Q3 2022 LegalZoom.com Inc Earnings Call
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Good day and thank you for standing by welcome to the legal since third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one.
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Then here an automated message advising your hand is raised please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Sara blend Securities Counsel. Please go ahead.
Thank you operator, Hello, and welcome to Legals in third quarter 2022 earnings Conference call. Joining me today, Dan Warner Cox, 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 state.
<unk> 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.
Such forward looking statements are based on management's assumptions expectations and information available to us as of today's date and are.
Subject to risks and uncertainties that could cause actual results to differ materially from such statements.
These risks and uncertainties are referred to in the press release, we issued today and in the risk factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission, except as required by law, we do not plan to publicly update or revise any forward looking statements whether as a result of any new information future events.
Or otherwise.
In addition, we will also discuss certain non-GAAP financial measures, our CEO and CFO use these measures and making decisions regarding our business and we believe these measures provide helpful information to investors.
Conciliations 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 <unk> Dot com. 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'll turn the call over to Dan.
Thanks, Sarah and good afternoon, everyone.
In Q2, we outlined a path forward that Leverages the brand leadership established over the last few years, while better capturing the demand we already have.
Increased product innovation.
As a result, we committed to a 15% EBITDA margin and a 15% share improvement in 2023.
I'm happy to say, we've made progress against both of these stated goals.
But more importantly, some of the larger product and platform investments, we've been making over the past few years are beginning to bear fruit.
To be clear, it's still very early innings for our product transformation.
The momentum is there and you should continue to see our product output to accelerate over time.
Before getting into more details on our progress against priorities I will give a brief overview of our third quarter results.
Q3 revenue came in at $154 million up 4% year over year.
Transaction revenue was down 14% in the period.
Subscription revenue offset this weakness growing 25%.
We go doing business formations grew 3% for the third quarter, while U S census formations were down 2%.
The share gain in Q3 is both the result of increased testing of our premium lineup and increase the acquisition through channel partnerships.
Adjusted EBITDA was $17 5 million in the third quarter.
Given the quick expense actions, we've taken we expect to realize improvements in margin for the remainder of the year.
To remind you. This is a result of multiple reductions in force over the past six months, while restricting hiring primarily to products and technology.
Progress automating, our core formation and tax the permanent process, which will continue to drive down variable costs.
In Q3, we began to reduce our brand spending rotating our focus to higher intents lower funnel and earned channels.
Moving on to some operational highlights we continue to focus on progress against our three growth vectors daily in the core business building and SMB ecosystem and to integrating experts into our core experience.
Those three priorities will translate into us forming more businesses solving more compliance problems in an integrated way and providing efficient and affordable access to the two most important advisors small business needs to succeed there or attorney in their accounts.
In Q3 and heading into Q4, we're ramping lineup testing and incorporating different variations of free with the goal of making our products more accessible to cost sensitive smbs.
We've learned quite a bit and are applying these learnings into new variance and as a result, we are accelerating the number of tests as we enter Q4.
In addition to reaching new businesses through lower cost entry points. We've also expanded our distribution through partners we.
We hope to add more partners looking to bundle our formations product with their own services, which include Fintech website and brand identity solutions among others.
It's important to note that as we bring our marketing spend down and begin to focus more on product conversion as a result of premium offerings and distribution through partners overall traffic to our site will show declines year over year.
Despite this reduction our overall traffic per month remains at roughly 10 times the number of businesses being formed in any given month as measured by census data and our product starts how we measure our highest net purchases are also materially greater than the whole of formations in a given month.
To be clear, we've never had a traffic issue our biggest opportunities have been evolving from a consumer to an SMB brand driving high intent traffic to our product pages and improving conversion rates the largest of those opportunities to improve conversion.
Finally, as we expand distribution through lower cost offerings.
Accelerating our automation efforts are speed to deliver our core formation products continues to improve and our error rates that drive customer calls continued to decline. This is a win win at speed of delivery is a core driver of net promoter score improvements in automation leads to lower Cogs.
