Q4 2022 LegalZoom.com Inc Earnings Call

February 23, 2023

Yeah.

Hello, and thank you for standing by welcome to Illegals, though fourth quarter for year 2022 earnings Conference call.

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I would now like to hand, the conference over to your speaker for today Sara blend you may begin.

Thank you operator, Hello, and welcome to legal them fourth quarter and full year 2022 earnings Conference call. 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.

<unk> 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 and expectations and information available to us as of today's date.

These forward looking statements are also 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.

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.

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 about legal dam 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.

Let me jump right in by sharing our Q4 performance.

Revenue came in at $147 million up 3% year over year Transat.

Transaction revenue was down 10% and subscription revenue was up 13%.

Legal zoom business formations grew 12% year over year in Q4, while U S census formations were slightly down in the period. This resulted in 12% growth and share the largest increase over the last two years.

Adjusted EBITDA was $26 million for the quarter and an 18% margin.

These results are reflective of our freemium test ramping and.

They are an early indication of the opportunity we have to drive meaningful share gains.

As we make the product more accessible we will continue to see improvements in conversion, allowing us to reduce our marketing spend.

Q4, <unk> was lowered by a third contributing to our margin expansion for the period.

We remain confident in the targets provided on our Q2 2022 call of growing share by 15%, while also expanding our adjusted EBITDA margin to 50% in 2023.

As we've mentioned in previous earnings calls our revenue growth is decelerating because one our business is roughly 40% transactional and has a correlation to the health of the formations macro which has been declining and two were experiencing consecutive years of a reduced formations macro which negatively impacts compliant subscription.

<unk> revenue that's attached at the time of formation.

As a result of those two factors, we expect revenue growth in 2023 to be 2%.

As we make this business model transition, we expect the shift to a freemium lineup to be revenue neutral in this calendar year and accretive in subsequent years, given the shift to subscriptions.

This is an unexpected positive results of our testing to date.

As we enter 2023, we're erring on the side of profitability as macro conditions remain unclear.

As the year progresses, we'll reassess marketing spend levels, but in all scenarios, we anticipate an improvement in marketing spend ROI.

As a result, we expect adjusted EBITDA in 2023 to be $100 million or 16% margin.

We want to provide additional clarity on the macro assumptions embedded in the guidance that I just shared.

We expect U S formations as measured by census data to decline mid single digits for the year.

We're also working off the assumption that the decline will accelerate in the back half of the year with an expected recession.

At this point, we are not yet seeing that in our business nor is it observable in the census data.

Philosophically haven't experienced multiple down cycles I very much believe you should plan for the worst case managing capital conservatively.

But also as the category leader, we need to be aggressive and consider it a time to accelerate customer growth through more acceptable pricing and products meeting customers, where they are with that philosophy embedded into our plan with an accelerated decline in the macro due to an expected recession in Q3 and Q4, we still would expect revenue to begin to show improvement.

In the back half of 2023, driven primarily by a buildup of our subscription revenue with the new lineup.

When I joined legal zoom I laid out three strategic goals one to scale to core formations business two to create an ecosystem of subscription services and three to introduce integrated experts.

Since 2019, we've increased the number of formations from 295000 to 474000 or 61% growth.

During the same period the formations macro has grown 44%.

<unk> revenue has grown from 206 million to $358 million or over 73% during the same period, which translates to a 20% CAGR.

And since then we've introduced new higher value products that integrate experts such as LG tax and attorney assisted trademarks, both of which are meaningfully contributed to growth.

While in the near term, we're seeing revenue growth slowdown alongside the macro it's worth pausing to consider a longer more normalized view absent the peak or valley caused by Covid and the post COVID-19 slowdown.

We're now moving from a period of marketing investment to want our product.

Looking ahead, we are beginning to benefit from the significant infrastructure investments required to enable scale or.

Our focus is on building the product experiences that we believe can help businesses better succeed at the time of formation and beyond especially during this economically challenging time.

Given actions already taken in 2022, we expect overall non <unk> operating expenses to remain relatively flat year over year, while materially increasing our investment in technology and development with.

Within technology, our investment in infrastructure is declining, enabling our engineering organization to more than double the size of the team working on our product and product platform.

