due to working capital filings including an $8 million reduction into accounts payable. Cash and cash equivalence were a $167 million as of June 30th, 2021. On July 2nd, we raised $667 million net of underwriting discounts and commissions from our IPO and repaid in full $522 million of our 2018 Term Loan. As we look ahead and think of our capital allocation and the use of cash, by priority to use our strong balance sheet to position us to invest in organic and inorganic opportunity that drives sustainable long-term growth. Now, we'll turn to our outlook for the remainder of the year. Total growth rate in 2021 will be impacted by the effect COVID-19 had on business formations in 2020. In Q2 of 2020, the onset of the pandemic you've uncertainty in the economy. The present business formation activity in the early portion of the quarter, conversely during the end of the second quarter and throughout Q3 of last year, business formations accelerated in part due to an unlock in pent up demand from the prior quarter. In the third quarter of 2021, we expect revenue of a $143 million to a $147 million. And at full-year, we expect revenue of $570 million to $578 million. We will not be providing specific quarterly adjusted EBITDA guidance because we believe that in a dynamic environment such as the one we currently see, there are opportunities to go after additional shares and we believe we have an efficient approach to scaling our customer acquisition spend. In the full-year 2021, we expect adjusted EBITDA of $55 million to $59 million or roughly 10% of revenue at the mid-20. Before we move to the Q&A portion of the call, let me end by reiterating that our leadership team is squarely focussed on driving long-term results which we believe will translate into outside shareholder returns. We believe that second quarter's results reinforced the underlying health of the business and look forward as continuing to execute against our growth strategy. And with that, let's go to questions. Operator: Thank you. Our first question comes from Sterling Auty of J.P. Morgan. Your line is open. Sterling Auty: Yes, thanks. Hi guys, welcome to the public market. My first question is actually tying a little bit off of what Noel was talking about in terms of the guidance and COVID. With Delta variant kind of come into the forefront, have you seen any impact here so far in this quarter? And I know, nobody has a crystal ball but how are you thinking about the potential impacts to the business in the back half of the year? Dan Wernikoff: Yes. Well, thanks for the questions, Sterling. First off, I just want to acknowledge, a very strong quarter, great work by the team to deliver it, while in the backdrop of going public. So, I'm cleared that first but and yes we're actually its interesting. We're seeing the summer seasonality actually which there's been a little bit more of a normalized pattern in general. As we this year relative to last year because if we reflect on last year, we actually saw with COVID coming towards us, a shutdown which impacted us at the end of Q1 and the beginning of Q2 which is historically our peak. And then, instead of staying at those levels that increased, which normally you'd see the exact opposite. You'd see the peak happening at the end of Q1 and in the beginning of Q2. I mean, you're see a drop-off as you hit the summer month. So, we aren’t all that surprised to see a normalized pattern coming back a little bit and I will say July had a little bit more softness but that was not incredibly unexpected for us. As you said, it's a very unique backdrop. People travelling for the very first time and then right at that period of time we saw the delta variant creep up as well. So, while we're pacing well, we really do have to acknowledge we're in this unique territory. Now SMBs, are they completely open for business? Yes, but do they have some restrictions? Yes, they also have them. Our people locked downed know they are people starting to be a little bit more cautious, yes. And so, all that lack of visibility makes it a tough time to launch our business. But again I'm very surprised just by how resilient small businesses are. From a historical perspective, formations actually remain relatively strong. And so, for us I mean we definitely need to see how the next couple of months play out but there is no really large surprise at this point in terms of what we're seeing. Noel Watson: I'd have just to add on that, Sterling, maybe if I can jump in here and also take a quick second just to note the Q2 results how that we're pleased with the results that we presented for Q2 and feel like it represents continued strong execution by all of our Zoom'ers. To your point to your question, there are a number of variables at play and a certain level of uncertainty. But we believe that the ranges that we provided reflect a fairly broad set of outcomes and we're confident that we can continue to execute and deliver results within the ranges provided. Sterling Auty: That makes a lot of sense. And then, my follow-ups a little bit of a loaded question. It's one of the most popular that I get. When you talk about the opportunity with tax, getting your former employer in to it, and that so is they're struggling to understand you compete, you partner, with the relationship going forward in the marketplace for your tax opportunity. Noel Watson: Yes. Thanks for the question and it's important to have this one we relatively clear. Intuit doesn’t provide tax services directly through experts. That's actually a really important channel and it's called the ProAdvisor channel where large practices that work with Intuit in both in terms of establishing the customers on clickable at online as well as providing advice on top of it and completing taxes leveraging