Q2 2021 LegalZoom.com Inc Earnings Call

August 12, 2021

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Thank you for standing by and welcome to legal group second quarter 2021 earnings Conference call. At this time, all participant lines are a little slow.

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I'd like to hand, the call over to Dan to give you here head of Investor Relations. Please go ahead.

Thank you operator, Hello, and welcome to legal Zoomed second quarter 2021 earnings Conference call.

Joining me today is Dan Warner Cobb, 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 words, such as believe expect plan anticipate will intend confident and similar expressions and are not.

Not and should not be relied upon as a guarantee of future performance or results.

Results could differ materially from those contemplated by our forward looking statements.

We caution you to review the risk factors section of our reports and filings with the Securities and Exchange Commission for a discussion of all the factors that could cause the results to differ materially.

Weird looking statements we make on this call are based on information available to US as of today's date and 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 Relations section of our website at investors that legal zoom dot com and <unk>.

Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Now I'll turn the call over to Dan.

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 at legal due to remind everyone of the significant opportunity ahead of us.

A little over 20 years ago legal zoom started with a vision to disrupt the legal services by leveraging technology.

We believe then as we do today that legal services need to be democratized, so everyone can access and aboard 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 powering the success of the U S economy on purpose all the more inspiring as these small businesses continued 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.

Back last year, just 8% of legal services in the United States will provided online.

The majority of legal services are still conducted through an offline attorney many of whom do not have a functioning website, let alone software to automate routine tasks, enabling lower cost of service.

In our system plagued by inefficiencies small business owners are left holding the bag or suspend our limited resources on services that are difficult to navigate at a price they often cannot afford.

Ultimately most will choose to avoid accessing legal protection altogether, leaving small business owners and their families vulnerable to significant financial risk.

Legal zoom is very well positioned to serve this huge need in the market.

First we are relentlessly focused on the customer experience and have built a differentiated product that makes business formation and legal compliance simple the.

The legal zoom product is still complex government forms into easy to follow up questionnaires that can be completed efficiently with little to no human involvement.

Our products ease of use and affordability has resulted in a net promoter score of 65 more than double that of traditional alternatives.

Second we have a clear brand advantage with our unaided awareness nearly eight times higher than our closest competitor.

The strength of our brand has been built over two decades of steady investment and cannot be quickly nor easily replicated. This gives us a meaningful head start.

Third we have a proven ability to navigate the complexity of the U S legal and compliance system across all 50 states and over 3000 counties. We have 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 SMB specific matter and geography, which creates a superior experience for our customers reflected in net promoter score is three times higher than a typical offline attorney interaction.

Fourth we operate within an attractive market that has both resilience and poised for growth.

The rise of the gig economy, and proliferation of SMB enablement tools are making it easier to start a business than ever before.

We believe we are well positioned to benefit from these macro tailwind, which should lead to accelerated share gains as the leading digital formations provider.

And finally, we have methodically built a best in class leadership team with an 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.

For the second consecutive quarter revenue growth accelerated ending the period at $150 million up 36% year over year.

Performance was driven by the transactional side of our business with revenue up 45% we.

We saw a mix shift towards business formations, which helped drive higher average order values in the period.

This shift is a positive signal that our efforts to reposition the legal and brand are resonating with small businesses.

The top line strength flowed 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, but it is important to remember that quarterly growth rates. In 2021 are and will continue to be impacted by the effect COVID-19 had on our business formations in 2020.

In summary, we're 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 is important to remember that we are building legal zoom into the next great category leader.

The executive team is focused on making the right investments today to support durable top line growth into the future.

I'd like to spend the remainder of my time, providing an overview of our three key growth vectors with an emphasis on areas of focus for the latter half of the year.

The first factor is scaling our core formations offerings through marketing and core product experience as.

As the clear digital leader and 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 first started ramping our marketing investment in 2020 with customer acquisition spend up 77% annually.

We're able to grow spend significantly while maintaining a tight 90 day payback period with most of our acquisition costs covered by the upfront transaction revenue alone.

We are confident that there is room to continue scaling our media spend particularly as we add new cohorts at higher ltvs, 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 modeling to optimize spend allocation and improve overall returns.

In addition to our performance marketing efforts. We are also focused on making the right SCO and brand investments to drive a larger share of organic traffic today.

Today, Despite our brand leadership the minority of our traffic comes from earn channels. This is both a problem and an opportunity in the near term, we'll continue to add depth to our in house team and we will equip them with the tools they need to build a best in class Seo function.

The other lever to drive core share gains as product when I first arrived at legal zoom in late 2019, our technology stack severely constrained our testing capacity with.

We quickly set in motion a 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 product to drive improvements to conversion.

Description cross sells and customer satisfaction.

In the near term will be focused on improving the formation process by refining our questionnaires streamlining the purchase experience and optimizing our lineup of subscription bundles.

Our second key growth vectors building, our ecosystem of SMB subscription services.

We know that in 2020, approximately two thirds of our customers had not begun to operating when they form their businesses through legal zone, giving us a unique position very early in the SMB lifecycle.

Our formation, we have an opportunity to earn our customers' trust by introducing them to the right set of products and services they will need to operate their business.

Certain of these services, we will deliver ourselves.

LTE tax which launched in October of last year is a good example of how we want to build in house expertise within compliance.

The most frequent support questions. We received at the time of formation relate to tax obligations and over 70% of small businesses do not have an existing account and relationship at the time of forming their business L.

<unk> offers and accountants and bookkeepers bundle in a monthly subscription and an 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 <unk> 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.

In the second half of this year, we expect to rollout a tax solution across 100% of LLC formation traffic with more traffic will 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 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 bouncy payment structures in favor of two way strategic and well integrated partnerships built on recurring revenue share models.

We expect this transition to weigh on our partner revenue line in the near term, but we are confident that this change in approach will lead to a better customer retention and drive higher <unk> over time.

Our third and final key growth vector 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 team 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 offerings. It will increase our <unk> as a premium priced digital solution, but we'll still be at a cost lower than existing offline alternatives.

And third we expect it will drive 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 trademark product users can now choose to file trademark themselves for $249 for <unk>.

With the help of an attorney for $599.

