Q1 2022 LegalZoom.com Inc Earnings Call
Good day, and thank you for standing by welcome to the legal Zoom first quarter 2022 earnings call.
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I'd now like to hand, the conference over to your host today, Danny bit here head of Investor Relations.
Thank you operator, Hello, and welcome to illegal James first quarter 2022 earnings conference call joining.
Joining me today is Dan <unk>, 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.
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 to make decisions regarding our business and we believe these measures provide helpful information to investors reconciliations.
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 thought legal zoom dotcom.
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 ill turn the call over to Dan.
Thanks, Danny and good afternoon, everyone. It's been a quick turnaround since our last earnings call. So I'll keep my comments brief today Q.
Q1 was a strong start to the year for legal Jim continuing the momentum we experienced in 2021.
In the first quarter of 2022, we generated $154 million of revenue ahead of the top end of our guidance range and up 15% year over year, Despite a challenging prior year comparison.
Subscription growth continued to outperform in the period with revenues coming in at $84 million up 29% year over year, the subscription strength driven in part by LG tax revenue continues to dislocate, our performance from the broader market for new business formations with consensus and non seasonal applications down.
Percent year over year in the period.
The census decline in the first quarter was within our expectations, we outperformed the macro in Q1 with legal zoom business formations down just 2% versus prior year.
We reported adjusted EBITDA of $1 3 million in the first quarter ahead of our guidance of breakeven.
As a reminder, there is a seasonal component to the recognition of our transaction revenue that weighs on margins in the first quarter of the year Noel will further unpack our guidance later in the call, but we continue to feel confident in our ability to deliver our adjusted EBITDA target for the full year of 2022.
Given the current state of affairs with geopolitical concerns inflation and other macroeconomic factors, causing significant uncertainty. It is important to consider the advantages our cost structure has been responding to external factors beyond our control.
First we reduced margins in the near term to accelerate revenue growth over the long term, we are investing across all areas of the business, but most significantly within sales and marketing, which grew from 27% of revenue in 2019% to 45% of revenue in 2021.
Excluding sales and marketing, we actually saw operating leverage over that two year period with non <unk> expenses declining from 50% of revenue in 2019% to 47% in 2021 I'll.
I make this comment because it points to the inherent flexibility in our operating model less than a third of our operating spend is fixed the vast majority is variable and can be flexed up or down dynamically as market conditions warrant.
We're an asset light business with capital expenditures running at just 2% of revenue in 2021.
And despite the ramp in <unk> spend we continued to generate positive cash flow and have just under $250 million of cash and no debt on the balance sheet.
We feel we're in a very strong financial position to weather a potential economic contraction, while still maintaining a healthy level of investment to drive durable long term topline growth.
I'll now transition to an update on <unk>, where we have successfully navigated our first peak tax season.
We saw a notable step up in the number of LLC formation attaching a tax absorption in the first quarter of 2022 with.
With taxes top of mind. It is not surprising customers were more open to the cross sell however, we were surprised to see a portion of these new customers had already completed their 2021 returns and were instead looking forward tax planning and bookkeeping solution for the 2022 tax here. This learning reinforces the power of our platform entrepreneurs are starting new businesses.
<unk> all year round and since we're often the very first third party entrepreneurs visit when starting their business. We have the unique opportunity to grow awareness and drive product adoption off cycle, a significant advantage to our competition, which primarily relies on new customer acquisition during peak tax season.
We're also seeing a significant opportunity to improve utilization of our tax platform to date, our efforts have focused on cross selling tax at the time of business formation. However, many of these new businesses are pre revenue and are therefore less likely to require tax filing services.
These insights reinforced the importance of engaging our existing base of $1 4 million active legal suite subscriptions, many of whom are generating income and scaling operations. We've seen the power of our channel to acquire new customers and grow awareness. Our focus now is providing these customers with the right service level at the right time and that journey, which is often months after that.
Norm.
And finally, so it's a bit too early to interpret retention data, we continue to see that customers, who engage with our tax platform and experts are really happy with the service.
