Q4 2021 LegalZoom.com Inc Earnings Call

Okay.

Good day, and thank you for standing by welcome to the legal Legals in fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.

Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Danny Xavier head of Investor Relations. Please go ahead.

Thank you operator, Hello, and welcome to recalls in its fourth quarter and full year 2021 earnings conference call.

Joining me today is Dan one o'clock, 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 and similar expressions and are not and should not be relied upon as a guarantee of future performance or results.

Results could differ 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 factors that could cause our 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 and we disclaim any obligation to update any forward looking statements, except as required by law.

In addition, we will also discuss certain non-GAAP financial measures, our CEO and CFO use these measures and making decisions regular regarding our business and we believe these measures provide helpful information to investors reckon.

Reconciliations of all non-GAAP measures. The most directly comparable GAAP measures are set forth in the Investor Relations section of our website.

Is that legal zoom dot com the.

The 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 will turn the call over to Dan.

Thanks, Danny and good afternoon, everyone I joined legal zoom at the end of 2019 with one goal to make it the digital destination for starting with small business. Our mission is to democratize law simplifying the legal and compliance complexities small businesses face the moment they want to turn their dreams into reality.

Whether it's registering their business with government agencies that incredibly important first step to protecting themselves and their assets or if it's reaching important milestones like signing a lease starting our first client project, making our first customer sale. We're hiring there first employee we're there every step of the way with them.

Helping them to create that LLC, keeping them compliant and incredibly complex and ever changing regulatory environment and connecting them to tech enabled experts that create a review legal docs and tax filings east.

These businesses rarely had VC funding corporate attorneys are fancy accounting firms when they start they just have the innovative ideas and incredible drive to succeed on their own and we want nothing more than to help them be successful.

Now, let me start by highlighting some of our Q4 results.

Revenue in the quarter came in at $142 $1 million up 16% year over year.

Excluding partner revenue, where we have exited a couple of non strategic relationships are revenue growth would have been 20% for the quarter.

Our subscription business continues to outperform with subscription revenue accelerating to 29% growth in the fourth quarter up from 24% in Q3.

We continue to lap strong prior year comparisons on the transactional side with transaction revenue up 8% in the period given.

Given the enormous volumes in prior periods, a more normalized view is to look at the two year CAGR, which remained strong at 26%.

Business formations were up 10% year over year and again it looked out at the two year CAGR the growth is strong with 22%.

Lastly, adjusted EBITDA was $7 million in the fourth quarter or 5% of revenue, reflecting investments in marketing and in our Lz tax offering both of which we believe will help to drive long term growth.

For the full year of 2021, we grew revenue 22% to $575 million.

We held 447000 businesses form that's that's almost one every minute.

This is up from 292002 thousand 19, a two year CAGR of 24%.

And in particular subscription revenue growth more than doubled to 26% for the year.

We continue to be profitable, albeit at a lower margin.

For the year, adjusted EBITDA was $48 million or an 8% adjusted EBITDA margin.

And given many of our services are annual subscriptions collect upfront our base of deferred revenue grew by $18 million driving unlevered free cash flow of 10% of revenue.

Importantly, we've also been prioritizing long term growth through investments in three critical areas first our brand with a particular focus on establishing knowledge of our SMB products.

In critical product infrastructure, and a move to the cloud to enable scale and increased speed of development.

And finally by launching Lz taxing acquiring or class mill, both new subscription businesses that leverage the formations channel.

In regards to our philosophy of balancing near term profitability relative to long term growth opportunities. We believe we are in the early innings of disrupting an industry will air on the side of capturing growth even when it impacts near term profitability.

For example, if we were focused solely on period over period margins, we would never launch lz tax or acquire or class male as.

As we invest to scale, both they invariably hinder our near term profitability, but we have confidence both will be businesses that we'll reach our long term goal of 30% adjusted EBITDA margin and they will positively impact our share of wallet through our existing channel as measured by RP games that you will continue to see quarterly.

These important longer term investments continue to show measurable progress our brand investment has yielded a 39% unaided awareness up from 25% just a year ago in Q4, 2020 and over 50% improvement.

We're attracting top tier product and engineering talent with a cleaner more modern tech stack and they are increasing our velocity of product innovation.