Moving to our ecosystem investments, we continue to both build and buy into unique SMB ecosystem designed to get businesses off the ground and keep them operationally compliance in.
In Q3, we began ramping the integration of first class mail soon to be renamed LG virtual mail into into our formation as well and early results look promising.
As a reminder, the majority of small businesses are homebase and virtual meal offer great at the time of declaring your business address is resonating with our customers.
In October we closed on the acquisition of Red.
<unk> is an online forms an esignature service. This acquisition will help us accelerate two critical areas of product investment.
Updating our forms library, while enabling expert collaborations directly on the form itself and providing the ability to send these forms outward E signature and have them stored and managed through our document solution.
Our research shows 40% of Smbs are paid for an esignature solution. So there are opportunities to commercialize this product as a standalone or potentially add it as a bundled capability to drive better retention and existing subscriptions.
The acquisition of Rev. Also establishes the talent beachhead in Bangalore further, enabling us to grow our product organization.
These capabilities are being integrated into our new application experience called miles.
You will begin to see a cohesive product strategy to integrate our formations capabilities and ecosystem subscriptions into a single experience.
Think of it as the place to Smbs interact with their experts find the right business solutions and the key destination for all of their compliance activities at.
It's also the place where we integrate strategic partnerships and we are now live with both Wickes and next insurance through this experience.
Finally, we continue to evolve our third priority integrating experts.
Experts remain critical to our strategy and Lv tax we're testing a new lineup with the newly launched advisory only solution for pre revenue customers.
Similar to our legal advisory subscription.
As a result, as we enter tax season. This year, we expect to have a product built to support businesses of different sizes and stages better optimized pricing and an improved first use experience with streamlined onboarding of clients and intake during tax season, all of which we also intend to deliver through <unk>.
We continue to include attorney bundles, and some of our lineup testing, but the early read hasnt been strong. So our focus has become much more concentrated on introducing a three or lower cost DIY alternative while sequencing a deeper integration of attorneys after we deploy new lineup.
Overall, it was a very busy quarter with significant progress made against our product roadmap.
Stepping back for a second we began adjusting to a deteriorating macro early in the second quarter of this year.
While we have yet to see a significant near term deterioration in the macro we remain vigilant in controlling expense actions and view many of the changes is natural in the course of shifting our focus more towards the product experience, which we anticipate will be the driver of future growth.
The efforts we've made to reduce costs are funding our efforts to build out our platform and ecosystem.
Formations have declined this year and for calendar year 2023, we expect formations to decline again, it's clearly a tougher environment for all businesses, including small businesses, which is why it's even more important to make our products more accessible with lower lead in pricing.
Goal is to help more of these businesses now with the expectation that we will be able to monetize in the future.
And we can do that while improving our profitability today through the actions we've already taken.
Given our low fixed cost structure strong cash position and cash generation and the leverage we expect to get from product improvements. We believe we are in the best position in our competitive set to not only weather the storm, but in the long term benefit from it.
With that I'll turn it over to Noel to go through the details.
Thanks, Dan and good afternoon, everyone.
I'll start today with a review of our performance in the third quarter and then what our outlook for the remainder of the year.
Total GAAP revenue in the period came in at $154 million up 4% year over year and above the top end of our guidance range.
Transaction revenue was 14% year over year at $58 million due to a 1% decline in total transaction unit and a 12% reduction in average order value.
We completed 117000 business formation for Q3 up 3% compared to the same period last year and up from a 16% decline year over year in Q2 as comparisons normalize.
Transaction units were 226000 in Q3 down 1% year over year as the increase in business formations was offset by a decline in actual property transactions, resulting from the discontinuation of our DIY trademark product and a continued reduction in the state planning and other consumer transactions.
Average order value came in at $255 in the third quarter down sequentially from the second quarter and down 12% year over year.
As noted on our prior call, we expected year over year declines in AOA.
The second half of the year due to testing of our new lower price lineup as well as growth in our carbon channel, where we provide wholesale rates.
In the quarter, we also experienced a temporary impact with fulfillment productivity as the team adjusted to a mid quarter reduction in head count.