And our Q4 earnings call in March I introduced our plans to conduct a series of lineup tests within our core formation experienced throughout 2022.
We spent the better part of two years driving efficiencies in our fulfillment processes, improving our attorney platform and expanding our subscription ecosystem to make that this testing possible.
Our thesis here is that by expanding our formations lineup, both up and down market. We widen the aperture of customer segments, we serve unlocking new opportunities to grow share and expand customer lifetime value.
I'm pleased to report that the first segmented lineup test was launched in late April to a subset of LLC traffic and a few smaller states.
The initial test includes a mix of do it yourself and attorney assisted formation experiences with prices ranging from free Standalone LLC registration to $1149 for customers seeking a high touch experience with an attorney.
At the high end customers will have on demand access to our independent attorney network for the first three months post formation as well as an attorney assisted trademark filing with an attorney staffed in our ABS law firm.
Services include everything from reviewing a lease contract or a new employee agreement up to applying for trademark registration.
Just one of a kind solution emulates the experience of working with the traditional law firm, but at a fraction of the price.
I am proud of our team for standing up this new experience in short order, we've taken an agile approach to these tests with the priority being to learn quickly iterate and expand we're carefully monitoring the user behavior in combination with business metrics such as conversion rates in.
Subscription attach rates.
I'd also like to talk about our progress on the partner front.
A couple of weeks ago, you likely saw the announcement of a new multi year partnership with Wix when.
When integrated entrepreneurs will soon be able to have a unified experience to legally form their business in the U S and build their online presence together in one place.
This partnership is truly bilateral whether you start with legal zoom in to add a website where start by building websites and then decided to formalize your business or protect your IP, we work side by side to provide an integrated experience.
The relationship is also built on recurring revenue model, where both parties share in the economics through the life of the customer.
The Wix announcement adds yet another major brand to our growing ecosystem of best in class SMB enablement solutions.
Other partners, including two at Amazon Square and toast.
The success, we've seen in attracting best in class SMB partners enhances our strategic mode.
You online providers come close to rivaling the scale of our third party ecosystem and with each successive new signed partner, we expand our competitive advantage by forging new relationships that offer integrations with more business applications and exposure to more potential customers.
We anticipate an initial launch of the integrated experience in the second half of this year, but do not expect material revenue from the partnership in 2022.
It will take time to commercialize these partnerships to their full potential but my conviction in the long term opportunity could not be stronger.
In closing I am very encouraged by our results in the first quarter and the energy I've seen across our teams to start the year. Despite a dynamic and in some ways challenged economic backdrop I remain optimistic about the future of small businesses are industry and legal assumes position within it we have a clear vision and plan and continue to execute against.
Our solid first quarter positions us well for a strong 2022 and the foundation is continuing to be laid to enable us to continue penetrating the 50 billion legal services industry in the years beyond.
And with that I'll hand, the call over to Noel.
Thanks, Dan and good afternoon, everyone.
I'll start today with a review of our performance in the first quarter and end with our outlook for the remainder of the year.
Total GAAP revenue came in at $154 million.
Up 15% year over year and above the top end of our guidance range.
We continue to lap a challenging comparison on the transaction side of the business with transaction revenue up 4% year over year at $64 million.
We completed 129000 business formation in Q1 down 2% compared to the same periods last year in line with our expectation.
As a reminder, we've made two small adjustments to our definition of a business formation.
The first adjustment is the removal of non U S formations all of which are attributable to our small presence in the U K the.
The second adjustment is the addition of doing business as our DDA transaction.
These transactions are most often completed by sole proprietors and are becoming a significant feeder into our portfolio of subscription services, particularly as we look to integrate <unk> into the DVA flow.
Excluding these small adjustments we would have completed 119000 business formations in the period also down 2% year over year.
Transaction units were 267000 units in the quarter down 3% year over year.
Average order value came in at $240 in the first quarter. The sequential decline is typical seasonal patterns in the business.