products like Lizard for instance which is an Intuit product. You can think of LegalZoom as one giant practice now that partners with Intuit. And we have a wholesale relationship on the QuickBooks online side. So, we're actually helping to distribute that to our customers. We internally have our own CPA's and we also are providing full end-of-year tax filing for our small businesses. But really important thing to note here is that when small business has formed with us, they almost have as many tax questions as they have legal questions. And 70% of them they come to us just have no account relationship at all and they're looking for a trusted partner. So, it's just a natural place for us to play a role and we did not want to recreate the wheel. There's an amazing wheel out there called QuickBooks Online and so we just wanted to partner with them. Sterling Auty: Okay. Thank you, guys. Noel Watson: Thanks, Sterling. Operator: Thank you. The next question comes from Elizabeth Elliott with Morgan Stanley. Your line is open. Elizabeth Elliott: Hi, thank you so much for the question. And congratulations for a strong second quarter. I was thinking if you could help us either quantitatively or qualitatively understand some of the sign posted you guys are seeing on how marketing can translate to better digital penetration. Understanding that it has been a slow moving market, so what other signs points that are seeing at when marketing is really over seated to drive the better show penetration? Dan Wernikoff: Yes. I mean, I guess what I'd point to is that there is a couple of things that we have opportunities. We talk about three different growth opportunities. 1) Growing the core. 2) One is adjacencies and 3) one is attorney assist. A lot of the growth that you're seeing right now is just us improving the product experience which in turn is helping with conversion and then becoming more efficient in our marketing spend. And we started from a great spot, I mean you can't get much more efficient than having a 90-day payback and then having lifetime value thereafter. But we're on the journey doing now is really scaling that up pretty significantly. So, we're trying to drive that up to a point where we're talking about north of 50% increases in TAM spend year-over-year. And so, that's exactly what we're trying to do at this point. You can see us doing that through different tools like Media Mix Modeling where we're able to use data and understand the interplay between different channels. We're also entering new channels such as digital video and OTT, social, and we're increasing our investment in search engine optimization. So, we feel like we have a lot of levers. There'll be two steps forward, one step back at times as you start to scale up a new channel, often times you'll have to then start to reassess the efficiency of that incremental spend but in general, it's an important level for us. Elizabeth Elliott: Okay. And then just a follow-up. Can it more longer-term, and thinking about business formations, understanding that right now there may be some tough comp as it relates to COVID. But I think the other side is that COVID has kind of fundamentally changed how many people operate in the world and that creates a business opportunity. So, kind of as we get through some of these tough comp, how do you think structurally about the rate of new business formations over the next couple of years, need to turning above or below kind of what you thought it pre-COVID level? Dan Wernikoff: Yes, I mean we definitely think it's going to trend above where it was pre-COVID. I mean, there's just the reality of people adopting digital enablement tools. There is also the reality of people realizing that they can form a business in their house relatively quickly because in some cases they've been forced to do it. And then, there's some really interesting regulatory tailwinds in that. Some platforms are now requiring or were requesting that the people who work on them actually form as an entity to help from a legal liability standpoint but also from like an employee status standpoint. So, we see this continuing and actually you're right, there is a little bit of a bump in Q3 because as Noel mentioned in the opening comments, last year we just saw a dramatic increase in Q3 in formation. And so, we have to lap that but we think it'll get back to a normalized level that was significantly higher than where it was when we were back in 2019 for instance. Elizabeth Elliott: Great, thank you so much. Dan Wernikoff: Thank you. Operator: Thank you. Our next question comes from Mario Lu with Barclays. Your line is open. Mario Lu: Great. Thanks for taking the questions and congrats on the first quarter all again. The first question is on retention. I was just wondering if you could provide some additional color on how retention has trended in recent months. In particular, from the newer cohorts that came on during the pandemic a year ago. And I know it's still a bit early if I has addition of expert services aided retention thus far. Thanks. Dan Wernikoff: Yes. It's just maybe just to make sure everybody tracks the commentary here. What we really talk about what we look at as the leading indicators, that 13 month retention on annual subscriptions. And they are primarily driven by business formations as well. And the one thing I'd say here is that it's probably too early to tell. We need to bake a little bit post the annual subscriptions and most of the accelerated growth happened in July and August of last year. And so, there is an element right now of not having complete visibility into what that looks like. I will say we haven’t seen anything in interim periods that has us concerned and if you were just pointing to for instance the Q2 data which sort of