Since launch we've seen a significant percent of our customers select the it's already led option driving a meaningful uplift in <unk>.

Late this year, we'll begin testing new ways to integrate attorneys into our customer journey with a focus on our most popular onramp LLC formation.

Similar to our Lz tax initiatives integrating attorneys as a long term play and we fully anticipate our go to market strategy to evolve as we test and learn.

Yes.

Let me end by saying we are incredibly excited for the journey ahead as a public company I am 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 legal zoom story is just beginning and that this company has an incredible growth potential for years to come.

We have high conviction that the investments, we're making will allow us to achieve that full potential.

With that I'll hand, it over to our Chief Financial Officer Noel Watson.

Thanks, Dan and good afternoon, everyone.

And so this is our first earnings call I'm going to start with an overview of our financial model.

Our results for the quarter and wrap up with guidance for Q3, and the full year 2021.

Let's start with our financial model.

Driving the hydro business at scale, and we operate with positive adjusted EBITDA, which allows us to reinvest operating leverage to drive durable long term growth.

The flywheel of our business starts with a new business formation, which we use as an opportunity to introduce customers to the legal zoom ecosystem, allowing us to offer ongoing subscription services and drive higher customer lifetime values.

Our revenue split evenly between transactional and subscription components.

The bulk of our customer acquisition spend is covered by the upfront transaction purchase alone, leaving behind a growing base of high margin subscription revenue and driving attractive unit economics.

Proximately, 85% of our subscriptions are billed upfront on annual terms provide any favorable working capital dynamics.

In the near term, we are laser focused on growing our 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 and the legal services vertical.

To accomplish this goal 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 profitability and cash flow metrics supported by a larger mix of subscription revenue.

Now I'd like to take you through our second quarter financial results.

Total GAAP revenue indicators came at $150 million up 36% year over year.

Transaction revenue represented 49% of total revenue was up 45% year over year.

Within transaction revenue, we will report on three Kpis.

Firstly as business formation, which includes LLC, Inc, and nonprofit formation events.

Growing our share of business formations with a major strategic priority when a business is formed through legal zones. We are then able to cross sell value added products and services to establish an ongoing relationship with the customers driving higher lifetime values.

We completed more than 122000 business formations in the second quarter up 34% year over year.

Our second Kpis transaction units, which in addition to business formations also includes other transactions involving intellectual property and estate planning.

In the second quarter, we completed 260000 transaction units up 12% year over year.

Strengthening business formations was offset by a year over year decline in state planning, which we expected given the spike we saw last year and demand for Wills and trusts following the onset of COVID-19.

The mix shift away from a state planning toward business formation has had a positive impact on our third GPI.

Average order value, which represents the average revenue contribution for each transaction unit.

In the second quarter <unk> came in at $282 up 30% year over year.

While we expect continued strength in <unk> business formations continue to account for a largest share overall transaction unit, we expect <unk> growth to taper in the back half of the year.

Subscription revenue, representing 46% of total revenue was up 29% year over year in the second quarter.

Within subscription revenue, we will report two kpis.

Firstly subscription units, which includes compliance related solutions, the primary being a registered agent service and adjacent offerings such as <unk>.

Approximately two thirds of the subscription before a registered agent service, making us one of the largest registered agent providers for small businesses in the country.

As of June 32021, we had over $1.2 million active subscription units outstanding up 69000 units from the end of the first quarter.

On a year over year basis subscription units were up 25% in the second quarter driving the bulk of our subscription revenue growth.

The second subscription kpis as well.

The average annual revenue contribution per outstanding subscription unit.

Please note we measure <unk> using the last 12 months subscription revenue given the vast majority of our subscriptions are built on annual terms.

In the second quarter of 2021, IPO was $230 up 3% 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 second quarter.

In the near term, we do expect lower sequential performance and on partner revenue line as we transition away from legacy partners that do not align with our strategic direction as Dan described earlier, we are focused on the long term opportunity to build an ecosystem of marquee 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 fulfillment care costs was $48 million in the period up 41% versus last year.

Gross margin came in at 68% of revenue down from 70% in Q2 of last year as our revenue mix shifted towards transaction, which carries a lower gross margin profile.

Within our operating expenses, the largest line item as sales and marketing representing just over 70% of spend.

Sales and marketing costs came in at $59 million in the second quarter with 39% of revenue within that customer acquisition spend of $45 million was up 61% year over year as we continue to aggressively scale, our media spend to grow business formation volume and to build on our digital brand leadership.

Our strategy is governed by a performance based approach that is ROI, driven and can be quickly dialed up or down as market conditions warrant.

In parallel a portion of the spend is allocated to brand building 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 the second quarter were 7% of revenue.

Future periods, we expect this line item to grow faster than revenue as we invest to build out a best in class product and technology organization.

General and administrative costs were $12 million in the quarter for 8% of revenue there were approximately $2 million of one time costs that we do not expect to return in the third quarter.

Over the long term, we expect G&A to grow but at a slower pace than our other opex lendings.

In total non-GAAP expenses were up 42% annually in the second quarter 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 deferred revenue as cash from our subscription offerings is collected upfront and recognized as revenue ratably over determined to subscription.

In the second quarter, we grew our base of deferred 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 items, including an $8 million reduction in accounts payable.

Cash and cash equivalents were $167 million as of June 32021 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 about capital allocation and the use of cash our priority is to use our strong balance sheet to position us to invest in organic and inorganic opportunities that drive sustainable long term growth.

Now I will turn to our outlook for the remainder of the year.

Quarterly growth rates in 2021 will be impacted by the effect of COVID-19 had on business formation in 2020 in Q2 of 2020, the onset of the pandemic drove uncertainty in the economy. The pressing the business formation activity in the early portion of the quarter.

Firstly during the end of the second quarter and throughout Q3 of last year business formations accelerated in part due to an unlocking pent up demand from the prior quarter.

For the third quarter of 2021, we expect revenue of $143 million to $147 million.

Full year, we expect revenue of $570 million to $578 million.

We will not be providing specific quarterly adjusted EBIT guidance, because we believe that in a dynamic environment such as the one we currently see or opportunities to go after additional share and we believe we have an efficient approach to scaling our customer acquisition spend.