More importantly, <unk> was up 8% year over year, driven by ongoing efficiencies and our order fulfillment processes and growth in our attorney led trademark solution, which carries a significantly higher <unk> than the DIY solution.
Subscription revenue continued to outperform expectations coming in at $84 million in the quarter up 29% year over year.
55% of our Q1 revenue was subscription up 600 basis points from the same period last year, we're very encouraged by the pace of this mix shift, which will drive a more predictable higher margin operating model.
<unk> was $244 in the first quarter up 8% year over year.
<unk> growth has accelerated every quarter, we've reported as a public company.
We view this growth as durable and driven in large part by a new high our <unk> services by <unk> tax and our class a mall.
Partnership revenue was approximately $6 million in the first quarter in line with expectations. We are confident in Q4 of last year was a trough in this part of the business due to the transition of the legacy relationship with misaligned strategic objectives.
Now turning to expenses and margins, where all of the following metrics are on a non-GAAP basis.
Gross margin came in at approximately 65% of revenue down from 69% in Q1 of last year.
We anticipated the year over year decline as we invested to scale. Our in house CPA ahead of the spring tax season.
We expect gross margin to normalize in the second quarter. It would be roughly in line with Q2 of last year.
Sales and marketing costs were $72 million in the first quarter, a 47% of revenue.
Our acquisition spend came in at $54 million in the period flat to Q1 of last year.
We signaled our intention to hold media spend roughly flat to 2021 levels.
Our outlook remains unchanged. So we continue to monitor our efficiencies and can adjust up or down quickly as circumstances change.
Within our non GM sales and marketing spend we do expect a one time $5 million expense in the second quarter related to the rollout of new creative assets.
Technology and development spend of $13 million in G&A spend of $15 million were both up modestly on an absolute dollar basis from Q4 <unk>.
But remained roughly flat as a percentage of revenue.
Adjusted EBITDA was $1 $3 million in the quarter ahead of our breakeven guidance and our base of deferred revenue increased by $17 million in the period, which follows typical seasonal patterns.
In the first quarter, we began to execute on our $150 million share repurchase authorization.
We repurchased a total of 79000 shares of our common stock at an average per share price of $14 for a total repurchase amount of $1 $1 million, including commissions.
We have continued to repurchase shares in the second quarter.
As of March 31, 2022, we had cash and cash equivalents of $248 million and no debt outstanding.
I'll now provide our guidance for the second quarter and full year 2002.
For the second quarter of 2022, we expect total revenue of $162 million to $164 million, 8% year over year growth at the midpoint.
Business formations peaked in Q2 of last year. So we are lapping the most challenging quarter for transaction growth.
However, we do anticipate total revenue growth to reaccelerate in the back half of 2022.
We expect adjusted EBITDA of $10 million to $12 million in the second quarter or 7% of revenue at the midpoint.
We remain optimistic about our ability to deliver strong financial results in 2022, particularly on the heels of a strong first quarter.
Given the fluid economic environment and the number of variables outside of our direct control we remain comfortable with our full year 2022 outlook provided in March.
To summarize for the full year 2022, we are expecting revenue of $650 million to $660 million, a 14% growth at the midpoint and we expect full year, adjusted EBITDA of $48 million or 7% of revenue at the midpoint.
As Dan mentioned are largely variable cost structure allows us to quickly flex, our EBITDA margins up or down depending on the operating environment.
We continue to favor our balanced approach to capital allocation that preserves a healthy level of operating cash flow, while still providing room for organic investments to drive durable revenue growth in the out years.
And with that let's open the call for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Withdraw your question press the pound key.
Our first question comes from Ron Josey with Citi.
Great. Thanks for taking the question guys I had two one is just on its face Dan. Thanks for the additional commentary around the testing of assessed across all the different verticals and bringing all of the services of additional law firm to your clients just talk to us about the roadmap here as Youre in a few states now what's needed what are the gating factors to expand the testing what are you.
Looking for before you sort of go nationwide would be question, one and then question too just on the macro.