Looking forward, we expect a similar year over year decline in <unk> in the fourth quarter as we saw in Q3 again, driven by a partner channel growth and continued testing of our freemium offering.
As we previously noted we expect the introduction of our lower priced or free SKU to drive significant volume and market share growth, but at a cost upfront transaction revenue.
Subscription revenue was 25% year over year at $91 million, we expect a slight sequential decline in subscription revenue in Q4 with a year over year growth slowing materially in the third quarter and into 2023.
The primary driver of the impact of the slowing macro environment and recent formation borrowings, which in turn reduces the number of gross subscription unification, particularly within a registered agent and compliance related subscription offerings.
ARPA was $259 third quarter up 12% year over year.
In the fourth quarter, we expect <unk> to grow year over year flattened sequentially as growth in our higher <unk> tax service slowed and we have introduced a new tax lineup with a lower price advisory only SKU and now have an integrated ECM operated in our formations flow, which is also at a lower price point.
Partnership revenue was down 29% year over year in the third quarter to $5 5 million as we continue to lap legacy partnerships no longer aligned with our strategic direction.
We expect partner revenue to remain steady on an absolute dollar basis in the fourth quarter and to be accretive to overall revenue growth moving forward as we now have fully lapped any significant impacts from legacy partnerships.
Now turning to expenses and margins, where all of the following metrics on a non-GAAP basis.
Gross margin came in at approximately 69% of revenue in the third quarter down slightly from 70% in Q3 of last year. Despite.
The slight decline in margin was largely due to higher fulfillment costs related to our expanded capacity to support growth in <unk> and added costs from our acquisition of class Mail.
Sales and marketing costs were $61 million in the quarter, a 40% of revenue down 5% from Q3 of last year.
Customer acquisition marketing came in at $44 million down 12% year over year, as we reduced our brand media spend and tighten the guardrails on our lower our clients' direct response channels.
And to further reduce our marketing spend in Q4, and therefore expect a significant sequential reduction given seasonality, but also as we continue to favor conservatism flexibility in this uncertain macro environment.
Technology and development expenses were $13 million in Q3 up $1 million year over year, we expect an increase in this expense in Q4, largely due to our continued focus on hiring talented engineers as well as the addition of headcount from our recent acquisition of breath.
General and administrative expenses were $15 million in Q3 up $4 million year over year due to higher head count and professional fees, we expect G&A expenses to decline sequentially in Q4, as we realize the benefit of recent head count reductions.
Adjusted EBITDA was at the top end of our guidance range of $17 5 million for the quarter compared to $15 million for the third quarter of 2021.
In our base deferred revenue increased $5 million in the period.
In the third quarter, we continued to execute on our $150 million share repurchase authorization.
We repurchased a total of $2 6 million shares of our common stock average price per share of $9 48.
For a total repurchase of $25 million, including commissions.
During the third quarter, we executed $64 million of buybacks with a total of $5 7 million shares repurchased which represents a reduction of approximately 3% of our prior year end fully diluted share count.
<unk> to repurchase shares in the fourth quarter.
As of September 32022, we had cash and cash equivalents of $212 million and no debt outstanding.
I'll now provide guidance for the fourth quarter and full year 2022.
For the fourth quarter of 2022, we expect total revenue of $145 million to $147 million or 3% year over year growth at the midpoint, we expect subscription revenue growth to decelerate in Q4, driven by lower formation volumes in the first half of the year and a slight impact from LG tax seasonality as tax revenue skew towards the <unk>.
Half of the year and tax prep needs are greatest.
We expect adjusted EBITDA of $23 million or 16% of revenue at the midpoint.
For the full year of 2022, we are increasing our guidance for both total revenue and adjusted EBITDA.
Now expect total revenue of $617 $619 million or 7% growth at the midpoint.
We now expect adjusted EBITDA of $60 million or 10% of revenue at the midpoint.
And with that let's open the call for questions.
As a reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
And our first question comes from Andrew Boone with JMP Securities. Your line is open.
Hi, good afternoon. Thanks, so much for taking my questions.