For the full year of 2021, we expect adjusted EBITDA of 55% to $59 million or roughly 10% of revenue at the midpoint.

Before we move to the Q&A portion of the call. Let me end by reiterating that our leadership team is squarely focused on driving long term results, which we believe will translate into outsized shareholder returns. We believe the second quarter's results reinforce the underlying health of the business and look forward to continuing to execute against our growth strategy.

With that let's go to questions.

Thank you.

Remainder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

That you please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Our first question comes from Sterling Auty.

<unk> of Jpmorgan Your line is open.

Yeah, Thanks, Hi, guys welcome to the public markets.

My first question is actually playing a little bit off of what Noel was talking about in terms of the guidance and in Covid with Delta variant kind of coming to 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.

So the business in the back half of the year.

Yeah, well thanks for the question Sterling.

First off I, just want to acknowledge a very strong quarter, great work by the team to deliver Wow and the backdrop of going public. So I am clear that first but yes, we're actually it's interesting we're seeing summer seasonality actually which there has been a little bit more of a normalized pattern in general.

As we have this year relative to last year, because if you reflect on last year, we actually saw with COVID-19 coming towards us.

Shutdown, which impacted us at the end of Q1 at the beginning of Q2, which is historically our peak.

And then instead of <unk>.

Staying at those levels it increased which normally you would see the exact opposite you'd see the peak happened at the end of Q1 and the beginning of Q2, and then see a drop off as you hit the summer months. So.

We arent 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 traveling for the very first time and then right at that period of time, we saw delta variance a creep up as well so while we're pacing well, we really do have to acknowledge we're in this unique territory.

Know smbs are they completely open for business, yes, but do they have some restrictions.

They also have them our people locked down no.

Are people starting to be a little bit more cautious, yes, and so all of that lack of visibility makes it a tough time to launch a business, but 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.

Months play out, but theres no really large surprise at this point in terms of what we're seeing.

And just to add to that thoroughly maybe maybe if I can jump in here.

Also take a quick second just to note. The Q2 results and we're pleased with the results that we presented for Q2 and feel like it represents continued strong execution by by all of our Zumiez.

To your point to your question.

There are a number of variables that play in a certain level of uncertainty but.

But we believe that the ranges that we provided.

Reflect a a fairly broad set of outcomes and we're confident that we can continue to execute and deliver results within the ranges provided.

That makes a lot of sense and then my follow up a little bit of a loaded question. It's one of the most popular that I get when you talk about the opportunity with Tak given your former employer Intuit investors are still struggling to understand do you compete do partner, what's the relationship going forward in the marketplace for Europe.

<unk> opportunity.

Yeah, Yeah. Thanks for the question and it's important to have this one be relatively clear.

Into it doesn't provide tax services directly through experts.

That's actually a really important channel and it's called the pro advisor channel, where large practices that worked with intuit and both in terms of establishing their customers on quickbooks online as well as providing advice on top of it and completing taxes leveraging products like <unk> for instance, which isn't intuit product you can think of legal zoom as.

One giant practice now that partners with Intuit.

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 cpas.

And we also are providing full end of your tax filing for our small businesses. The really important thing to note here is that.

When when small businesses form with us they almost have as many tax questions as they have legal questions and.

70% of them that come to US just have no account relationship.

It all and Theyre looking for a trusted partner. So it's just such a natural place for us to play a role and we did not want to recreate the wheel theres, an amazing wheel out there called Quickbooks online and so we just wanted to partner with them.

Perfect. Thank you guys.

Thanks Sterling.

Thank you.

Our next question comes from Elliot with Morgan Stanley. Your line is open.

Hi, Thank you so much for the question and congratulations on a strong second quarter.

I was wondering if you could help us either quanta.

Quantitatively or qualitatively understand some of the signposts that you guys are seeing on how marketing.

Blake to better tissue penetration understanding that it has been a slow moving market. So what are the signposts that or seeing that the marketing is really what was needed to drive the better penetration.

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. One is growing the core one is adjacencies and one is attorney assist a lot of the growth that youre 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 what we're on the journey doing now is really scaling that up pretty significantly. So we're trying to drive that up too.

<unk>, where we're talking about north of 50% increases in Cam 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.

<unk> 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 oftentimes you'll have to then.

Start to reassess the efficiency of that incremental spend but in general it's an it's an important level for us.

Great and then just a follow up had my longer term.

And thinking about business formation understanding that right now there may be some.

Comp as it relates to Covid, but I think the other side is that Covid has kind of fundamentally changed how many people operate but we're all in that create a business opportunity so kind of as we get through some of these tough comps.

Do you think structurally about the rate of new business formation over the next couple of years trending above or below kind of what you thought at pre COVID-19 level.

Yes, I mean, we definitely think it's going to trend above where it was pre COVID-19 I mean, theres just the reality of.

People are adopting digital enablement tools and there's also the reality of people realizing that they can 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 tailwind.

Yes.

<unk> platforms are now requiring or or requesting that the people who work on them actually form as an entity.

To help from a legal liability standpoint, but also from Lincoln employee status standpoint. So we see this continuing and actually you are right. There is a little bit of a bump in Q3, because as as Noel mentioned in the opening comments last year. We just saw a dramatic increase in Q3 and formation.

So we have to lap that but we think it will get back to a normalized level that was significantly higher than where it was.

When we were back in 2019 for instance.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from Mario Lu with Barclays. Your line is open.

Great. Thanks for taking the questions and congrats on the first quarter out of the gate.

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.

<unk> ongoing.

A year ago.

And I know, it's still a bit early but has the addition of expert services aided retention that's fine. Thanks.

Just maybe just to make sure everybody tracks. The commentary here, what we're really talk about what we look at is the leading indicators that 13 month retention on annual subscriptions.

And there are primarily driven by business formations as well.

One thing I'd say here is that it's probably too early to tell we need to bake.

Little bit post the annual subscriptions in most of the accelerated growth happened in July and August of last year and so there is an element right now 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 the subscription units forecast is forecasted within it.

It was essentially right spot on of where we expected it to be.

As it relates to expert services and the impact that that will have on retention going forward.

Know that when people work with an expert whether it be an attorney or.