There are a few comments in here about.
More fluid results on macro and just tell us if you could tell us what youre seeing from a macro basis.
Maybe how the quarter progressed, what youre seeing in April would be very helpful. Thank you.
Yes, Thanks Ron.
On the first question around what we're doing with assisted I mean, it's worth going back and even just thinking about the journey here we.
We started by providing an assistant solution for trademarks and the main thrust of that was just knowing that it's a more complex transaction some customers wouldn't be comfortable enough doing it on their own.
We've also gone out and really started a law firm in Arizona, which is under.
An alternative business structure, which allows us to practice on one geography. So that we can start to understand the end to end experience of our customers working on our platform and now we're really just trying to expand that and think about how we can approach.
Customers, who have typically been afraid to do these types of transactions on their own and that all the way into doing that for our formation, specifically, which is where the most the bulk of the volume is in our business and so we've introduced the lineup. We're only at this point and three small states.
Part of the objective here is running water through the pipes and making sure that we're operationally very sound and we are thinking about the experienced in starting to tweak it a lower volume the way. We're measuring results is we're looking at one year bookings and trying to understand if thats accretive and also the shift from lower <unk>.
<unk>.
Pricing, which is likely because we're also introducing free along with more subscription bookings and understand the balance between the two as we start to offer a more comprehensive lineup to our customers and then as we see results, we like weakness will continue to expand it through.
Through multiple states.
Part of the thing Thats happening in the background of all of this is we have a pretty significant investment in automating the fulfillment of orders.
We also have an investment that we've made that's really around efficiency for our independent network of attorneys. So theres a lot of things going on at once and actually have been pretty pleasantly surprised with the with the early testing and are operationally was very sound, we're starting to get data in and we'll probably be expanding it in the next quarter given what.
We're seeing so far so things are going going pretty well there.
On the macro side.
This one is pretty clear as well I mean, we went into the year.
With a pretty clear understanding that we'd see the macro decline year over year. In Q1, we saw the census was down 8% we were down 2% in that period. So we gained we gained a little bit of share.
What I'd say is as you look at April because the census, just printed April that wasn't that was a little bit on the lower end of what we expected, but still within the range of what we've used to do our plan.
And we're just going to continue to watch it it's a very dynamic environment.
We do have a pretty flexible cost structure, and we think oftentimes in advance around what we're seeing from a demand perspective, and dialing up or down our media spend along with it. We're also really consciously thinking about our marginal return in our camp spend and taking some of the insights that we've been getting from media mix.
Modeling and shifting some of our spend around right now so that we can go after better marginal return on the last dollar spent so.
But there's nothing that we've seen that we didn't expect so far this year in the macro but again, we just want to be somewhat cautious knowing that theres a lot going on in the <unk>.
Broader economy.
Yes, Ron just to build on that real quick.
Terms of Dan's comments on the macro I mean, thats really largely describes why.
Sort of reiterated and maintained our guidance for the full year for both top and bottom line.
Perfect. Thanks, guys thinking Oh, well, thank you Dan.
Yes.
Our next question comes from Elizabeth <unk> with Morgan Stanley .
Great. Thank you so much guys.
A follow up on the comment for the outperformance informations versus the broader macro.
Last year share gains information.
Lighter than what you were expecting in the guidance for this year was implying a similar rate of gains. So can you just hit on the pace of share gains versus your expectations and especially in light of the marketing spend changes that you guys are doing thank you.
Sure. Thanks for the question Elizabeth.
Yes, I mean, I just mentioned.
The macro was down 8% we were down to.
It's roughly 5% share gain which I think isn't that far out of line and in fact, you should see on a quarter to quarter basis, it's not going to be entirely linear there are things that we are doing in terms of shifting our marketing spend and part of this.
Shift started at the end of the quarter and is actually happening currently and where.
Whenever you do this.
A shift in media mix oftentimes, there's different durations and payback of that media mix and.
But we are starting to dial down and some of the areas, where you have immediate payback and what youre starting to see us putting it into some different channels that have paybacks that could be 246 weeks.