has this subscription units forecast within it. It was essentially right spot on it where we expected it to be. As it relates to expert services and the impact that that will have on retention going forward. We know that when people work with an expert whether it'd be an attorney or an accountant that small businesses have a much more likelihood of succeeding. And so, we do expect that over time it'll improve. And it's probably more of a factor of just how many of our customers adopt those expert guidance services which will drive it. So, that's why we're so if you think of our strategy, there's two big pillars in there. One is the adjacencies and LZ Tax where we're layering it a CPA but also just that attorney assistance side. So, people can get off on the right foot and then have an expert that they can go through to get advice along the way. Mario Lu: Great. That makes sense. And then, just one the competitive landscape. You guys are reinvesting back into marketing in this back half of the year. I guess, any color in terms of what you see from your peers, are they doing the same and any color there would be helpful. Thanks. Dan Wernikoff: Yes. I mean I don’t think we've seen any changes with the competitive landscape. I think we expect there to be over time as people continue to emulate our model. The thing that we're squarely focused on is that only 8% of legal services are delivered digitally today. And so, when we think about competition, it's really an offline attorney or it's an offline accountant now as well as someone who doesn’t leverage technology. And so, we feel comfortable that we have a superior solution relative to those alternatives. And it's as measured buying that promoter, you can see it. When someone works with one of our experts, they're three times the net promoter score of when they work with an offline attorney. When they work directly in our product, it's over two times in net promoter score of working with an attorney. And so, I think that's the competition we focus on the most. And we know that there's going to be people who emulate our business model and try to compete with us directly. Mario Lu: Great, thank you. Dan Wernikoff: Thank you. Operator: Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open. Stephen Ju: Okay. Thanks, so much. So, I'll add my congratulations as well. So guys, following-up on the earlier tax question. I think, you came out with new subscription products like Tax Advisory last October. So, as you go around this path of widening your product offerings, it's like what has been the adoption rate in like so far. What kind of tax rates and perhaps incremental ARPU that you're seeing. Thanks. Dan Wernikoff: Yes. Thanks for the question, Stephen. We tend not to provide tax rates on individual products. And actually the reason why is because often times there is a relationship between our cart and one the tax rate will go up and one will go down depending on how it what we're solving for in terms of the mix of subscription and AOV and ARPU. But what I will say is we have been surprised by the attach rate that we've had. I think I've noted this before that we're seeing an attach rate that's pretty much on par with our tax rate for our legal attorney subscription which when you think of a company named LegalZoom, you wouldn’t necessarily think right off the bat that the tax product would have a similar attach rate. So, we're feeling really confident about where we are. We're just getting started here too by the way. We initially we're doing outbound sales primarily to access this customer base. And right now we're doing lots of testing of how we put it in the product itself. And you have some early reads there are showing some promise. We think there's lots of opportunities to continue to increase attach and like I said one of the interesting things here is there is a symbiotic relationship between once you start to have one expert that is helping you with the business, it probably helps in terms of when you start to feel the success and you start to feel the support they're providing in helping us do other cross sales and some of our other expert services. So, I think but very early in the journey and but feeling good. Noel Watson: Yes. And maybe just to add to that with that. One of the important focus here is for us around tax is really on the operational side making sure that we're focused on scaling up operations to meet the demand that we're seeing through our formations flow and that we're protecting the consumer experience as we do that and really investing the right way in that business. Yes. It's a really good point. Right now we have no demand issue whatsoever. We actually in many ways are actively throttling demand, in some cases to make sure we get the experience perfect before we sort of unload and get all of the attached the entire base. And so, you'll see us do a little bit as there is testing the channel and making sure that the channels working and then there's insuring that the experience is perfect for the customers and at that point we're getting close to the point where we're really ready to just go broader on it. Stephen Ju: Okay. Thank you. Operator: Thank you. And next question comes from Matt Pfau with William Blair. Your line is open. Matt Pfau: Hi guys, thanks for taking my question. And great results. I wanted to ask on the partner program. Can you just give us an update on where you're at in that revamp and when that line item could become more of a contributor to revenue growth? Dan Wernikoff: Yes. Thanks for the question, Matt. I think this is one of the areas that I think we've made the most progress and yet at the same time it probably looks the worst. Because in a lot of ways we're revamping everything that we've done with