Talked last quarter about 20% of traffic being dedicated to premium testing can you just talk about where you are at right now in terms of slowing traffic over freemium and then what are you seeing so far from tests, how do you feel about the product and conversion and everything else.
And then secondly, with the funding environment changing in 2022 with higher rates are you seeing any change in terms of the competitive SaaS from other priors privates excuse me can you just talk about competition overall, thanks, so much.
Yeah, Thanks for the questions Andrew.
Yes on the traffic side its hard at any given time to say what the specific traffic level. We have is because there is lots of different tests that we have going and we turn them on and off at different times based off of what we're reading into the test themselves, but at this point you will see us pretty consistently.
In Q4 be above that 20% level and we're really just beginning to ramp up lots of the different variants where.
In the past we were testing very broad concepts will start to test a narrower set of concepts that have been refined and we will do many variations of those with different pricing.
Options. So so that's a pretty dynamic environment.
So it's hard to say specifically, what the traffic will be because it's kind of depends on what's happening with the test themselves.
As it relates to the dynamics with competition and kind of what's been happening with the macro I mean, I think what I would say is that first.
First off we just want to focus on what we need to do in this environment as a starting point, which is get to the right cost structure and so you've seen us kind of <unk>.
Our cost down whether it relates to automating fulfillment or right sizing some of the Opex and head count and even thinking about some of that last dollar spent on the marketing side.
That's enabling us to go after share while still increasing profitability and so that's really important when we're in a bad environment.
This is as a chance to really consolidate can go after more customer growth knowing that you can be confident later to to monetize those those customers down the road. So that's what we're really focused on our side now in parallel we also have a really strong balance sheet.
We're still cash generative.
And we have a brand that's really well known and we have the ability to sort of draft off of that knowledge of our brand. So I do think it puts us in a better position than anybody that was spending into.
Negative profitability because at some point, we'd have to go out and think it will get funding and this obviously isn't the best environment for funding, but but again, it's really more about what we're trying to do which is we want to be aggressive during a time like this we feel like this is when when people win.
And really set themselves up for long term growth and so that's what our strategy is.
Thanks, Ken.
Thanks, Andrew.
Thank you one moment for our next question.
And our next question comes from Mario Lu with Barclays. Your line is open.
Great. Thanks for taking the question. So first one is on your comment in terms of.
Expecting formations declined again next year.
I was just curious if you could share any data points that led to this estimate obviously those macros are very soft right now.
Last quarter, you guys talked about distribution trends in your data just curious if that was one of the factors.
Yeah. Thanks for the question Mario.
Actually Dissolutions has started to recover and we're seeing them back to a normalized path, which is a pretty good thing, but I think thats also just related to there was an over inflation of businesses being formed and no businesses failing when there was stimulus still being.
Hand, it out in 2021, so there was sort of a natural.
Almost like an inverse action that happened post pandemic, where we saw higher dissolutions and now its really it has stabilized a bit.
So that feels like thats getting more back to where we've seen historically.
You start to think about formations next year, we're just cautious.
You look at the current trend in Q4, and if you think about Q3, we think of the macro as being relatively flat, but just looking on the horizon, it's clear that macro conditions are getting worse.
So we expect that there'll be a decline in 2023, we're not ready to say at what level, we see that decline, but it's just something that we anticipate.
Okay makes sense and then in your acquisition of spreads.
Wondering if you could highlight the main factors that led to this acquisition any other areas in particular that you are targeting to build out your capabilities.
Yeah.
Really really excited about Rev. I mean, if you think about what legal zoom was founded on it was really democratizing legal forms online.
But over the last 10 15 years those forms.
These are less modern then we'd wanted them to be and so we were.
Kicking off a pretty significant investment in making our forms collaborative making them travel to customers thinking about how we have them and we started to look at some of the external environment and Redwood was just a perfect fit.
So they bring with them.
Pretty strong library of forms and we obviously can keep augmenting it because it's a pretty flexible platform as well, it's a WYSIWYG type designs. So small businesses will find it very easy to adjust those forms and customize them, which is really important for them.