It's not going to be a linear share gain all throughout the year, it's going to be something where it's going to be there's going to be some variance quarter to quarter. The other thing I'd mention is as we start to do more premium deployment.
Probably we will begin to see us look to accelerate share gains.
If it's working you will see us start to take more share because we're going after the price sensitive customers and again, we will only do that if we feel like it's a net positive on a one year bookings basis, but that may mean that where we're.
We're giving it a little bit on the <unk> in order to really push harder on continuing to accelerate the subscription bookings.
And just to add further highlight that last sentiment. So subscriptions has been an ongoing focus for us and you saw that we had 29% revenue growth in subscriptions for the quarter. So I think our focus and investment around building out that ecosystem.
Further helps to dislocate us from from the macro.
Great and then following up on subscriptions.
The units added in the quarter.
Lighter than what you did on average in 2021, so how should we think about the balance between kind of the unit volume and <unk> for the remainder of the year, especially after as you go after some of the higher value units in tax.
Yes.
The things that is.
As a reality of our business model is there is a there is a coupling between the transactional growth in the subscription units and so when you think about the beginning of this year when we're lapping some of those comps from prior year. It certainly will impact some of the unit growth. What's also interesting too is do you think about this year and as you get to the back half of the year there is a.
Seasonal component to our business as well with LG tax and so I would expect that to start to decelerate a little bit and then the thing thats.
A bit of an unknown or an opportunity to the good side, though is that we.
We haven't really marketed lz tax to the broader base. We now have virtual mail through our <unk> acquisition, and we have the opportunity to market that as well, where it's not penetrated into the base.
And then again.
Piece on premium is.
It's really interesting because with a free solution, we have the opportunity to go after price sensitive customers.
Just to remind everybody those customers as they may form of business for free.
Probably.
Paid solution as you talk about <unk> and compliance so we'd hope that that will be accelerating our subscription growth in the back half of the year as well. So there is there's a little bit of a reality in the front half of the year on transaction growth lapping, but we have a lot of levers that we're currently testing and looking to sort of offset that in the back half.
And then just further on that as you were alluding to a little bit in terms of you do have to look at subscription unit growth and <unk> growth and coordination because.
More than willing to make a trade off if the LTV is right for a higher RPC subscriptions and as we mentioned in our prepared remarks, we expect.
Durable RPI gains kind of consistent with the year over year growth that we saw in Q1 moving forward in part driven by the focus on tax and the integration of ECM.
8% ARPA growth year over year, its just its a reflection of that mix shift and again, there's less units coming from tax then we have from compliance, but at a higher price.
Great. Thank you so much.
You.
Our next question comes from Andrew Boone with JMP Securities.
Good afternoon, and thanks for taking my questions.
Dan as we think about our premium offering as well as alone offerings coming to market can you frame just the overall product offering and a more comprehensive way as we start to think about 2023, what does that start to look like and how do we think about share gains as well as pricing as well as just overall growth as we put those pieces together and then secondly, now that you have.
To your first tax season, with LC tax I'd love to hear how that went and what you need to do to improve the experience for next year. Thanks, So much.
Great Yes.
The premium offering.
And this is more early innings to be honest, because we know how we want to approach a free solution for customers, where it's really free filing with the state.
But then lots of add on services and products.
So that piece is pretty straightforward the premium piece there is a little bit different in that there is going to take some experimentation to get this right. One of the things that we had believed last year was that customers wanted assistance as they were forming their business right at the moment of formation, meaning like I wanted to know what entity I should be and what we've realized.
<unk> is actually one of the bigger problems is.
Customers don't know what to do once they form.
And they start to have real challenges when they hired their first employee or they have to sign a lease or they have their first contract and so we've really structured this initially to be more comprehensive and having access on demand to an attorney for three months post formation.
That also includes the ability to a manager formation and do other things that are sort of.