Youll begin to see the fruits of that increased investment through more product announcements. This year, our product pipeline is robust.

As we entered the year, we continue to make and then progress around our growth priorities of scaling the formations business, we expect to be rolled out to 100% of traffic with the new lineup by the end of Q1.

We will continue to test different components of the lineup for some time to come but a free formation will be a consistent foundational elements.

We also continue to make progress in automating our fulfillment process a precursor to deploying the premium lineup was driving more efficiencies in the cost to fulfill ensuring we are meeting our customers' escalators with much higher volume.

With these investments we have reduced the time to fulfill and the cost of revenue excluding filing fees on a per unit basis for our former formation transactions is also down.

We continue to invest here and believe there are more opportunities to drive higher efficiencies along with a better customer experience for multiple years.

Our second strategic goal, creating a robust ecosystem of subscription services is what allows us to reduce formation pricing.

But more importantly, what we're building here is simply doesn't exist anywhere else.

Running a new business is challenging enough in 2020 to over 70% of the Llc's, we formed where a business of one person in.

And the majority of small businesses formed in recent years operate out of their home or somewhere other than the company office.

Land scape of legal regulatory and compliance changes occurring at the federal state and county level is overwhelming.

Product development is focused on bringing order to it especially for those businesses have one without a staff more time to navigate this complexity.

By mid year, both esignature and virtual Mayo will be completely integrated into the experience virtual meals already part of our formations process and the business performance continues to exceed our expectations.

Additionally, in the quarter, we launched an embedded experience with next insurance and we also launched a banking partnership with chase.

Both are critical services, a formation and both are best in class providers.

Moving to progress on our third strategic goal integrating experts, we've been very busy leading up to tax season recall that last season, we launched quickly considering and an opportunity to learn fast.

Since we are focusing narrowly on a group of businesses right at formation, we sought to understand their unique tax needs are.

Our product at the time was not well integrated and as a result, we aired on higher staffing to ensure a good experience at the cost of efficiencies.

During the course of last season, we discovered some challenges and how we commercialize the product and as a result, we experienced higher attrition than expected.

But we did prove to things that have become the foundation of this season.

We have a powerful channel and given our focus on the needs of the new new to the world businesses, we have a novel accounting experience with the net promoter score above 80%.

We're excited about this tax season, we have a new complexity base lineup, we brought all of the customer Onboarding and tax intake online integrated into my LC and we tuned our scheduling experience also adding a synchronous access to our experts.

Our advisory sessions are trending materially higher than they were last year NPS has held and we are demonstrating improved efficiency per customer and return.

We are now selling lz tax from ILD expanding access to our full base of subscribers. We are prepared for tax season. This year and are already in the heart of it.

Stepping back while we acknowledge the external environment is putting near term pressure on revenue our new freemium lineup is providing an opportunity to go after customer growth and we're in a unique position to do that while expanding our profitability we.

We remain cautious on the overall formations market planning for the worst case.

But we can't help but be optimistic that small businesses are resilient and some emerging trends such as side businesses for those working from home will persist.

Our goal is to fuel that trend by building a world class product that unlocks this entrepreneurial spirit, removing all the roadblocks that our customers can build successful driving businesses.

With that I'll turn it over to Noel.

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 Q1 and the full year 2023.

Total GAAP revenue in the period came in at $147 million up 3% year over year and at the top end of our guidance range.

Transaction revenue was down 10% year over year at $51 million due to a 10% reduction in average order value. While total transaction units were flat year over year.

The expected reduction in average order value was driven by acceleration of our new lineup testing. In addition to strong growth from our wholesale price partner integration channel.

We completed a 115000 business formations in Q4 up 12% compared to the same period last year.

Our formation the growth outperformed the market, which declined 1% during the period as measured by U S census data, revealing new applications for <unk>.

Enabling us to grow our market share by 12% versus the same period last year.

Transaction units were 211000 in Q4 flat year over year as the increase in business formation transactions was offset by a reduction of intellectual property transactions due to the discontinuation of our DIY trademark product and a continued decline in our estate planning and other consumer transactions.

Average order value came in at $241 in the fourth quarter down sequentially from the third quarter and down 10% year over year again, driven by accelerated testing of our new lower price lineup and growth in our partner channel, where we provide wholesale rates.