And L D taxes already an important contributor to our growth and had an early transactional net promoter score of 83% in Q4 out of the gate. It has the strongest net promoter score of any service we offer.

As we continue to turn our attention towards 2022, it's worth reiterating what we outlined during the IPO process nine months ago.

There are three important areas of focus for driving long term durable growth.

First growth vector is scaling our core formations offerings.

Up to now this has been primarily done through increased marketing efforts, but in 2022, we would expect to see this begin transitioning to a more balanced approach of marketing and core product improvements that will lead to better long term growth efficiencies.

Since pivoting our marketing strategy in early 2020, we've increased our cam spend from $67 million in 2000 $19 million to $195 million in 2021 with that large increase in marketing spend we've seen efficiencies decreases you'd expect them to but we have always maintained and stayed within a guardrail of first year booking.

Payback.

However, as we look out to 2020 to consider a more normalized macro we're projecting our cam Spence remained roughly flat year over year.

As growth in marketing spend begins to moderate we will also be spending a bit differently. In 2022, we expect to benefit from our investment in media mix modeling and will accelerate our growth in new channels that have had low historical investment that have higher projected return than our current primary channels.

We're also developing a new creative platform with the continued objective of driving legal serum product knowledge as an SMB formation solution versus the historical perception of being a consumer Steve planning provider.

Over the last few years, we've invested heavily in our LLC product experience and as a result, it converts at approximately two times the level of our other SMB workflows and has higher attach rates into our subscription ecosystem non.

Non profit DBA and corporations are collectively about a third of the volume of policies, but as of yet have not been migrated over to this new technology and experience in 2022, we'll move these workloads over modernize the experience and enable similar cross sell targeting which should in turn enable better performance most specifically in mobile.

Finally, and maybe most importantly, we've been focused on automating manual processes required to fulfill orders the cost and time to process. A formation quarter has historically made are prohibited to explore lower cost business model innovation. In 2022, we will continue to deploy these changes throughout the year and you will see us be more.

Aggressive in going after share by creating a segmented lineup that supports cost sensitive businesses, all the way up to those looking for expertise and willing to pay a premium for it.

Our second growth vector is building an ecosystem the SMB formation related subscription services. This is an area, where we've already made significant progress.

First I'll talk a bit about LTE tax.

As you recall, we launched LTE tax from January 2021.

We've been happy with the attach rate and that rate continued to increase as we enter the new year and get closer to tax season as I mentioned in the most important metric in any new services NPS and our accountants advice sessions have highest score of all the subscription services and its very first year.

Now over 100 accounts strong and currently focused on executing the tax season.

In 2022, we will remove the throttling, we have in place and marketed to the whole basis of formation as customers moving beyond just LLC as well as more seasonally to our existing subscriber base through cross sell within our product experience as well as through E Mail marketing.

We also expect to learn a lot from this tax season, which will inform investments and efficiency and the service.

After one year in market, our Lz tax practice is one of the largest accounting distribution partners of Quickbooks online.

Now, let me talk a little bit about the acquisition of first class mail.

To refresh we bought for <unk> because of the channel product and technology synergy it has with our registered agent service.

These are required to declare our business address and increasingly they are homebase operations that want to look professional and separate their business and personal lives.

We are hard at work at beginning to integrate it into our product channel and we will begin testing different approaches to commercialize it well.

We'll also begin to understand legal zoom customer usage patterns and capacity needs and tailor the product to them as we tune the offering to get some product market fit for our segment of newly formed businesses.

In parallel we're working to scale up the operational side of our Clos meal to meet the significant organic demand that we anticipate relative to the existing operations.

Our final key growth vectors integrating attorneys into our products and services.

We know that many people are afraid to do legal transactions on their own and they feel they are forced to seek advice from excessively priced offline attorneys.

By integrating attorneys, we lowered the barrier to entering the legal zoom ecosystem for many people looking for legal services.

We've made a significant amount of progress in integrating attorneys into how customers interact with us.

We've tested and deployed our first attorney assistant solution for trademarks in 2019 and since that launch we're now doing more than half of our trademarks with the help of an attorney and the mix continues to grow customers.