It's a the entity selection, but it's much more comprehensive theres two skus right now that we're testing one is just the formation itself and having access to the attorney. The other one and then also adds a trademark because we know that most of our customers that Dubai trademark do it within six months of forming their business. So there's an obvious.
Bundling opportunity there as well we started with price points that.
Premium price points, and we have a lot of flexibility to try and test and learn what the right price point is here as well and we will have a lot to learn how we commercialize it how we talk about it if you think about it today, we're not doing anything at the top of the funnel. So most of the people who come to legal zoom are coming to <unk> for a DIY solution. You also have to reframe that we have.
This this hybrid assisted solution as well and so there's some work to do even at the top of the funnel that will start to start to do it at the later parts of this year.
Anything you'd add there Noel before I jump into the tax season.
Okay.
Season so.
This was this was a.
A really interesting tax season.
This is I will say the first time I've worked on a tax season, that's been very specific for small businesses.
I would say we learned quite a bit we went into this season by the way not trying to optimize operationally, but really focus on the customer experience and we created a very broad offerings. So they werent like segmented offerings. They werent.
Really well targeted and we wanted to learn as much as we could during season. So that we can start to tune the offering for next year and I think we discovered quite a few interesting things. So first off is that our customers are very simple filers.
The majority of them being $10 40 with schedule six versus the more complex like $11 20 corporate filers.
Service delivery was much more spread out than we thought it would be.
And thinking that it would be very peaky and the reality is we ended up not seeing the peaks as high at the end of the tax season of the filing deadlines and instead saw a lot of people doing extensions.
We also saw our customers over waiting on advice because they were so early on their journey as a business. So a lot of them worked in operations yet we're paying for a comprehensive service, but really just wanted access to an accountant.
So it speaks a little bit to the opportunity that we have around how do we commercialize that product as well so that there's sort of a low end product and then a very premium products.
And then I'd say the last pieces and we learned a lot about how to operationalize this business like <unk>.
Said, we hired into the season very specifically to make sure. We lost no customers behind and now we have a better sense of the actual filing curve and how we're going to approach efficiently supporting those customers for next season.
Great. Thank you.
Our next question comes from Matt Pfau with William Blair.
Great. Thanks for taking my questions guys wanted to.
Just first hit on retention and if you could give us any updated commentary on what you're seeing with retention within your subscriber base and then how we should think about that.
The recession environment, where we perhaps see an uptick in business failures.
Yes so.
I'll hit on recession, primarily on the core products, our core compliance products, it's harder to talk about retention just yet on things like LD tax a virtual mail, because we havent really lapped the acquisition of those customers.
Not much has changed here I mean, we did see a weakness in the customers acquired during Covid and as we look back at the data there were two things that would distinguish them. Some of those business were designed to be somewhat ephemeral like in reaction to Covid and then we also saw higher.
Mix of first time businesses. So we have typically a mix of people who for multiple Llc's and then we have people who are trying it for the first time that mix actually went up pretty materially and we attribute that to a higher level of a failure as well that's already started to normalize and the other thing I would point out though is that every.
Other cohort so as you get into the 25, and the 37 month and all the different age cohorts, we were seeing improvements in our retention.
As it relates to recession.
I wouldn't say that we're I don't know if anybody can say they are completely recession proof business.
But as we've lived through the great recession, we did see that formation volume went down roughly 10% during the great recession.
We actually accelerated through that and as it relates to business failures. So you should expect a little bit more from business failures, typically though again, it's going to be the ones that have less of a track record it's going to be like the cohorts that are being acquired as you go as you go into the recession versus more of the age cohorts.
Really really helpful. And then I wanted to hit on just how youre thinking about marketing, perhaps can spend maybe this year and into next so you have I E.
A lot of new products that youre working on whether it be the free filing product or the premium one and an <unk> tax, which hasnt been perhaps broadly marketed yet is it possible we would see a big uptick as these products start to gain traction and you want to take them out more broadly or how should we think about that.
Hey, it's almost be it's almost the opposite we really wanted to have a singular message for customers and we do have a brand campaign.