They are highly collaborative.
Which for US is incredibly important because we want attorneys to collaborate through the form with their clients and then we now have esignature capabilities, which is so important when you're creating a form you need to get that documents signed and you need to then store it somewhere where you can easily access it so all of them.
That is really coming out of the boxes as well as it's an API driven solution. So it can be distributed differently, there's great Seo capabilities, when we talk about forms.
Is a really I think.
A very very strong acquisition and something Thats indicative of what we're trying to do in our ecosystem. So just a refresh on the ecosystem side I mean, what we want to do is be the place to help small businesses get started and then also help them manage their business and stay compliant and so there is multiple other areas.
We feel like we can participate theres.
Multiple other areas, where we think our partnership participate and so that's going to continue to be a huge investment area for us.
Yes, the one thing I'd add there as well as on the revenue.
Transaction that gets us excited.
Comes with a really strong leadership team there some really talented engineers and.
It gives us a bit of a foothold in that location to continue to build out from that base of engineers and add quality talent, there and helped the overall blend down our cost structure on the engineering side. So that's another aspect of the deal that gets us really excited.
Great. Thank you both.
Thanks, Laura.
Thank you one moment for our next question.
And our next question comes from Ron Josey with Citi. Your line is open.
Great. Thanks, guys I wanted to go back maybe on macro trends in freemium and I just want to understand so if I understand your comment around the broader macro environment being more fluid and the outlook for 2023, but I think we've talked in the past about trends, maybe returning to seasonality or at least stabilizing here and so I just wanted to see if youre seeing that in the current environment.
Around just macro stabilization and if so if that's improving the operating environment, given given things might be more stable and then the second question just on freemium because I think it is so interesting.
I know you just talk to us about what youre seeing in the early task clearly they've been positive as you open it up to more traffic I'm curious what's worked what surprised you in any insights on conversion trends would be helpful. Thanks, guys.
Thanks for the question Ron.
Yes.
The macro.
Q3, we saw it down about 2% in the October numbers, just printed and it was a 1% increase so it's not that we're seeing a significant deterioration and we are seeing that it's following seasonal patterns. So whenever we talk about looking forward, we're really projecting out what.
We anticipate based off of what we're seeing in the economy.
And there is at this point, we're not guiding to anything.
More specific than that.
And when we get to 2023, we'll probably have a better sense of how we want to talk about our expectations for the macro and that will be maybe a little bit more detailed.
As it relates to testing.
We really don't want to provide a lot of detail into the test themselves because they are in process and there is obviously a lot of reasons for from a competitive standpoint not to share the insights, but we feel extremely confident in the 15% share increase that we expect for next year.
And I would say youre starting to see that impact in Q3, you saw a four 5% increase in share which was from a portion of that traffic.
We don't think we will fully deploy this in Q4 by the way as we start to see where we are today and just knowing how many variance we wanted to test and the limitations on our traffic.
And also thinking through the end to end implications of deploying it we are focusing primarily on quality and we want to make sure. The end to end experience actually ties back to this premium lineup. So it's likely that it gets deployed in different phases, but we feel pretty confident where we are at this point.
Thank you Dan.
Thank you one moment for our next question.
And our next question comes from Elizabeth <unk> with Morgan Stanley . Your line is open.
Great. Thank you so much I had a question on the subscription units and that adds kind of came down again and I was wondering if you could help parse out the impact between just this overall slower new business formations and the associated attach versus churn it sounds like the dissolution headwind, maybe moderate so any sort of insight.
It into how we should think about net subscription adds going forward would be very helpful. Thank you.
Yes, thanks for the question Elizabeth.
Yes, 13 month retention at this point has actually stabilized again, it's the relationship between disk solutions that we now have also seen stabilizing and our churn rates are probably getting to a normalized level of even a couple of years ago.
I would say is as more of the impact on our subscription business is exactly what you pointed out which is you start to lap multiple years of either flat or down macro growth that is the main channel for our most significant subscriptions, which are our registered agents subscription are compliant.