Accounts that small businesses have a much more likelihood of succeeding and so we do expect that over time, it will 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 is two big pillars in there one is the Adjacencies and Lv tax where we're we're layering in a CPA, but also just that attorney assisted side. So people can get off on the right foot and then have an expert that they can go to to get advice along the way.

Great that makes sense and then just one on the competitive landscape.

Reinvesting back into marketing in the 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.

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.

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 as measured by net promoter you can see it when someone.

Works with one of our experts they have three times the net promoter score of when they work with an offline attorney when they work directly in our product Thats over two times. The 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 direct.

Great.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open.

Okay. Thanks, so much so I'll add my congratulations as well so guidance.

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 along this path of widening your product offerings like what has been the adoption rate.

So far what kind of attach rates and perhaps incremental <unk> or.

Are you seeing thanks.

Yes, thanks for the question Stephen.

We tend not to to provide attach rates on individual products and actually the reason why is because oftentimes there's a relationship between our carton one attach rate will go up and one will go down dependent on how we're what we're solving for in terms of the mix of subscription and <unk>, but what I will.

Say as we have been surprised.

By the attach rate that we've had I think I have noted this before that we're seeing in attach rate.

Pretty much on par with our attach rate for our legal attorney subscription, which when you think of a company named legal zoom 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 some early reads there are showing some promise so we.

We think there's lots of opportunities to continue to increase attach in and like I said one of the interesting things here is there's a symbiotic relationship between once you start to have one expert that is helping you as a business. It probably helps in terms of when you. When you start to feel the success. When you start to feel the support they are providing and helping US do other cross sells of some of our other expert services.

No.

But very early in the journey.

But feeling good.

Yes, Stephen just to add just add to that one of the important focus areas for us around taxes 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.

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 attach.

The entire base and so you'll see us do a little bit. This is testing the channel and making sure that the channel is working and then there is ensuring that the experience is perfect for the customers and.

At that point were getting close to the point, where we're really ready to just go go broader on it.

Okay. Thank you.

Thank you.

Our next question comes from Matt Pfau with William Blair. Your line is open.

Hey, 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.

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 historically, they've been somewhat tactical balance sheet, one way directional relationships.

With brands that Couldnt necessarily offer traffic back to us. They just didn't have established large bases of customers.

And we're really rethinking this too.

Would it be more bi directional b brands that we're 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.

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 leveraging the data that we have in a couple of cases and you can see almost immediately you can see conversion improvements just by offering them. The right solution based off of 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.

Low build back up because most of these again are more ratable relationships.

There again more by the by directional and Theres a lot of testing and we want to make sure again. The experience is good between these companies that we're partnering with.

Great and just wanted to follow up on the business formations.

Look either at the quarter or the first half of this year.

These continue to take.

Sure business formations and in your estimation.

We're not one of the things, we've decided and it's actually interesting. So the EIA data that most people look at the census data.

As a great directional indicator of the of the macro but it's also a pretty noisy.

For those who have been looking at that data. It is inclusive of companies that are trying to get a PPP loan.

Typically it has to be processed through a bank account, which requires an EIA and so you might need an EIA and but you may not have formed entity. If you go bankrupt do you actually have to get an EIA and if you hire an employee.

It's your first employee you have to have any iron. So these are things that kind of dislocated from the true macro which is looking at businesses that are forming through secretary of state data is proprietary data is something that we have we choose not to release it.

And we don't want to on a regular basis, we probably will consider doing it on an annual basis.

But.

As I've said before our whole strategy is to take share and drive lifetime value and we're feeling pretty good about how things are going this year.

Got it thanks, a lot guys I appreciate it.

Thank you.

Thank you. Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Hi, guys. Thanks for taking the questions.

Gordon.

A dynamic environment currently and that marketing spend is ROI based but spend was up 77%.

As I think about this is probably the biggest swing for profitability and understood you guys arent arent, giving guidance there.

Why didn't you spend more right like how do we think about that.

If you want to take that sure.

Yes, I mean.

Andrew Thanks for the question.

Our spend was up from a customer acquisition marketing standpoint, 61% year over year, which is still a massive uptick.

And spend.

To your point it is.

The vast majority of our allocation is too.

Against performance and ROI, and it's ROI based and so we're setting guardrails 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 and 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 based as 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 <unk>.

Other opportunities that we're creating to monetize our customer relationships and to expand LTV through things like LG tax and through things like our partner channel, which we are looking to grow and so as those become additional monetization opportunities that are material to our overall LTV equation.

That will allow us some visibility into spending up even more aggressively but we do we do plan to continue to stay aggressive.

Our marketing spend yes, the only thing I'd add there is.

Yes.

Because we're entering a lot of new channels.

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's almost a spend up and then a measure and then reallocate and then spend up and what you see is.

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, but one thing I would also add in there is that we are looking for what I would call more brand partnerships in areas, where we can make investments to just raise awareness one of the bigger opportunities that we still have we have a high awareness.

A level.

But if you 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 that 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 youll start to see a little bit more of that activity probably in the back half of the year.

<unk>.

Got that dovetails very nicely into my next question.

So just given the fact that legal zoom 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 as awareness versus just that education piece versus holding some paint.

Yes, I think it's a little of both those things I mean, there is a an awareness component of this which is I.

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.

Youll have some people, who just have a fear of doing it on their own and Thats, where the backstop of having attorneys available. If you need them again, we don't really feel like most people will require an attorney.

It may just help them tried our product knowing that if they run into a problem and they will 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 but those two factors together.

Are what are really going to drive People's acceptance of the category and then obviously, we want to be putting more fuel on that with our <unk> spend.

Great. Thank you.

Thank you. Thank you.

Our next question comes from Brent Thill with Jefferies. Your line is open.

Thank you this is John beyond for Brent Thill.

Two questions one.

If you could maybe remind us of the typical seasonality by quarter and how you expect it to be different this year.

Colgate a lot of factors.

And then in terms of product investment if you can maybe building going on what are the biggest priorities.

Near term thank you.

Great. Thank you John.

Yes, so 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 of 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 the one of the weakest quarters Q2, it took a while 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 and seasonality.