Customers are also showing greater satisfaction and the attorney led model with assisted net promoter scores exceeding the do it yourself option.

We've already tested an attorney assistant solution to aid in the formation of an LLC, which showed a lot of promise.

It also helps us understand the infrastructure required to fulfill it since then we've been diligently working to build out an attorney platform and some of the key collaboration capabilities to enable this first of a kind innovation in the legal space.

And the next quarter Youll begin to see us testing a new lineup that includes this offering and while I am excited to launch this capability as we know from experience that our attorney network has three times. The net promoter score of an offline attorney and we offer access to them at a material discount in cost.

I'll return to specialize and do high volume of the matters that our SMB you seek out we're confident in our ability to provide superior expertise at a lower cost.

Stepping back in 2021, we saw record formation, specifically in the first half of the year driven by Covid related government stimulus.

As a result of that peak last year, we are forecasting U S formations to decline modestly this year.

<unk>, we have seen and expect to continue to see strong growth in our highest margin subscription revenue.

The addition of new high <unk> services like LG tax in first class Mail. In addition to improved retention among our age cohorts is expanding customer lifetime value.

New product offerings will continue to add predictable high margin income stream since the business independent of the health of the macro.

And considering both the platform investments we've made to date and the strength we've seen in the subscription side. We believe now is the time to innovate on our commercial lineup will be running a series of tests throughout 2022 to identify the ideal mix of do it yourself an attorney assisted formation experiences that cater to every customer demographic.

We'll be disciplined in our approach with success measured by the growth in year one bookings.

As we turned the page on 2021 I'd like to share one final reflection when I joined legal zoom a little over two years ago. It was because of its position as the leading digital brands in a market that remains largely analogue. Our thesis has been that only innovation by the leader in this space can create the market. That's our job is legal.

Over the past couple of years, we've been working to enable growth by attracting the right talent, making foundational investments in data and infrastructure investing in our platform and creating an ecosystem of services needed at formation.

The last step is to re imagine the core product itself.

22 will be the year, we do that now.

Now I'll turn it to Noel to go for a more detailed review of our financial results.

Thanks, Dan and good afternoon, everyone.

I'll start today with a review of our performance in the fourth quarter and end with our outlook for 2022.

Total GAAP revenue in the period came in at $142 million up 16% year over year.

We continued to face a challenging compare from Q4 last year and the reopening of the economy led to a surge in pent up business formation borrowings.

The two year revenue CAGR remained at a healthy 20% in the fourth quarter.

Transaction revenue was $57 million in the quarter.

<unk>, 8% year over year.

We completed 96000 business formations growing 22% annually over the prior two year period pacing ahead of market benchmarks.

I'll note here that we'll be making to small adjustments to our definition of a business formation.

These changes will be applied prospectively and reported on in future periods.

The first adjustment is the removal of non U S formation all.

All of which are attributable to our small presence in the UK.

The second adjustment is the addition of doing business as for DVA transactions. These transactions.

<unk> actions are most often completed by sole proprietors, becoming a significant peter to our portfolio of subscription services.

Particularly as we look to integrate <unk> into the DBA.

Collectively these two adjustments led to an additional 36000 formations in 2021, representing 7% of our total business formation.

Can refer to the supplemental materials posted on our Investor Relations website, which include business formation Council prior periods based on the updated definition.

Transaction units, which also include other transactions involving intellectual property in the state plan for 211000 units in the quarter performing in line with business formation.

Average order value, which represents the average revenue contribution from each transaction. It came in at $267 in the quarter roughly flat to last year.

As expected <unk> growth moderated in the back half of the year as our mix of business formations as a percentage of transaction units begins to stabilize.

Subscription revenue was $81 million in the fourth quarter with year over year growth accelerating to 29%.

We added 65000 net subscription units sequentially in the period and reported <unk> was $236 up 6% year over year.

The subscription strength continues to reflect strong strong core retention among our age cohorts and significant growth in all of the tax.

Partnership revenue was approximately $5 million in the fourth quarter.

As Dan mentioned the sequential decline in partner revenue was due to the transition of our legacy relationship with missile line of strategic objectives.