partnerships. So, historically they’ve been somewhat tactical bounty, one-way directional relationships with brands that couldn’t necessarily offer traffic back to us. We just didn’t have established large bases of customers. And we’re really rethinking this to on how to be more bidirectional the brands that were really excited about offering our customers but also brands that are willing to market our services directly to their customers. This last quarter, we actually signed four different partnerships and all of them with strong brands. All of them, I would say in a pilot mode right now but the early results are very strong. And one of the things that we're also doing at this point which had never historically been done is we're targeting and leveraging the data that we have in a couple of cases and you can see it almost immediately you can see conversion of improvements just by offering them the right solution this or for the type of business they are. So, this has been an area where it's been almost flat to down in terms of its year-over-year growth rate. Flipping hopefully to being accretive to our growth rate in the next couple of years. But it will be a slow build back up because most of these again are more ratable relationships. There again more bidirectional and there's a lot of testing, we want to make sure again the experiences is good between these companies who are partnering with. Matt Pfau: Great. And just want to follow-up on the business formations. As you guys look can you direct the quarter or the first half of this year, did BG continue to take share of business formations in your estimation? Dan Wernikoff: Yes. And one of the things we've decided and it's actually interesting. So, the EIN date that most people look at the census data, is a great directional indicator of the macro but it's also pretty noisy. For those who've been looking at that data, it's inclusive of companies that are trying to get a PPP loan. And it typically it has to be processed through a bank account which requires an EIN. So, you might need an EIN but you may not have formed the entity. If you go bankrupt, you actually have to get an EIN, and if you hire an employee and you it's your first employee, you have to have an EIN. So, these are things that are kind of dislocated from the true macro which is looking at businesses that are forming through secretary state data. It's proprietary data that's something that we have. We choose not to release it and we don’t want to on a regular basis. We'd probably will consider doing it on an annual basis. And but, as I have said before, our whole strategy is to take share and drive like term value and we're feeling pretty good about how things are going this year. Matt Pfau: Got it. Thanks a lot, guys. I appreciate it. Dan Wernikoff: Thank you. Noel Watson: Thank you. Operator: Thank you. The next question comes from Andrew Boone with JMP Securities. Your line is open. Andrew Boone: Hi guys, thanks for taking the questions. Understood we're in a dynamic environment currently and that marketing spend is all wide based but it's done with a 77%. And it has I think about this is probably the biggest swing for profitability and understood you guys aren’t giving guidance there. Why didn’t you spend more like how do we think about that? Dan Wernikoff: Do you want to take that? Noel Watson: Sure. Dan Wernikoff: I better not. Noel Watson: Yes. I mean, Andrew thanks for the question. We -- our spend was up from a customer acquisition marketing standpoint 61% year-over-year which is still a massive uptick. In spend, to your point it is the vast majority of our allocation is to against performance and ROI and it's ROI based and so we're setting guard wheels for the spend. We will tweak that dial up or down as we see different opportunities where we can be more aggressive. And we also keep an allocation for kind of testing and learning new channels so that we can make sure that for the longer-term there are opportunities for us to continue to spend up. The approach that we're taking on the ROI base is we are stepping into it. As we're learning and making sure that we're just paying attention to our efficiencies. And also, in conjunction paying attention to the other opportunities that we're creating to monetize our customer relationships and to expand LTV through things like LZ Tax, and through things like our partner channel which we are looking to grow. And so, as those become additional monetization opportunity, is that our material to our overall LTV equation. That'll allow us some visibility into spending up even more aggressively. Or we do plan to continue to stay aggressive in our marketing spend. Dan Wernikoff: Yes. The only thing I'd add there, is we -- because we're entering a lot of new channels, well we really are sort of a measure twice cut once on that, and we look at the marginal spend return and also the interplay between the different channels. And so, there is almost the spend up and that to measure and then reallocate and then spend up. And what you see is its sort of gentle increase in the marketing spend that should continue on a dollar basis. But it's going to start looking smaller on a percentage basis just because we're at a different scale. The one thing I would also add in there is that we are looking for what I would call more brand partnerships in that. And areas where we can make investments just lays awareness. One of the bigger opportunities that we still have, we have a high awareness level but if you ask small businesses what we do, you get a lower level of understanding of our product and that we're really squarely focused on this concept of being the platform, the destination, the starting place to form your business. And so, we're looking for ways to get that out in a