So I actually think thats encouraging because the normal seasonality that we're now seeing is that 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'll go back to the framework that we use there is a lot we can do in our core platform and 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 kept building as we've gone throughout this year and since then we've now been investing in the purchase experience and re commercializing it with new parts of our ecosystem.

Lz tax.

And then we're also now focused on the engagement experience post formation.

We're creating a hub, where we call my account, where you can go in and schedule with your your experts or you can message with your experts on demand.

Can start to get compliance dashboard, where you can see different compliance events happened in your company and we want that to be a place where where customers are coming back on a regular basis and seeing the value that they're getting from the services that we offer but but in terms of product investment I'd say right now probably the biggest investment is on Lz tax.

Where we are spinning up essentially of extremely large tax business.

Which is offering full service tax filing tax advice and again.

Wholesale relationship with Intuit on the Quickbooks online side, so I think that that adjacency opportunity doesn't really stop at Lz tax we think theres 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.

A significant area of investment.

Great. Thank you.

Thank you.

And I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Dan <unk>.

Chief Executive Officer for closing comments.

Yes, well I want to thank you guys.

Obviously, it's a lot of work to get to this point.

No Alan.

The broader team feel like we're really really just at the very beginning of a journey here I want to thank all the <unk> out there who have done the hard work when we've been on the road to go public and excited to get digging back into the business in a deeper way.

We're really excited to keep innovating for small businesses and look forward to catching up with all of you next quarter. So stay safe stay safe everybody and we'll be talking soon.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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Thank you for standing by and welcome to legal for the second quarter 2021 earnings Conference call. At this time all participant lines are slowly mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask a question during this session Star then one of your telephone please be advised that todays call may be recorded.

If you require additional assistance. Please press Star then zero switching operator.

I'd now like to hand, the call over to Dan to give you here head of Investor Relations. Please go ahead.

Thank you operator, Hello, and welcome to legal in second quarter of 2021 earnings conference call joining.

Joining me today is Dan Warner Cobb, 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 words, such as believe expect plan anticipate will intend confident and similar expressions and are not.

And should not be relied upon as a guarantee of future performance or results.

Results could differ materially from those contemplated by our forward looking statements.

Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Now I'll turn the call over to Dan.

Thanks, Danny and welcome everyone.

Thank you for joining us today for our first earnings call as a public company.

So Alan 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 at legal due.

Everyone have a significant opportunity ahead of us.

A little over 20 years ago legal Jim started with a vision to disrupt the 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 powering the success of the U S economy and purpose all the more inspiring as these small businesses continued to navigate a global pandemic.

Our journey took democratized law brings with it a compelling economic opportunity.

Despite the digital transformation, we've seen across many other large and highly regulated end markets like tax prep financial services or healthcare or $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation.

In fact last year, just 8% of legal services in the United States will provided online.

And our system plagued by inefficiencies small business owners are left holding the bag or suspend our limited resources on services that are difficult to navigate at a price they often cannot afford.

Ultimately most will choose to avoid accessing legal protection altogether, leaving small business owners and their families vulnerable to significant financial risk.

Legal zoom is very well positioned to serve this huge need in the market.

First we are relentlessly focused on the customer experience and have built a differentiated product that makes business formation and legal compliance simple the.

The legal zoom product is still complex government forms into easy to follow up questionnaires that can be completed efficiently with little to no human involvement or.

Our products ease of use and affordability has resulted in a net promoter score of 65 more than double that of traditional alternatives.

Second we have a clear brand advantage with our unaided awareness nearly <unk> higher than our closest competitor.

The strength of our brand has been built over two decades of steady investment and cannot be quickly nor easily replicated. This gives us a meaningful head start.

Attorneys have deep expertise in our SMB specific matter and geography, which creates a superior experience for our customers reflected in net promoter score is three times higher than a typical offline attorney interaction.

Fourth we operate within an attractive market that is both resilient and poised for growth the rise of the gig economy and proliferation of SMB enablement tools are making it easier to start a business than ever before.

We believe we are well positioned to benefit from these macro tailwind, which should lead to accelerated share gains as the leading digital formations provider.

And finally, we have methodically built a best in class leadership team with an 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.

For the second consecutive quarter revenue growth accelerated ending the period at $150 million up 36% year over year.

Performance was driven by the transactional side of our business with revenue up 45% we.

We saw a mix shift towards business formations, which helped drive higher average order values in the period.

This shift is a positive signal that our efforts to reposition the legal and brand are resonating with small businesses.

The topline strength flowed 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, but it is important to remember that quarterly growth rates. In 2021 are and will continue to be impacted by the effect of COVID-19 at on business formations in 2020.

In summary, we're 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 is important to remember that we're building legal zoom into the next great category leader.

The executive team is focused on making the right investments today to support durable top line growth into the future.

I'd like to spend the remainder of my time, providing an overview of our three key growth vectors with an emphasis on areas of focus for the latter half of the year.

The first factor is scaling our core formations offerings through marketing and core product experience as.

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 first started ramping our marketing investment in 2020 with customer acquisition spend up 77% annually.

We're able to grow spend significantly while maintaining a tight 90 day payback period with most of our acquisition costs covered by the upfront transaction revenue alone.

We are also entering new channels, such as digital video and paid social leveraging media mix modeling to optimize spend allocation and improve overall returns.

In addition to our performance marketing efforts. We are also focused on making the right SCO and brand investments to drive a larger share of organic traffic today.

Today, Despite our brand leadership the minority of our traffic comes from earn channels. This is both a problem and an opportunity.

In the near term, we'll continue to add depth to our in house team and we will equip them with the tools they need to build a best in class Seo function.

The other lever to drive core share gains as product when I first arrived at legal zoom in late 2019, our technology stack severely constrained our testing capacity with.

We quickly set in motion a 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 product to drive improvements to conversion.

Ascription cross sells and customer satisfaction.

In the near term will be focused on improving the formation process by refining our questionnaires streamlining the purchase experience and optimizing our lineup of subscription bundles.

Our second key growth vectors building, our ecosystem of SMB subscription services.

Know that in 2020, approximately two thirds of our customers had not begun to operating when they form their businesses through legal zone, giving us a unique position very early in the SMB lifecycle.