On an absolute basis, we expect partner revenue to improve sequentially in the first quarter of 2022 and by the second half of the year, we expect partner revenue to grow in line with the overall business.

Now turning to expenses and margins, where all of the following metrics on a non-GAAP basis.

Gross margin came in at approximately 68% of revenue down slightly from 69% in Q4 of last year.

The decline was expected and driven by investments to scale. Our in house CPA ahead of the spring tax season.

Sales and marketing costs were $64 million in the quarter or 45% of revenue.

We continued to scale customer acquisition spend which came in at $47 million in the period up 73% year over year.

We scaled our acquisition spend quickly since the beginning of 2020, given the softening macro we will look to moderate our investment here in 2022.

C. A number a tailwind to our marketing efficiency this year, including yield from our significant brand investments in 2021, as well as optimize spend allocation across emerging channels.

Technology and development spend was $11 million in the fourth quarter or 8% of revenue roughly flat quarter over quarter.

Finally G&A.

G&A spend was $14 million in the quarter or 10% of revenue.

The sequential increase was expected due to additional headcount and consulting costs.

Adjusted EBITDA was $7 million.

Under 5% of revenue our base of deferred revenues declined by $6 million in the period, which followed typical seasonal patterns.

As of December 31, 2021, we had cash and cash equivalents of $239 million.

No debt outstanding.

The sequential decline in our cash balances largely driven by the acquisition of our class now, which we completed in November .

Before turning to our guidance, let me first take a step back and provide a bit of context.

In many ways 2021 was a tale of two halves most noticeably on the transaction side of the business.

In the first half our transaction revenue growth was exceptionally strong at 40% year over year step.

Step function growth in business formation that would be done in Q3 of 2020 extended into 2021, resulting in higher transaction units and <unk>.

However, beginning in July of last year, the market for new business formations moderated and our transaction revenue followed suit growing just 6% in the back half of 2021.

We will continue to face a challenging compare in the first half of this year on the transaction side of the business.

And given the many uncertainties related to the macro or specific to our market forbidden inflammation, but also related to the economy in general we're going to remain cautious in our forecast which transactions are.

Our caution here will also reflecting our projected acquisition spend which we expect to be relatively flat year over year.

As comparisons ease in the back half of the year, we do expect revenue growth to Reaccelerate.

I'll now provide our formal guidance for the first quarter and full year 2022.

The first quarter, we expect total revenue of $150 to $152 million, 12% year over year growth at the midpoint. The two year CAGR reflects a more normalized annual growth rate 19%.

We expect adjusted EBIT to breakeven in the first quarter consistent with typical seasonal patterns on a year over year basis, we expect to see margin expansion as we exit 2022.

For the full year of 2022, we expect total revenue to be in the range of $650 to $660 million or 14% growth at the midpoint.

Within that we expect subscription revenue to grow approximately 25%.

And finally, we expect adjusted EBITDA of $48 million flat to 2021, as we continue scaling opex investments across the business to support our many growth opportunities and emerging revenue streams.

As we look beyond 2022, we continue to believe this business is capable of durable mid 20% growth rate annually, while steadily growing adjusted EBIT margins north of 30% over time.

After years of deferred investment in the business, we're now deploying capital in the right ways, which is attracting new talent and significantly improving the velocity of innovation.

Underscore our confidence in the business today, we are announcing that our board of directors has authorized a share repurchase unless you're $150 million, we'll plan to execute on this program Opportunistically based on the value we see in our stock.

Before jumping into Q&A I'll turn the call back to Dan for a quick analysis.

Thanks Noel.

We announced this morning that so bond whitely current chief legal officer of block, formerly square has been appointed to our board of directors for experience with high growth technology companies small business service providers and his strong operational background within highly regulated and disruptive industries makes her an excellent addition to our board we are all looking forward.

Working closely with <unk> when she joins later this month.

I also want to thank you on who is stepping down from our board for his years of service and I wish him well in his future endeavors and with that let's open up the call for questions.

Thank you.

A reminder to ask a question you will need to press Star and then one on your telephone to withdraw your question. Please press the pound key once again Thats Star and then one to ask a question.

And our first question comes from Mario Lu from Barclays. Your line is open.

Great. Thanks for taking the question.

First one on the.