Especially launching this weekend, where it's just a singular message around we are the place to go to form your business.
And what we want to do is to have the products work as the channel for all the services, but we know that there is still a pretty big opportunity.
To get the product knowledge that legal zoom stands for small business formation versus the consumer side.
So the brand campaign itself is all about forming forming your business and then again, we have we have opportunities in the product I would say none of US are happy right now with.
How sophisticated we are in targeting and really knowing our customer and making sure that we're marketing to them. The right solutions. So this is a big area of focus for us as well. So I'll give you. An example, if you came in to our platform and you are pre revenue you really don't need a tax filing solution.
Right now we're marketing it and those customers some of them were selected for the tax advice.
Youll see us coming out of this season have something very specific for customers who are.
Not yet are pre revenue and looking for help making tax strategies.
Part of their formation process and.
And I think there is other things like that as well, where we really we know a lot about these customers that haven't been as sophisticated and targeting them as we should be.
Really helpful. I appreciate you taking my questions. Thanks.
Thanks, guys.
Our next question comes from Mario Lu with Barclays.
Great. Thanks for taking the question.
One on the <unk> partnership.
You mentioned its going to rollout sometime in the second half of the year.
I was just hoping you could help us frame the long term opportunity.
As regards to this partnership and I guess, how does that compare to the ones you currently have with others.
Correct correct.
Correct.
Yeah, Great question. Thanks Mario.
So we're really excited about this one.
I think this one's it's death.
A win for legal zoom I think it's a big win for Wix, and it's a really big win for our customers. So 80% of the customers that form with US today don't yet have a web site, which is pretty incredible.
Because we also know that 70% of them intend to get one.
And so what we're really trying to do here is build a extremely tight integration. This is not one of these kind of affiliate relationships, but this is one where there is a.
Material process investment on both ends so that we can integrate their experience into the formation experience. So we also know that wix.
Myers.
More customers than we do.
From a small business standpoint, and we also only have 10% share. So there's a pretty material acquisition opportunity going the other direction and the team. There is great I mean, they really think partner first and they've built a pretty compelling platform.
We have lots of ideas of how we can integrate our products into their solution not just on formations by the way, but these are customers who are very focused on identity as well and so things like IP and trademark they're really interesting opportunities when you start thinking about their base.
This is one where we're starting with testing where the integration won't be as deep and.
I'm happy to say that that will happen much sooner than in the back half of the year and we will start to get real learnings about what's resonating with customers, but the deep product investment would be happening towards the back half of this year. We think it will be material and this is the type of thing that we'll do.
In terms of the types of partnerships that we have going forward just not in this in this fiscal year and you'll start to see the impact next year first youll see it in customer growth.
And then youll start to see the buildup in that recurring revenue.
Got it Super helpful. Thanks, Dan and then just one for a while in terms of the gross margin this quarter.
Believe it came a little bit lower than expected and versus historical.
Guess what were the main drivers here.
And how should we think about gross margins for the rest of the year.
Yes, Thanks, Mario so.
As we mentioned in our remarks this was.
Really in support of tax season, and we've said a few times that we were going to scale up pretty aggressively to make sure that we could support our first tax season.
We do expect gross margin percentage to normalize in Q2 as we also mentioned and really just start to see some some slight leverage from that kind of sequentially throughout the back half of the year.
Got it thank you.
Our next question comes from Nat Schindler with Bank of America.
Yes, hi, guys just quickly to just really pile on the macro side.
Just wondering.
Is there been any historical evidence, particularly around business formation that shows.
A trend, particularly people have talked about potentially they are being made.
Do we slow down in front of a recession and then early expansion business formations as you've come through a recession is that at all an accurate statement or have you seen evidence that suggests that.
You know that's one I'd probably have to go back in and studied closer I mean, when you look at census data you do see there is a 10% reduction and then a 5% reduction over the two years of the great recession, and then an acceleration coming out but.
To try and understand the timing at that finite level as I would have to be looking on a month over month basis, and I haven't I haven't looked at that back at 2008 2009.