And so that's just the compounding effect and we do think thats going to continue to be a bit of a headwind as we go into 2023.
But again, it's the core subscriptions that we have are doing a much better from a retention standpoint than they were last we talked.
Great and then.
Looking out ahead in Q4 guidance suggests about the 3% revenue growth exiting the year end.
The Street is looking at about 8% growth for fiscal 'twenty, three and are probably a little bit too early for guidance, but any sort of.
<unk> color you can put on what we could see as potential accelerated revenue or go to <unk>.
Headwind as we think about 2023 would be helpful relative to that forecast. Thanks.
Yes. Thank you well I think at this point, we're not ready to come out with any revenue guidance for next year and we're really again focused on how do we make sure we manage our expenses and how can we accelerate our customer growth will.
We will be ready to do that in the next quarter for sure.
Anything you'd add.
No I think that's I think we're still in our planning process I think there's a lot that we still need to learn in the coming months here around the macro itself.
Obviously, we've talked a lot about some of the initiatives that we have in place and <unk> is a big focus Dan just talked about some of the.
New capabilities that the <unk> transaction, we will bring in we've now integrated RF class Mayo into our formation flow. So theres lots of different initiatives that we're working on that will be drivers of growth next year, but it's too early for us to really get into any specific guidance around 2023.
Got it thank you.
Thanks Elizabeth.
Thank you one moment for our next question.
And our next question comes from Matt Pfau with William Blair. Your line is open.
Hey, Thanks for taking my questions guys I wanted to ask on the increase in average.
So our revenue per subscription unit.
What drove that specifically I assume a lot of that is <unk> tax, but anything else to call out.
Yes. Thanks for the question Matt. This is Noel so we've been pretty consistent for a number of quarters now just talking about the path that we've been on with <unk>.
A lot of it is out of the tax at the higher.
Average revenue per SKU.
And <unk>.
That growing in terms of its overall share.
Also.
I am kind of bringing that into the into the overall equation and seeing some growth there both organically and now having it in.
In our formations flow as well.
So those are the big drivers we did note in our remarks that we expect <unk> to continue to grow in Q4, but to sort of flatten out from an absolute dollar standpoint sequentially.
And Thats really one is.
Now have a lower price SKU and our LNG tax lineup that's live.
So a bit of acquired a quarter in Q4 for LD attachment revenue recognition standpoint.
The integration of class mail in our information flow.
Is currently at a lower price point as well so we do expect our.
<unk> growth, but just kind of flattened sequentially in terms of the absolute dollar value.
Just to build on that the LLC tax piece is something we talked about on the last call where last season, we did not have a good product for pre revenue customers and so we've deployed what is more of an advisory subscription for those pre revenue customers going forward, it's a much.
Lower price SKU, but our objective here is much more around retention and making sure that we're.
Getting the right solution to the right customers and retaining them longer versus the higher RPC product going forward.
Great and wanted to follow up on the share gains in business formation. So.
Yes, it's a premium product is not out to a majority of your traffic yet, but I assume that contributed somewhat to the share gains anything else you'd call out that helped you out on the share gains that you saw in the quarter.
Yes, I think thats that was a big component because we continue to test.
<unk> skus and different variants and some of them to do very well some of them. Obviously don't do all that while there's all different types of price points. So.
The aggregate of that gave us a little bit of a tailwind also our partner channel. We have some newer partners that are distributing the product through their own solutions in the way that works is we have an API and and any service provider can actually leverage our API and bundle a formation with their own servicer.
Products and we're seeing some uptick with that with a couple of our partners as well, which we are really.
Quite happy with and I'd say, we're more in the testing mode. At this point, but we see that as a potential very large channel down the road, where any any small business enabler could essentially offer our solution either through their brand or our brand in a way that's bundled with their core subscription so.
Those are probably the two biggest factors.
Perfect. Thank you.
Thanks.
Thank you one moment for our next question.
And our next question is from John <unk> with Jefferies. Your line is open.
Hi, This is John again for Brent Thill. Thank you two questions maybe this might be related to the previous one.