Our formation, we have an opportunity to earn our customers' trust by introducing them to the right set of products and services they will need to operate their business.

Certain of these services, we will deliver ourselves.

Lv tax which launched in October of last year is a good example of how we want to build in house expertise within compliance.

The most frequent support questions. We received at the time of formation relate to tax obligations and over 70% of small businesses do not have an existing account relationships at the time of forming their business.

Lv tax offers and accountants and bookkeepers bundle in a monthly subscription and an access to CPA that can provide tax advice and complete their annual business tax filings. It's.

In the second half of this year, we expect to rollout attack solution across 100% of LLC formation traffic.

With more traffic will 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 to meet anticipated future demand.

In 2020, we made a significant change in our strategic approach, we're actively transitioning our existing one way partnerships with bouncy payment structures in favor of two ways strategic and well integrated partnerships built on recurring revenue share models.

Our third and final key growth vector 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 <unk> as a premium priced digital solution, but we'll still be at a cost lower than existing offline alternatives.

And third we expect it will drive 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 trademark product users can now choose to file trademark themselves for $249 for file with the help of an attorney for $599.

Since launch we've seen a significant percent of our customers select the it's already led option driving a meaningful uplift in <unk>.

Late this year, we will begin testing new ways to integrate attorneys into our customer journey with a focus on our most popular onramp LLC formation.

Similar to our Lz tax initiatives integrating attorneys as a long term play and we fully anticipate our go to market strategy to evolve as we test and learn.

Yes.

We believe that the legal zoom story is just beginning and that this company has an incredible growth potential for years to come.

We have high conviction that the investments, we're making will allow us to achieve that full potential.

With that I'll hand, it over to our Chief Financial Officer Noel Watson.

Thanks, Dan and good afternoon, everyone.

Since this is our first earnings call I'm going to start with an overview of our financial model.

Our results for the quarter and wrap up with guidance for Q3, and the full year 2021.

Let's start with our financial model.

Driving a high growth business at scale and we operate with positive adjusted EBITDA, which allows us to reinvest operating leverage to drive durable long term growth.

The flywheel to our business starts with a new business formation, which we use as an opportunity to introduce customers to the legal ecosystem, allowing us to offer ongoing subscription services and drive higher customer lifetime values.

Our revenue split evenly between transactional and subscription components.

The bulk of our customer acquisition spend is covered by the upfront transactional purchase alone, leaving behind a growing base of high margin subscription revenue and driving attractive unit economics.

Proximately, 85% of our subscriptions are billed upfront on annual terms, providing a favorable working capital dynamics.

To accomplish this goal we are prioritizing growth over profitability.

Our focus 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 profitability and cash flow metrics supported by a 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 at $150 million of 36% year over year.

Transaction revenue represented 49% of total revenue was up 45% year over year.

Within transaction revenue, we will report on three Kpis.

Firstly as business formations, which includes LLC, Inc, and nonprofit formation events.

Growing our share of inflammation that major strategic priorities. When your business was formed through legal zones. We are then able to cross sell value added products and services to establish an ongoing relationship with the customers driving higher lifetime values.

We completed more than 122000 business formations in the second quarter up 34% year over year.

Our second Kpis transaction units, which in addition to business formations also includes other transactions involving intellectual property and estate planning.

In the second quarter, we completed 260000 transaction units up 12% year over year.

Strengthening business formations was offset by a year over year decline in state planning, which we expected given the spike we saw last year and demand for wells in trucks. Following the onset of COVID-19.

The mix shift away from a state planning toward business formation has had a positive impact on our third GPI.

Average order value, which represents the average revenue contribution for each transaction unit.

In the second quarter <unk> came in at $282 up 30% year over year.

While we expect continued strength in <unk> business formations continue to account for the largest share overall transaction unit, we expect <unk> growth to taper in the back half of the year.

Subscription revenue, representing 46% of total revenue was up 29% year over year in the second quarter.

Within subscription revenue, we will report TTS.

Firstly subscription units, which includes compliance related solutions, the primary being a registered agent service and adjacent offerings such as <unk>.

Approximately two thirds of the subscription before a registered agent service, making us one of the largest registered agent providers for small businesses in the country.

As of June 32021, we had over $1.2 million active subscription units outstanding up 69000 units from the end of the first quarter.

On a year over year basis subscription units were up 25% in the second quarter driving the bulk of our subscription revenue growth.

The second subscription Kpis.

For the average annual revenue contribution per outstanding subscription unit.

Please know we measure our accrual using the last 12 months subscription revenue given the vast majority of our subscriptions are built on annual terms.

In the second quarter of 2021, <unk> was $230 up 3% 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 second quarter.

In the near term, we do expect lower sequential performance in our partner revenue line as we transition away from legacy partners that do not align with our strategic direction as Dan described earlier, we are focused on the long term opportunity to grow the ecosystem of marquee 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 fulfillment and share costs was $48 million in the period up 41% versus last year.

Gross margin came in at 68% of revenue down from 70% in Q2 of last year as our revenue mix shifted towards transaction, which carries a lower gross margin profile.

Within our operating expenses, the largest line item as sales and marketing representing just over 70% of spend.

Our strategy is governed by a performance based approach that is ROI, driven and can be quickly dialed up or down as market conditions warrant.

In parallel a portion of the spend is allocated to brand building 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 the second quarter were 7% of revenue.

Future periods, we expect this line item to grow faster than revenue as we invest to build out a best in class product and technology organization.

General and administrative costs were $12 million in the quarter or 8% of revenue there were approximately $2 million of one time costs that we do not expect to return in the third quarter.

Over the long term, we expect G&A to grow but at a slower pace than our other opex lemmings.

In total non-GAAP expenses were up 42% annually in the second quarter of 2021 slightly below our transaction revenue growth of 45%.

Adjusted EBITDA was $22 million in the quarter were 15% of revenue.

We continue to build a growing base of deferred revenue as cash from our subscription offerings is collected upfront and recognized as revenue ratably over determined the subscription.

In the second quarter, we grew our base of deferred revenue by $5 million.

Cash and cash equivalents were $167 million as of June 32021.

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.

Now I will turn to our outlook for the remainder of the year.