Our full year guidance for.

For a description of revenue.

I'm wondering if you could.

A little bit more detail in terms of how do you get to that 25% year on year.

Between your core business and then incremental one site.

As class now.

All of the impacts.

And then secondly in terms of the EBITDA margins for this year.

Just to be sure there is flat year on year. So is the right way to think about it that G&A, we should see leverage and that's.

Basically fully offset.

Sales and marketing and technology. Thank you.

Thanks for the questions Mario.

Yes on the first one we don't really break out the components of our subscription revenue and so this is the first time, we're providing guidance there and want to provide in the aggregate.

Conceptually or Directionally, you can think of it as the newer services that we're offering are growing faster.

Then the core services that we have which traditionally.

They lap the transactional growth that we have as well so in the aggregate the really strong print when youre talking about the 25% growth in subscriptions, we're really happy with that.

That's a newer development for the company to dislocate the growth in subscriptions from transaction growth like we are today.

Thing that we plan to do in the future as well.

On your second question.

Specific to the repeat that one more time.

Yes, the second question was.

Could provide a little bit more detail insurance.

EBITDA margin guidance.

Areas, where we should see.

Some more deleverage than others, and then leverage I'm, assuming it's going to come mostly from G&A, but any any color there would be helpful. Thank you.

Yeah, well, maybe I'll hit this one at a high level and then I'll hand, it over to Noel as well.

When youre thinking about our margin.

Is impacted by some of the new services that we offer and if you were to take those out you would start to see probably a little bit more of an improvement and you'll also see a pattern of.

Front half.

And really the side of the business. So we do expect margin expansion in the back half of the year.

Which I think will reflect a more natural growth rate once we're done lapping that.

Volume that we saw.

Beginning of black.

Well, yes, just to jump in and build on that Mario in terms of.

Opex for next year, so what I'd say.

We're continuing to make important organic investments in the business next year, we've talked a lot about lv tax and we continue to invest heavily there, particularly as we go through our first tax season.

With the newly acquired risk class Bell our plan is to make investments in that offering as well both of those are in 2022, we will continue to be a drag on margins.

I will say that even with the investment from Elsie tax given the strength in our subscription revenue, we expect to see a little bit of leverage in our gross margin line.

And then we talked about in our prepared arc staff from expense standpoint, really moderating spending.

Looking for it to be relatively flat year over year. We're obviously guided most by the guardrails that we set for our marketing spend and so we will lean into it or pull back depending on what we see.

As we spend into it and as we learned throughout the year.

And then across our other opex categories were really still looking to invest in our technology and development.

Our capabilities in particular, where some of that that you see in opex as annualized Asian of expense from hiring that we've done this past year. So we've really noticed the business in terms of adding capacity this year.

And then G&A I would think of that more as like the exit rate with some modest increase throughout next year.

Great. That's very helpful. Thank you both.

Thank you. Our next question comes from Matt.

<unk> from William Blair. Your line is open.

Hey, guys. Thanks for taking my questions I wanted to ask on the partner revenue.

So at this point now are we sort of.

Past this transition period of getting some of those older related transactional relationships reworked into recurring ones and then it seems like you expect to see some improvement in growth with that in the back half of 2022, but I guess what needs to happen.

In order for the partner revenue line item to become a more mature material contributor to growth.

Yes, thanks for the question, Matt, Yes, we're pretty much past.

Exit.

A couple of partnerships that we felt like weren't aligned with our strategy going forward and there they are already being replaced with new partnerships, but we've talked about this before new partnerships aren't structured with balances they're structured much more as like recurring revenue relationships that will build.

But overtime, so you won't see that.

A significant jump up immediately and the partnership line, but you will see by the back half of the year that it'll drawing alongside the business in a healthy way and then the hope is that it starts to accelerate pass it in 'twenty three.

We do have some partnerships in the in the queue right now that I think are both really important ones for our customers, but also ones that definitely integrate closely with the formation transactions. So we're pretty excited about that as well.

Got it and then one more for me on the transactional revenue side.

Obviously.

There is some some difficult comps in the first half of the year that you are facing.

But besides that what sort of expectations are you factoring in or how you're thinking about business formations.