No problem. Thank you for the couple of months.
Yes.
Our next question comes from John <unk> with Jefferies.
Hi, This is John again for Brent Thill.
For taking the question.
I have two on the.
Almost halfway through the quarter and just wondering if you could share a bit more about the trends you're seeing April may across the different segments and then second on LNG tanks.
I'm wondering if you could provide a little bit more colleagues too.
The profile of <unk>.
Customers you attract any you mentioned many of them have done their taxes.
They are typically coming from DIY type profile that use like a CPA with tax tour and.
Okay.
Was there any difference in terms of the.
Tracking them in April versus earlier this year. Thank you.
Yes. Thanks for the question John I think the.
Yeah.
On the April and May performance, we really don't like to get into the forward performance and there's a lot of the quarter to still play out. The one thing I'll again, pointing to is the census data, which did get printed for April which showed a 13% decline in formations.
But that's something that I don't think it was that far out of our expectation on the LTE tax side I'd say the profile of the customer is like I mentioned before.
Leaning much more towards micro businesses side businesses.
More personal filers in a way and when we think about who is what that means in some cases. It means they are actually current provider is really a personal tax provider and this is adding on his schedule C to that filing.
A lot of them. It was interesting we saw some people who didn't fully understand the doing a schedule <unk> filing is a personal filing and so some people would actually come to us and bought the service.
Filed a personal return and then we went back and amended that personal returned to make sure that we put the scheduled <unk> filing on it as well. So it just gives you a sense of how early they are in the cycle of their business.
At the same time, we have everything in our base. So we have corporate customers as well people are incorporating and you'll see 11% to filers.
Nonprofit filers.
Complex filing returns as well I think that's the big opportunity for us by the way because if you look at how we commercialize the product. This year. It was more based off behavior versus forms and we know that forms are a really good way to segment customers because it shows the complexity of their business.
So that's a place where I know, we'll do a lot a lot more next year.
Great. Thank you.
Thank you.
As a reminder, if you'd like to ask a question at this time that Star then one.
Our next question comes from Stephen Ju with Credit Suisse.
Okay. Thank you guys.
As a follow up to one of the earlier questions around the partnerships.
Can you talk generally about how these will appear on the P&L I mean, recognizing every one of these deals may be different but presumably there will be some sort of exchange and economics. So would there be some sort of expense recognized for finders fee or lead gen fee or maybe a contra revenue item and.
So as you think about the cost of the customers acquired through these partnerships is this more efficient versus your typical direct marketing campaign. Thanks.
Hey, Stephen this is Noel thanks for the question. So first I'll go back to some of Dan's comments just mentioning.
Strategically this fits into our sweet spot in terms of.
The relationship being bilateral and recurring revenue and so.
Part of it will be.
We will flow through our sort of core streams in terms of it will be formations that are driven through the relationship with wix and.
And we will fulfill them as we normally would.
And you'll see other the other part of the stream is where we're presenting wix offerings to our customers.
And that will flow through our partnerships revenue.
With our contract revenue for the Rev share.
Yeah from an economic standpoint on the cost of acquisition.
These these partnerships are early and we're working with the partners.
Partners in the case of like Wix, where it's bilateral it's very clear and we both come into this with an expectation and understanding what our cost to acquire another channels are and so we are pretty much set the economics somewhere near that.
I am sure that'll be something that we also continue to learn from.
The interesting part here again is that we actually feel like this just increases the overall size of the pie of people that we can access because these are existing businesses that in the case of Wix for instance spend a considerable amount of time in that application I mean, thats, where they run their business and so you can almost think of this is not just.
Hey.
An acquisition play, but also a brand play I'd like really helping people understand what legal zoom does and same thing on their side that the moment you are forming a business. We're introducing it to what we think is an amazing brand of Wix and so these are both pretty economical ways to approach acquisition of our customers.
Yeah.
Thank you.
Thank you.
I'm showing no further questions in queue at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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