Quarterly growth rates in 2021 will be impacted by the effects of COVID-19 had on business formation in 2020 in Q2 of 2020, the onset of the pandemic drove uncertainty in the economy.

New 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 formation has accelerated in part due to an unlocking pent up demand from the prior quarter.

For the third quarter of 2021, we expect revenue of $143 million to $147 million for the full.

Full year, we expect revenue of $570 million to $578 million.

For the full year of 2021, we expect adjusted EBITDA of 55% to $59 million or roughly 10% of revenue at the midpoint.

And with that.

Excellent question.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Our first question comes from Sterling Auty.

<unk> of Jpmorgan Your line is open.

Yeah, Thanks, Hi, guys welcome to the public markets.

My first question is actually playing a little bit off of what I was talking about in terms of the guidance and in Covid with Delta variant kind of coming to 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.

So the business in the back half of the year.

Well thanks for the question Sterling.

First off I, just wanted to knowledge, a very strong quarter, great work by the team to deliver Wow and the backdrop of going public. So I am clear that first but yes, we're actually it's interesting we're seeing summer seasonality actually which there has been a little bit more of a normalized pattern in general.

As we have this year relative to last year, because if you reflect on last year, we actually saw with COVID-19 coming towards us.

Shutdown, which impacted us at the end of Q1 at the beginning of Q2, which is historically our peak.

And then instead of <unk>.

Staying at those levels it increased which normally you would see the exact opposite you would see the peak happened at the end of Q1 and the beginning of Q2, and then see a drop off as you hit the summer months. So.

We arent 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 traveling for the very first time and then right at that period of time, we saw the delta variance a creep up as well so while we're pacing well, we really do have to acknowledge we're in this unique territory.

Know smbs are they completely open for business, yes, but do they have some restrictions.

They also have them our people locked down no.

Months play out but.

But theres no really large surprise at this point in terms of what we're seeing.

And just to add to that thoroughly maybe maybe if I can jump in here.

I'll also take a quick second just to note the Q2 results.

We're pleased with the results that we presented for Q2 and feel like it represents continued strong execution by by all of our zoom or <unk>.

To your point to your question.

There are a number of variables that play in 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.

<unk>, what's the relationship going forward in the marketplace for your tax opportunity.

Yeah, Yeah. Thanks for the question and it's important to have this one be relatively clear.

Into it doesn't provide tax services directly through experts.

You can think of legal zoom 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.

Internally have our own cpas.

And we also are providing full end of your tax filing for our small businesses. The really important thing to note here is that.

When when small businesses form with us they almost have as many tax questions as they have legal questions and.

And 70% of them that come to US just have no account relationship.

At all and Theyre looking for a trusted partner. So it's just such a natural place for us to play a role and we did not want to recreate the wheel theres, an amazing wheel out there called Quickbooks online and so we just wanted to partner with them.

Perfect. Thank you guys.

Thanks Sterling.

Thank you.

Question comes from Elliot with Morgan Stanley Your line is open.

Hi, Thank you so much for the question and congratulations on a strong second quarter.

I was wondering if you could help us either quantitatively or qualitatively understand some of the signposts that you guys are seeing on how marketing can translate to better tissue penetration understanding that it has been a slow moving market. So what are the signposts that or seeing that the marketing is really what was needed to drive the better digital penetration.

Yes, I mean, I guess, what I'd point to is that.

Theres a couple of things that we have opportunities we talk about three different growth opportunities. One is growing the core one is adjacencies and one is attorney assist a lot of the growth that youre 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.

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 what 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 income.

<unk> spend year over year, and so that 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 oftentimes you'll have to then.

Start to reassess the efficiency of that incremental spend.

But in general it's an it's an important level for us.

Great and then just a follow up kind of more longer term.

And thinking about business formation understanding that right now there may be some.

Tough comps as it relates to Covid, but I think the other side is that Covid has kind of fundamentally changed how many people operate but we're all in that creates a business opportunity so kind of as we get through some of these tough comps. How do you think structurally about the rate of new business formation over the next couple of years trending above or below kind of.

What you thought a pre COVID-19 level.

Yes, I mean, we definitely think it's going to trend above where it was pre COVID-19 I mean, theres just the reality of.

People are adopting digital enablement tools and there's also the reality of people realizing that they can 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 tailwind.

<unk>.

Some platforms are now requiring or or 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 youre right Theres, a little bit of a bump in Q3, because as as Noel mentioned in the opening comments last year. We just saw a dramatic increase in Q3 and formation.

So we have to lap that but we think it will get back to a normalized level that was significantly higher than where it was.

When we were back in 2019 for instance.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from Mario Lu with Barclays. Your line is open.

Great. Thanks for taking the questions and congrats on the first quarter out of the gate.

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.

<unk> ongoing pandemic a year ago.

I know, it's still a bit early but has the addition of expert services aided retention that's fine. Thanks.

Just maybe just.

To make sure everybody tracks the commentary here, what we're really talk about what we look at is the leading indicators that 13 month retention on annual subscriptions.

And there are primarily driven by business formations as well.

One thing I'd say here is that it's probably too early to tell we need to bake.

Sort of has the subscription units forecast is forecasted within it.

It was essentially right spot on of where we expected it to be.

As it relates to expert services and the impact that that will have on retention going forward.

Know that when people work with an expert whether it be an attorney or.

Accounts that small businesses have a much more likelihood of succeeding and so we do expect that over time it will.

Crude and its 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 is two big pillars in there one is the Adjacencies and LD tax where we're we're layering in a CPA, but also just that attorney assisted side. So people can get off on the right foot and then have an expert that they can go to to get advice along the way.

Great that makes sense and then just one on the competitive landscape.

Reinvesting back into marketing in the back half of the year I.

I guess any color in terms of what you see from your peers or they are are.

Are they doing the same and.

Any color there would be helpful. Thanks.

<unk>.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open.

Okay. Thanks, so much so I'll add my congratulations as well so.

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 along this path of widening your product offerings like what has been the adoption rate.

So far what kind of attach rates and perhaps incremental <unk> or you're seeing thanks.

Yes, thanks for the question Stephen.