broader way through brand arrangements. And so, you'll start to see a little bit more of that activity probably in the back half of the year. Andrew Boone: Okay. And thanks. That tells very nicely and then the next question. So, just given the fact that LegalZoom is faster and cheaper than offline alternatives, what's the biggest hurdle to getting people to move online? Do you think assist unlocks that or how big of a step function is awareness versus just that education piece versus quoting from hand? Dan Wernikoff: Yes. I think it's a little about those things, I mean there is an awareness component of this which is I don’t think anybody really knows of this category. There's not like a defined category around business formation. And so, we're trying to establish that. But as soon as you establish that, you'll have some people who just have a fear of doing it on their own and that's where the backstop of having attorneys available if you need them. And again, we don’t really feel like most people will require an attorney and may just help them try the product knowing that if they run into a problem, they'll be able to access that attorney. And so, having them be part of our ecosystem and a core part of our ecosystem is extremely important. But those two factors together are what are really going to drive people's acceptance out of the category and then obviously we want to be putting more fuel on that with our team spend. Andrew Boone: Great. Thank you. Dan Wernikoff: Thank you, Andrew. Operator: Thank you. The next question comes from Brent Thill with Jefferies. Your line is open. Unidentified Analyst: Thank you. This is John Byun for Brent Thill. I have two questions. One, if could then maybe remind us of the peak proceeds not in my quarter and how you expect it to be different this year due to COVID or other factors. And then, in terms of product investment, you should maybe delve into between what are the biggest priorities from a near-term, thank you. Dan Wernikoff: Great. Thank you, John. Yes, the seasonality traditionally we've seen it's almost sort of an aspirational component at the beginning of the year where people start a new business, we also see a lot of people get a tax refund the consumer tax refund and that becomes the seed money for their business. So, there is it's kind of a natural peak that happens at the end of Q1 and at the beginning of Q2. And then you generally see it taper off for the rest of the year with Q4 being the lowest quarter for formations. Last year was the exact opposite with COVID. Q1 was one of the weakest quarters, Q2 it's of lot to build back up, Q3 it started to accelerate momentum. And we've been sort of off cycle really until we got all the way through April of this year. And we started to see some normal pattern return in seasonality. And so, I actually think that's encouraging because the normal seasonality that we're now seeing is that at a completely different level of what it was relative to where we were in FY'19 which again gets to the secular tailwind around the idea of businesses being easier to form now. From a product investment standpoint, I mean again I'll go back to the framework that we use. There is a lot we can do in our core platform and in our core products today. This year, we launched a whole new redesign of the site. We also made it completely mobile responsive and pretty quickly we saw improvements in conversion that gets building as we've gone throughout this year. And since then, we've now been investing in the purchase experience and recomercializing it with new parts of our ecosystem like LZ Tax and then we're also now focused on the engage with experience post formation where we're creating a hub where we call My Account, where you can go in and schedule with your experts or you can message with your experts on-demand. You can start to get compliant stash forward where you can see different compliant events happening in your company. And we want that to be a place where customers are coming back on a regular bases and seeing the value that they're getting from the services that we offer. But in terms of product investment, I'd say right now probably the big investment is on LZ Tax where we are spinning up essentially of an extremely large tax business which is offering full service tax filing, tax invoice and again the wholesale relationship within too in one the QuickBooks Online site. So, I think that adjacency opportunity doesn’t really stop at LZ Tax. We think there is other areas where we can be investing in the future. But we really want to get that one right before we go to our next one. And today, that's a significant area of investment. Unidentified Analyst: Great. Thank you. Operator: Thank you. And we're currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Dan Wernikoff, Chief Executive Officer, for closing comments. Dan Wernikoff: Yes. I want to thank you guys. It's obviously it's a lot of work to get to this point. Noel and I in the broader team, they'll feel like we're really just at the very beginning of the journey here. I want to thank all the Zoom'ers out there who've done the hard work when we've been on the road to go public and excited to get dinged back into the business in a deeper way. And we're really excited to keep innovating for small business. And look forward to catching up with all of you next quarter. So, stay safe. Stay safe everybody and we'll be talking soon. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.LZ Ratings Summary
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LegalZoom Shares Plunge 25% After CEO Change and Reduced Revenue Forecast
LegalZoom (NASDAQ:LZ) shares plummeted over 25% on Wednesday following the announcement of a new CEO and a downward revision of its full-year revenue forecast.