Going forward and incorporate it into the implied guidance that you provided.

Yes.

Recap last year in the first half of the year, we saw 60% growth in census data so.

This data is we've talked about before it's more directional than anything else, but when.

When you start to think about that now lapping that transaction volume.

On a two year CAGR things look healthy, but obviously, it's a bit of a headwind and so we've actually forecasted the macro to be down modestly this year and you'll be able to get in a AAA to calculation that kind of shows our transaction growth modestly growing.

And if you were to think about last year, we took share by our own internal calculations, we took share every quarter.

And yet at the same time, we werent all that happy with our performance so far if I'm, reflecting on it I didn't come here to chip away at share on a quarterly basis. We came here to go after the whole market and get ourselves to a place where we move from 10% to 30% share that's not baked into this plan.

The things that we'll be testing this year from a product standpoint.

Enable faster growth and share we believe but we're not.

Certainly expecting it in the plan that we're providing right now because theres going to be lots of testing that we have to do and learning as we as we start to deploy it.

Instead, what we've done is really assume something consistent with what we've seen last year in terms of those share gains.

Got it very helpful guys. Thank you.

Thank you. Thank you.

Thank you. Our next question comes from Sterling Auty from JP Morgan Your line is open.

Alright, great. Thanks for taking my questions guys. This is Jackson ader on for Sterling.

The first one Dan you mentioned that you were looking to shift maybe some some marketing activities are kind of channel activity away from things that maybe werent working toward things that you expect to have a better.

Our return.

We just had some specifics are examples on where things are shifting from and where they're headed.

Sure. Thanks for the question Jackson.

Traditionally we've been very aggressive in two channels so SCM.

Which is.

Somewhat demand constraint. So you can see that moved with the macro in linear TV, where we're really trying to increase the brand awareness and drive demand.

And over time, we've been making investment in media mix modeling so that we could understand the interaction of those two channels, but also start to introduce new ones and what we've discovered over the last year as we did a lot of the testing of new channels is that as we expected some of those new channels have higher payback than the ones that we've been leveraging in.

The path so.

It's pretty common sense of where youre going to see that that growth.

It's going to be in places like digital video, it's going to be social it is going to be in display still performance marketing, but performance marketing that has sort of a mix of brand benefit as well as a return on the marketing spend so that's the primary shift that you'll end up seeing in <unk>.

It's likely to be down in linear television this year.

Okay, Alright, great. Thank you and then as a follow up we're spending a lot of time, obviously on the on the business formation transactions, but I'm curious what about on the personal side or the non.

Non formations are you seeing any particular trends there are there any areas, where you're really looking to invest for growth in the coming in 'twenty two or beyond.

Yes, I mean, the consumer side of our business is interesting in that it has had a bit of an inverse reaction from the small business.

Segment. So if you think about the pandemic and we talked about this.

The state planning business actually had a really high performance at the very beginning of the pandemic as before.

Obviously concerned about their health and their families and did some advanced state planning.

Since then.

We're very tough comparables because of that and so it's actually been declining in the background.

But a slower decline and there's opportunities there to be.

A little bit more tactical and a little bit better in terms of commercializing products.

But it really is not a big focus area if anything it probably.

Matt So a little bit more strength that we see in the whole ecosystem on the small business side.

Okay alright, thank you.

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

Hi, good afternoon, thanks for taking my questions.

Can you talk a little bit up the opportunity of extending our portfolio to lower price products again, I think you mentioned that in your prepared remarks.

And then just as we were kind of almost midway through March can you talk about your earnings Laura early learnings from Lv tax as we make our way through taxes. Thanks, So much guys.

Thank you Andrew Yes, so I mean, the big opportunity that we see as going after more of the Tam in our space around formations and if you think about how we've been doing that.

Historically, it's been as the premium priced digital provider.

Really see two opportunities that we've been missing.

One is to go after cost sensitive small businesses. So we know that the bulk of small businesses are really micro micro small businesses more like sold props that are converting to a legal entity.

They're going to be extremely cost sensitive and today. They may go to the to the secretary of state site or a lower cost digital alternatives right now the fact that we have created this <unk>.