We expect lower <unk> in 2023, particularly in the first half of the year as we fully rollout our premium lineup and our other lower price Skus and before we start to lap our lineup testing in the back half of 2022.

Subscription revenue was $91 million in the quarter up 13% year over year due to an 8% increase in the number of subscriptions as well as improving our booth.

While our newly introduced subscriptions show healthy unit growth, we have seen a slowdown in our core compliance subscriptions given the muted for a negative formation volumes experienced for several quarters.

<unk> came in at $258 up 9% year over year. The increase was primarily due to growth in <unk> and Earth class Mail, which we acquired in Q4 of 2021.

We expect year over year ARPA growth to moderate throughout 2023, primarily due to the rollout of overall lower pricing and LG tax.

Partnership revenue was flat year over year in the fourth quarter of $5 million early in 2023, we exited our partnership in the uncontested divorce space, which has an approximate one point impact on our expected revenue growth for 2023.

In Q1 inclusive of the impact of this partner exit we expect partner revenue to be flat to this past quarter.

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

Gross margin came in at approximately 70% of revenue in the fourth quarter up from 68% in Q4 of last year.

Slight improvement in margin was largely due to efficiency gains from cost reduction initiatives implemented in Q3, partially offset by higher fulfillment costs driven by continued growth of <unk> tax and ECM.

We expect a slight decline in gross margin in 2023, as we experienced higher filing fees as a percentage of revenue due to the increase in business formation volume as a result of the rollout of our premium lineup.

Sales and marketing costs were $46 million in the fourth quarter or 31% of revenue down 14 points from Q4 of last year.

Customer acquisition marketing came in at $32 million down 33% year over year as planned we continue to reduce our lower converting grand media spend in the quarter.

We're also benefiting from higher conversion rates within our existing traffic is.

Combination is serving to drive higher efficiencies across our overall spend and we are excited to amplify. This result, with improved marketing messaging centered around three as we fully rollout our new lineup.

Technology and development expenses were $14 million in Q4 up.

$2 million year over year as our primary focus remains in product and engineering.

We are now also fully reflecting the added head count costs related to our recent acquisition of <unk> and.

In 2023, we expect to continue to grow our technology team as we begin to rely more on development of our products versus marketing spend to drive growth.

General and administrative expenses were $16 million in Q4 up $3 million year over year, primarily due to higher professional fees and consulting costs.

Adjusted EBITDA was above our guidance range at $26 million for the quarter compared to $7 million in the fourth quarter of 2021, and our base deferred revenue decreased $4 million in the period we.

We are pleased to see the improvement in adjusted EBITDA as it reflects the multiyear infrastructure investment that has helped to generate efficiency improvements across multiple facets of our business and gives us greater visibility and confidence in our ability to deliver in 2023.

In the fourth quarter, we continued to execute on our $150 million share repurchase authorization, we repurchased a total of $3 6 million shares of our common stock at an average price per share of $8 66.

For a total repurchase of $31 million.

Through the fourth quarter, we have completed $95 million in buybacks total of $9 2 million shares repurchased which represents a reduction of approximately 5% of our prior year end fully diluted share count.

As of December 31, 2022, we had cash and cash equivalents of 189 million and no debt outstanding.

I will now provide guidance for the first quarter and full year 2023 for.

For the first quarter of 2003.

We expect total revenue of $153 million to $157 million were flat year over year growth at the midpoint.

We expect adjusted EBITDA of $17 million or.

Or 11% of revenue at the midpoint.

For the full year of 2023, we expect total revenue of $620 million to $640 million or 2% year over year growth at the midpoint.

As Dan mentioned, we expect adjusted EBITDA of $100 million or 16% of revenue at the midpoint.

And with that let's please open the call for questions.

Thank you.

Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

Withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Andrew Boone with JMP Securities. Your line is open.

Thanks, So much for taking my questions. Dan I think you said in the prepared remarks that the transition to freemium is expected to be revenue neutral in 2023 can you just break that down a little bit more can you talk about the assumptions here across attach rate and then conversion and then noelle in your commentary I think you said you'd amplified.

The marketing message around three lineup.