Wanted to get an update on the <unk> partnership it looks like you said you went live but I'm wondering.
When they might start in how thats going and then second on the <unk> acquisition.
Could discuss more in terms of.
Hub, how it could show up.
In terms of products, whether it's bundling or distinct skus.
Could you give more color beyond what was in our prepared remarks. Thank you.
Yes, so on the <unk> piece, we have been in market for about a quarter.
You can actually see it within our <unk> offering, which is where we primarily marketed and the goals. There are again sort of integrating as tightly as possible and leveraging as much of our data as possible to make the first use experience really strong with wix.
<unk>.
Done as well as we would have expected at this point, we're still in the early the first quarter of releasing it and we're a little bit ahead of schedule in terms of.
Getting all the learnings that we wanted to and then starting to really scale, it up which youll start to see in the next quarter or so and I think it's just indicative of a strategy thats broader which is.
What are the partners solutions that our customers need right when theyre, forming and one of the other partners that we added this quarter was next insurance.
Which is a great solution for helping small businesses get the insurance they need right. When they start they typically don't know exactly what type of insurance they need some people don't even know that they need insurance at the time of formation.
So this is another good example of helping them through our ecosystem and through miles specifically.
On the Rev side.
That how that shows up in our product is going to be probably tested a little bit because theres a theres a piece thats core that we already do today, which we've always had a forms library and so this will replace and modernize it but you'll now start to probably see it integrated with our legal subscriptions as well.
And anytime that we're providing any type of legal interaction with the customers. It can be an interaction that's happening through a form.
So that's a piece that will be integrated with the next versions of our assisted solutions and then the final piece is the signature then esignature theres multiple ways. We can approach that I mean, we could have that be a standalone subscription you see companies like Doc you sign will charge up to $15 a month for small business.
Or we could consider that a.
Bundled offering in some of our core subscriptions and it can help with retention and we'll be testing lots of different ways to go to market with it and I don't think were ready yet to declare exactly which one is going to win.
Thank you.
Thank you.
Thank you one moment for our next question.
And our next question is from Stephen Ju with Credit Suisse. Your line is open.
Alright, Thank you so Dan.
I guess to ask the freemium in the marketing spend question in another way.
Do you feel like with the current curve or conversion funnel that you have in place.
Maybe it makes sense to lay off paid acquisition channels and as you refine iterate.
And hopefully and inevitably improve conversion rates than maybe you can think about playing a greater level of offense.
And I guess do you think this is an appropriate.
Strategy for all of your legal products or only a subset.
Okay. Yeah on the first one I think you're right over the target of what we're trying to do.
We know that we've had.
Overreliance on marketing.
We caught all of this COVID-19 traffic and there was so much demand and yet our product wasn't necessarily ready for that demand and so now that we've done the infrastructure work, we've automated a lot of the orders and we have the ability to go out to market with a lower cost product, we think of that almost as a trade off to the marketing.
Spend that we used to have so I anticipate this will bring down the marketing spend considerably and I think what we're trying to do is show a conversion improvement that even can offset the ov. So like we're trying to get this to be a model that's highly optimized more product driven and less dependent on.
Our marketing spend.
On the second question.
When youre asking kind of apply to the.
New lineup and other formations in products or are you, saying the freemium model yes.
Okay.
I think free plays a role.
Most every product in most.
Models do have.
Some offering which is a sort of a lower cost entry point offering and so when we start to think about things like getting access to an attorney or an accountant as an example.
There are ways to consider that being a benefit to conversion and then building a relationship and then over time augmenting that relationship with more of a paid paid one or or transactional look its a return or if it's some transaction youre doing from a legal perspective so.
The first step, though is proving it out on our core products I mean, we're really singularly focused on making.
The changes that we are to our formations lineup, but theres no reason that it couldnt be extended into other parts of our of our product portfolio.
Gotcha, so that as a final follow up then I mean, your top of funnel should significantly expand with a free version of a product out there and that will that's right I mean, the gateway drug for lack of a better.
Yes, well I think the key thing too is all of our freemium testing to.