Awesome ecosystem of adjacent services now allows us to think about different ways to go after these customers by reducing the cost on that upfront transaction establish the relationship now build up a subscription business around them, which is an opportunity. We frankly didn't have before because just the cost of processing. These order.

We've made it slightly prohibitive and.

And so now we've been working on infrastructure over the last couple of years that gives us a lot more flexibility in how we view the fun part, which is more testing and innovating and building product, which is which is why I came here.

Other end of that though is equally as important we still know a good portion of small businesses do the opposite they have very little price sensitivity and they go to an attorney and they are willing to pay thousands of dollars for help as they form and we know that we can provide a much more efficient.

Our experience and the.

A better experience if we integrate attorneys into our platform and offer that has a way to help them get started as a brand new business and so both of these together are really the ways that we're going to go out and attack share.

It may it may work in combination that may work in different ways within the lineup and that's really what we're going to be on the discovery of this year, but we think both of them are a big big big opportunities.

Separately on healthy tax.

As we've talked about this one.

This is our first tax season here I mean, some of US have been involved in past seasons in other environments, but it really is a different segment of customers. So we are we are in the learning mode in terms of how the service these customers and even understanding the demand curve as it relates to tax filing.

Small businesses are later, they typically don't have refunds, so theyre going to wait a little bit too to file their taxes.

And there is some good news in here too, though because our small businesses are typically schedule can you filers, which makes them a little bit easier to process as well.

But I would say.

Couple of things that really stood out. This season. One is we are seeing acquisition go up as we get closer to season and obviously.

People are on their minds and so we're seeing.

Strong strong attach at this point.

The second thing I'd say is the net promoter score has held pretty well I actually had a slight concern I mean, there is a bit of providing advice.

Its something thats going to have a high net promoter score outside of tax season, but when you get into tax season. There's more urgency you typically will see the net promoter score to go down a little bit and we just haven't seen that erosion at all so people are liking the service and then the third thing I'd say is that it's probably going to be.

Late tax season, just because what we've seen is the continuation of a trend over the last five years people are really getting comfortable waiting till the last minute because they know that solution providers and actually still handle their return because they are much more efficient use digital tools.

We're very pleased with how tax season has played out so far.

And it's exciting to be in the frozen and the team is energized and we're looking forward to.

Next year, making it a more efficient tax season as well this year, we were little less focused on.

How we manage the returns and efficient way and much more focus on net promoter, but we know that we can do this with higher margins as well.

Thanks, Ken.

Thank you.

Thank you. Our next question comes from Brent Thill from Jefferies. Your line is now open.

Hi, This is John again for Brent Thill, Thanks for taking the question.

We're.

More than two months into Q1 and wanted to see if you could maybe provide a little bit more color as to how things are going quarter to date.

Cross selling the core segments.

Whether you might be seeing sometimes it's typically seasonally stronger started you when people.

Scott and set up new small businesses.

And then for modeling purpose I was wondering if you could maybe provide a little more color as to how.

<unk> and <unk> might trend.

The quarters this year. Thank you.

Great I can take the first of all and then maybe I'll hand, it off to dwell on the <unk>.

We haven't seen anything surprising this season, so far and you can see that.

Sensus is published.

EIA application growth that's negative.

And January was down 11% in February I think it was down 3%.

So collectively it's sort of where we thought it would be coming off of the strong season that we had last year, especially in those first three months.

So everything has been pretty much as we'd expected up to now and I wouldn't say that there's anything that has us overly concerned.

Yes on the <unk> side.

In terms of <unk>.

<unk> grew 6% year over year in the quarter and we saw it was up a couple of points sequentially as well.

As we've talked about previously we expect our proved to be an ongoing tailwind. So we will see modest.

<unk> throughout next year in <unk>.

We've talked about that being tied to the fact that within our ecosystem are now, bringing higher price points subscriptions to bear, namely Tac, which we've talked a lot about but also being able to add ECM and this year as well are among factors that will.

Buying up.

Upward pressure on <unk>.

Moving forward.

As far as the <unk> side, so <unk> as we noted on our prior call.

We said that we.

<unk> to flatten out from a year over year standpoint in Q4, and so we've seen that.

Really we've now lapped a significant shifts that we saw towards business formations within our overall unit within our overall transaction unit mix.