Well, we tend not to provide attach rates on individual products and actually the reason why is because oftentimes there's a relationship between our carton one attach rate will go up and one will go down dependent on how we're what we're solving for in terms of the mix of subscription and <unk>, but what I.

I will say is we have been surprised.

By the attach rate that we've had I think I have noted this before that we're seeing in attach rate.

Much on par with our attach rate for our legal attorney subscription, which when you think of a company named legal zoom 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 some early reads there are showing some promise so.

We think there is lots of opportunities to continue to increase attach and like I said one of the interesting things here is there's a symbiotic relationship between once you start to have one expert that is helping you as a business. It probably helps in terms of when you. When you start to feel the success. When you start to feel the support they are providing and helping US do other cross sells of some of our other expert services.

No.

But very early in the journey.

But feeling good.

Yes, Stephen just to add just add to that one of the important focus areas for us are around taxes 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 great right.

Right now we have.

No demand issue whatsoever.

We actually in many ways.

Our.

Actively throttling demand in some cases to make sure we get the experience perfect before we sort of unload and get all of the attach.

At that point were getting close to the point where were really ready to just go go broader on it.

Okay. Thank you.

Thank you.

Our next question comes from Matt Pfau with William Blair. Your line is open.

Hey, guys. Thanks for taking my question and Great results 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.

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 historically.

<unk> been somewhat tactical balance sheet, one way directional relationships.

With brands that Couldnt necessarily offer traffic back to us. They just didn't have established large bases of customers and we're really rethinking this too.

Have it be more bi directional b brands that we're 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.

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.

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.

It will be a slow build back up because most of these again are more ratable relationships.

Again more by the by directional and Theres a lot of testing we want to make sure again. The experience is good between these companies that we're partnering with.

Great and just wanted to follow up on the business formations as you guys look either at the quarter or the first half of this year.

We continue to take share.

Share of business formations and in your estimation.

We're not one of the things, we've decided and it's actually interesting. So the EIA data that most people look at the census data.

It's a great directional indicator of the of the macro but it's also pretty noisy.

For those who have been looking at that data. It is inclusive of companies that are trying to get a PPP loan.

It's your first employee you have to have any iron. So these are the things that kind of dislocated from the true macro which is looking at businesses that are forming through secretary of state data is proprietary data is something that we have we choose not to release it.

And we don't want to on a regular basis, we probably will consider doing it on an annual basis.

But.

As I've said before our whole strategy is to take share and drive lifetime value and we're feeling pretty good about how things are going this year.

Got it thanks, a lot guys I appreciate it.

Thank you.

Thank you. Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Hi, guys. Thanks for taking the questions.

In a dynamic environment currently and that marketing spend is ROI based but spend was up 77%.

And as I think about this is probably the biggest swing for profitability and understood you guys arent arent, giving guidance there.

Why didn't you spend more right like how do we think about that.

Do you want to take that sure.

Yes, I mean.

Andrew Thanks for the question.

Our spend was up from a customer acquisition marketing standpoint, 61% year over year, which is still a massive uptick.

And spend.

To your point it is.

The vast majority of our allocation is too.

Against performance and ROI, and it's ROI based and so we're setting guardrails for the spend we will.

The equation that will allow us some visibility into spending up even more aggressively but we do we do plan to continue to stay aggressive.

Our marketing spend yes, the only thing I'd add there is.

Yes.

We are entering a lot of new channels.

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's almost a spend up and then a measure and then reallocate and then spend up and what you see as 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, but one thing I would also add in there is that we are looking for what I would call more brand partnerships in areas, where we can make investments to just raise awareness one of the bigger opportunities that we still have we have a high awareness level.

If you if you ask small businesses, what we do.

You get a lower level of understanding of our products and that we're really squarely focused on this concept of being the platform the destination that 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 youll start to see a little bit more of that activity probably in the back half of the year.

<unk>.

That dovetails very nicely into my next question.

So just given the fact that legal zoom is faster and cheaper than offline alternatives whats the biggest hurdle to getting people to move online do you think assist unlocks fat or how big of a step function as awareness versus just that education piece versus holding some paint.

Yes, I think it's a little of both of those things I mean, there is a an awareness component of this which is I don't.

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 youll.

We'll have some people who just have a fear of doing it on their own and Thats, where the backstop of having attorneys are available. If you need them again, we don't really feel like most people will require an attorney.

It may just help them tried a product knowing that if they run into a problem and they will 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 but those two factors together are what.

Are what are really going to drive People's acceptance of the category and then obviously, we want to be putting more fuel on that with our <unk> spend.

Yes.

Great. Thank you.

Thank you. Thank you.

Our next question comes from Brent Thill with Jefferies. Your line is open.

Thank you this is John Byun on for Brent Thill.

Two questions one.

If you could maybe remind us of the typical seasonality by quarter end.

Do you expect it to be different this year due to COVID-19 a lot of factors.

And then in terms of product investments. If you can maybe they only doing what are the biggest priority.

Near term thank you.

Great. Thank you John.

Yes, so 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.

Last year was the exact opposite with Covid.

Q1 was the one of the weakest quarters Q2, it took a while 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 and seasonality.

From a product investment standpoint.

Again I'll go back to the framework that we use there is a lot we can do in our core platform and our core products today.

Lz tax.

And then we're also now focused on the engagement experience post formation.

We're creating a hub, where we call. It my account, where you can go in and schedule with your your experts or you can message with your experts on demand.

Where we are spinning up essentially is an extremely large tax business.

Which is offering full service tax filing tax advice and again.

Wholesale relationship with Intuit on the Quickbooks online side, so I think that that adjacency opportunity doesn't really stop at LG tax we think theres 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.

A significant area of investment.

Great. Thank you.

Thank you.

And I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Dan <unk>.

Chief Executive Officer for closing comments.

Well I want to thank you guys.

Obviously, it's a lot of work to get to this point.

No Alan.

And the broader team feel like we're really really just at the very beginning of a journey here I want to thank all of the Zumiez out there who've done the hard work when we've been on the road to go public and excited to get digging back into the business in a deeper way.

We're really excited to keep innovating for small businesses and look forward to catching up with all of you next quarter. So stay safe stay safe everybody and we'll be talking soon.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Q2 2021 LegalZoom.com Inc Earnings Call

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