And our Google searches were starting to see some some free.

Wording in search results can you just talk about the improvement that's expected in marketing there or any uptick that you would expect an efficiency as you guys roll out that messaging. Thanks, so much.

Okay. Thanks for the question Andrew.

I think the first question is really around a little bit more of a breakdown of the freemium test and what we're seeing.

Ed in the prepared remarks.

To share that we were a little bit surprised that it's revenue neutral in year, one we were sort of assuming that because we.

Get a different mix of subscribers relative to transactions that it may defer some revenue a year or two.

The reality is it.

It covers that revenue in year, one while still seeing a mix shift so youre too remains pretty positive on the revenue side.

And.

What I should just stepping back here just.

Reiterate this is very specific to testing and LLC, only which is about three quarters of our formation transactions.

We're seeing very clear conversion improvements and you can see the partial results of that conversion improvements in Q4 with the share gains that we recognized.

And it's probably going to mean that we're changing a bit around what we're doing from a marketing standpoint, which probably leads into the second part of the question, but I just want to reiterate something here that are free strategy really only works because of two things that we've been focused on one is driving efficiencies through our.

Restructure so while reducing the cost of process, which allows us to scale it and still deliver on the SLA, but probably more importantly is over the last couple of years, we've been investing very heavily in.

And owning a subscription ecosystem of services required rate at the time of formation. So we've always had.

Our strong presence in compliance subscriptions, but obviously, we've added Rev, which does E signatures, we're adding virtual male.

We have healthy tax which is a new we have some partnerships that are being added and what's really interesting about it is we're bringing it all together into a single experience, which really just does not exist in the category. So there's a lot of exciting stuff there and I think premium is a bit of a tip of the spear.

But theres a lot thats happening in our ecosystem.

And Andrew.

Andrew This is Noel just too.

So that's your second question. So we have been very limited and what we've been able to test around free messaging in the market and so as we fully rollout our lineup will be doing lots of AB testing. There as you can imagine I will look to broadcast hit across all channels. So.

SCM as well as the contextual marketing around Seo display ads on our social channels, so really being able to roll it out everywhere and so we're expecting that not only need to have an impact on overall traffic that we drive to the site, but also on conversion rate.

And our experience as well just as you.

Hit them early on with that message of free.

Likely has an impact on conversion and the product flow as well. So there's a lot we need to learn so you don't have an answer on the necessarily expected efficiency that it drives, but we'll be iterating on that throughout the year, but it clearly I think when you think about the conversion improvements, we're seeing is clearly, allowing us to dial down.

The Cam spend in the aggregate and then we haven't yet tested Nols point because of the ability to test on top of a test marketing efficiencies.

Would expect that there'll be some pretty material efficiencies.

Thank you.

Please standby for our next question.

Our next question comes from the line of seamless about quarter with Morgan Stanley . Your line is open.

Great. Thank you very much I first wanted to dig in on the improvement for subscription revenue in the back half of the year just given many new customers are tied to that business formation, which has been soft and expect it to get a little bit softer it sounds like what drives the improvement in subscription revenue and what are you seeing in terms of attaching subscriptions.

<unk> had more of the existing customers. Thank you.

Yes. Thanks this is <unk>.

Really what I was just referencing and the premium taxes that we've been building out an ecosystem for some time.

And we're starting to integrate all of those new subscriptions more tightly into.

Into the formation experience and also even post formation experience. So if you think of something like Lv tax law.

Last season, it was integrated into formation, but it wasn't part of miles.

And we Werent doing lifecycle marketing back to the full base, we've started to do that really in Q4.

If you think about virtual male that was actually fully integrated in Q4 and it's.

Other than a couple of states, which have different regulations around the postal service.

It's essentially launched out to the full LLC space, we haven't yet done it but youll see us integrating Rev and D E signature capabilities.

Which will be another opportunity as we get into 2023, but pretty much across the board, we're starting to do a better job of integrating these both informations and post formation.

With miles, which will continue to drive that subscription growth overtime.

Got it and then just a follow up on on tax season.

We're approaching that Dan what's the benefit, particularly for blended our opinion that we can see from just a new kind of better product rollout heading into the season and how are you seeing demand trends towards the high end versus the low end product.