So it's kind of leveled out we would expect it to be fairly level next year as well with the normal seasonality that you would see so from a seasonal standpoint year over year, we would expect it to be within.

A fairly tight range.

Noting that there is seasonality.

For example in Q1, we expect <unk> to be down.

Q4.

When comparing where we actually have really strong.

Volume and transaction unit orders.

But because of that.

The size of the volume, sometimes those orders core over into the second quarter in terms of fulfillment and sort of revenue recognition tied to fulfillment generates higher <unk> in Q2 or it would be in Q1. So there is some seasonality in the quarter, but from a year over year standpoint, we expected to be relatively flat.

Sure.

Thank you.

Thank you and again, ladies and gentlemen to ask a question. Please press star and then one.

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

Alright. Thank you so Ah Dan Youre Cam on a dollar basis is down sequentially during the fourth quarter and yet.

Your net subscriber unit growth and seemingly accelerating so can you talk about what may be happening here underneath the hood or are you seeing greater efficiency in gross subscriber.

Or is the churn rate dropping.

And.

You can also give us an update on the adoption rate for attorney assist I think last time, it was about 50% or so for trademark. So wondering where that's currently landing and anything you can tell us about expansion into other.

Other product categories categories. Thanks.

Can you just repeat the second one on trademark I missed that yes, I think you said attorney assist for trademarks was about 50% adoption right. So yes. We're that's currently non day.

Anything you can talk about in terms of expansion into other product categories.

Got it okay.

First one.

I want to make sure I understand the question as well Youre talking about the Cam dollars being down sequentially, but formations up.

Is that is that.

What you are asking what the gross.

The net subscriber additions actually nominally accelerated right. So the optimist immune wants to believe that the efficiency in your advertising is coming up I am just wondering if there's other factors that play here.

Yes, Okay, yes.

Threw me off on the <unk> piece of that because there is a little less of a relationship there necessarily on the on the subscription side.

What we are seeing is we are seeing improvements in retention in our core subscriptions and then you're layering in as well what we've talked about which was in Q4, we were willing to make some trade offs.

Looking at the overall value of the parts.

And.

At times erring on the side of the value being leaning heavier towards subscription and transaction, which would.

In period, it hurts us a little bit, but from a lifetime value perspective, and from a bookings perspective, it's actually quite positive. So that has continued to drive our subscription growth up and.

And I think youll see us make that decision quite often.

The direction, we want to be as continue to drive that mix up further and further on the subscription side.

Trademarks.

Testing.

Our trademark product has been split between a DIY product and an assisted product and you know when we first launched it.

Which was now almost two years ago.

We were seeing a split of about a third of customers choosing the assisted we're now seeing it over 50% and we're getting to a point, where we're starting to really consider whether or not that should only be offered as an assistant solution. There are certain types of transactions that are pretty complex and so they require an <unk>.

Interactions directly with an attorney if you want to.

The filing to be done successfully and in the case of trademarks that actually is a better experience for our customers in terms of the acceptance of success rate of the trademark itself. The net promoter score and it's also.

Are much higher.

So you might see us lean a little bit more into that assisted solution over time.

And then you want to take the last one because you're moving into other categories any new product yes.

Yes.

On that piece, we're always looking at whether or not we should be providing additional subscriptions as adjacencies.

That is there are things that are on our horizon.

We are considering opportunities they would be smaller acquisitions, most likely it is how we would enter.

And they would be compliance related primarily so there are some some areas where we've got it.

Eyes on them, but there is nothing that we're ready to announce at this point.

This isn't a well obviously, we're really excited about ECM and adding that as a product and so one of our big focal points for this year is going to be.

Properly integrate them and integrate the product offerings and commercializing on the site and that will be done in phases.

So that's one of the big focus points for us this year.

Thank you.

Thank you.

And that does conclude our question and answer session for today's conference and I'd like to turn the call back over to Dan Mondor call for any closing remarks.

Thank you operator, while I just want to thank all of you for taking the time today and a special thanks to all of the Zumiez that legal zoom, our employees, who have continued to execute in.

And perform incredibly strong throughout the year and looking forward to the next year. So thank you guys.

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

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