The company disclosed that Jeffrey Stibel, currently the Chairman of the Board of Directors, has been appointed as the new CEO effective immediately. Additionally, John Murphy has been named the Lead Independent Director of the Board.
Outgoing CEO Dan Wernikoff decided to leave the company and resign from the Board, stating that the transition is timely as LegalZoom shifts its focus towards subscription-based revenue to achieve long-term profitable growth.
For the second quarter, LegalZoom maintains its revenue projection between $172 million and $176 million, with adjusted EBITDA expected to be between $25 million and $27 million.
However, for the full year, the company revised its revenue forecast downward to a range of $675 million to $685 million and reduced its free cash flow expectation to between $75 million and $85 million.
Despite these adjustments, LegalZoom reiterated its full-year adjusted EBITDA guidance, which remains in the range of $135 million to $145 million.
LegalZoom Q1 2024 Financial Forecast: Earnings and Revenue Growth Insights
LegalZoom's Upcoming Financial Performance: A Look Ahead
LegalZoom (LZ:NASDAQ) is on the brink of revealing its financial performance for the quarter ending March 2024, with expectations set for a notable uptick in both earnings and revenue. The forecasted earnings of $0.10 per share represent a substantial 42.9% increase from the previous year, while revenue is anticipated to climb by 5.4% to $174.87 million. This optimistic outlook is underpinned by the company's recent trading activity, where LZ's stock price has ascended to $12.16, reflecting a 1.76% increase. This price movement is part of a broader trend that has seen the stock fluctuate between $11.895 and $12.43 in a single day, showcasing the market's reactive nature to the company's financial health and prospects.
Despite the positive revenue and earnings projections, the unchanged consensus EPS estimate over the last 30 days suggests a cautious stance from analysts, possibly due to the Earnings ESP (Expected Surprise Prediction) model indicating a -1.96%. This model, which aims to forecast the likelihood of an earnings beat, points to a potential shortfall against the consensus EPS estimates. However, it's crucial to note that LegalZoom has a history of outperforming expectations, as evidenced in the previous quarter where it posted earnings of $0.13 per share, surpassing the anticipated $0.10 and delivering a surprise of +30%. This track record of exceeding consensus EPS estimates in three out of the last four quarters may offer some reassurance to investors.
The company's current market position, with a market capitalization of approximately $2.3 billion and a trading volume of 1,053,812 shares, further highlights its significance within the NASDAQ exchange. This financial stature, combined with the stock's performance range over the past year—from a low of $6.89 to a high of $15.68—illustrates the volatility and potential growth opportunities that LegalZoom presents to its investors.
In the broader context of the Zacks Industrial Services industry, LegalZoom's anticipated financial results contrast with those of its peer, TPI Composites, which is expected to report a loss of $0.68 per share for the same quarter. This comparison not only underscores LegalZoom's relative financial health but also its potential resilience in a challenging market environment.
As the earnings report date of May 7, 2024, approaches, investors and market watchers alike will be keenly observing how LegalZoom's financial performance aligns with these projections. The combination of anticipated year-over-year growth in earnings and revenue, alongside the company's recent stock performance and market valuation, paints a picture of a firm that is navigating its financial journey with a degree of success, albeit with the cautionary note provided by the Earnings ESP and Zacks Rank.