To date has been sort of in our product experience. It has not been aggressively testing the top of the funnel messaging so the.
A moment that we get the lineup optimized for free is the moment that youll start to see us really focus on making this more ubiquitous.
Starting to help people understand that this is a great alternative to both the secretary of state directly or two going to an attorney or even going to an account and when we start talking about things like tax advice, and having advisory services and making that lower cost as a starting point into the ecosystem. So free is a really important.
Strategy, we feel like it can be ubiquitous we feel like it's it's just another cost of acquisition, but probably a more effective one and so we're thinking about how do we trade that off from our Cam spend.
The one one last thing I will say to us.
This all comes together to us through miles.
And again Youll start to see a pretty significant acceleration in development in <unk>, but the more services that we offer and the more that we help customers understand that that's where they go to understand their formation process.
The more touches we have with the customer the more likely we are to continue to build the relationship and extend it and so that's a part of the product experience that never existed before and now we're starting to really make momentum things like LTE tax is going to be provided through that experience.
Schedule an attorney.
Appointment through that experience you can see your virtual mail you can get your documents you can do E signature and know that someone's read that document is signing it and so all of that kind of comes back to this ongoing engagement that we're trying to drive which should help all of the subscriptions with retention over time.
Thank you.
Thank you Steven.
Thank you one moment for our next question.
And our question comes from Jackson Ader with Moffett Nathanson Your line is open.
Great.
Taking my questions Paul.
First one is.
On the when you think about share gains.
Macro environment.
Are there any kind of.
Macro environment in 2023 were.
You feel like legal and would be looking at the shops in terms of share gains we're seeing.
Is actually get worse, you would expect legal them to really do better or vice versa, but we're still thinking about.
Okay.
Thanks for the question Jackson.
I do think the worst the macro gas probably the better we're doing relative to our competition, but that doesn't necessarily mean, it would translate into better performance in an absolute basis.
So, but I do think there is that relationship because starting with a really strong balance sheet being cash flow generative, having the brand that.
It's already well understood or known where we don't have to pay for that awareness.
<unk> is a real differentiator, especially with our competitive set that's a little bit.
Almost no brand awareness a lot of it is VC funded.
And I think that environment is changing pretty dramatically for those types of alternatives.
Really strong environment, though I think we still have really strong share gains, especially if we're able to deploy.
Our competitive offering on the free side, where our competition doesn't have the ecosystem that they can offer along it. So we can still pay to acquire customers in a free solution because we have <unk> tax because we have a.
Illegal service that we can we can attach because we have esignature now because we have virtual mail I mean, there's lots of different products that we own directly whereas most of our competitive set they sought a partner for those different things and get more bouncing relationships. So so I think in either of our environment, We look pretty.
Good.
On an absolute basis, we're going to look a lot better and healthy macro.
A negative macro will probably get more and more share.
Okay, Alright that makes sense and then.
Quick follow up on.
On the tax side the shifting skus.
A little bit down in price.
Is any of that.
Either respond to increased competition in the space.
Signal something about.
How.
You guys are thinking about differentiating yourselves in bulk.
Increased competitive market.
Not really I mean, this is more about the uniqueness of our channel So we're getting businesses.
Before they have revenue and they have no tax filing need in our prior lineup. They would've had to have bought a tax filing SKU that came with tax advisory and what we discovered is we had a high degree of people of trade within the first 60 days, which is a refund period because they got the advice they wanted and they did.
Really expect to file. So this is more of a reaction to what we observed and learned from our customers and tuning very specific to what I think is an incredible channel by the way if you think about most tax providers.
They have a sprint where they're trying to acquire a customer and a very narrow window of dates and in our case. We are building a relationship the moment that a business forms by providing them. The tax advice, that's going to help them set up their company properly, which then gives us an entre into a longer relationship over time, so really not a <unk>.
<unk> of response type thing, we still we believe were also lower price than where most people go which is their neighborhood account.
And so in some ways in some ways, it's still very disruptive.
Okay makes a ton of sense. Thank you.
Thanks Ashley.
I am showing no further questions at this time I would now like to.
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