Yes. Thanks, Thanks for the question Elizabeth the follow up.

Tax piece is interesting and that what we've done this season as we've introduced an advisory product, which is actually a lower priced subscription so that will have the effect of decreasing <unk>.

But we do feel like we'll be attaching more customers because it's more relevant to a larger number of our pre revenue are very simple businesses that arent yet thinking about filing we are not going to share the mix on this but I would say still the majority are people who are looking for a filing relationship and one of the <unk>.

Really really interesting pieces of tax.

And the advisory part of the businesses as we start to establish that relationship you would think that we have pole position.

Actually serving that customer when they are ready to do a filing as well. So we can consider that almost like a pipeline into our filing business. So the tax season.

Actually has started so I should say if we're not getting ready we're fully in season at this point and that commercialization change with Super important, but I would say equally important is what we did in the product last season, a lot of what we were doing with customers was offline or somewhat disjointed.

From an experience standpoint, because we had a lot of experts, but we didn't have the right infrastructure. This season, we've taken all of the Onboarding process and put it in our products. We've taken all of the intake, which is essentially building tax software into miles.

And we now are able to track cohorts of customers, we are able to reach out and understand where people are actually failing in the process of where they may get confused and mutually that reach out through an expert and so it's just feeding back into loop that helps us get smarter and smarter as we get through tax season and building out the offering so it's pretty exciting I feel really good about where we are with tax season, we're going to.

To learn this year, but it is scaling nicely.

And just to build on that Elizabeth.

Not only as Dan mentioned is two advisory SKU help us with upsell kind of meeting the customer where they are where they are at at the time, and then being able to upscale up sell them in the future.

So things that can have an impact on overall retention and our tax subscription business as well.

And.

With all of the infrastructure and process improvement the damage is alluding to.

<unk> earlier uptake in terms of tax preparations and we're expecting to therefore prepare a lot more return this year.

It will also help to drive retention in the product.

Understood. Thank you so much.

Great. Thank you.

Thank you please standby for our next question.

Our next question comes from the line of longevity with Citi. Your line is open.

Hi, Dan This is Jay kind of like on for Ron.

So my first question was on the channel partnerships.

Was wondering if you could share more about the percentage of this transaction units that come through the channel partnerships.

How you think about the opportunity to expand distribution with those partners and then just the second question was just on the automation of processes and if you could share more just about how that improving the efficiency and.

In the business.

Yes, thanks for the questions Jay.

On your first question on partnership Channel I'd say thats still emerging for us.

Don't break it out.

But it is growing at this point I'd say many of the partners that we have today.

Leverage our brand there are some where they do it within their brand we built a pretty unique platform here, where it can be customizable and it can be integrated directly into any solutions through api's you can almost think of us as.

The stripe of small business formations and that enable other people to distribute them.

We do have some newer partnerships, where they're starting to contribute but the one thing I'd say is we also have some legacy partnerships, where we are actually terminating some relationships. We we have a history at times of actually partnering with competitors in the industry and so we've decided that thats something that we don't want to do.

Forward some of those are material in terms of for instance, active subscribers and so that might be a little bit of a headwind from a unit perspective.

But theyre very low <unk> units and so when you think theyre not that material. When you start to look at it from a standpoint of subscription revenue. So there's lots of puts and takes there we're not really breaking out any specific components of it or how much of it is of our total mix.

It's not a significant amount at this at this point.

On the automation side I mean that has been a significant focus from the moment I got here.

When you think about fulfilling an order oftentimes an order goes to the secretary of state.

It comes back it needs to be fulfilled sometimes with also within <unk> and you have things.

Things like submitting operating agreements annual reports and so when I joined it was somewhat manual process, we've been on a steady journey here.

We have been reducing the cost associated with fulfilling primarily our LLC transactions, because thats, where the bulk of our volume is we're starting to move into other areas as well. So theres still room to have continued efficiencies there, but that's what's enabled our freemium launch and wed expect that that helps us from that.

Cost of revenues perspective for some time to come and the one thing I'll just call out, though as we do launch freemium, we have a higher mix of filing fees as well that are associated with.

The actual transaction, which somewhat mutes.

The benefit from some of the automation. So again couple of puts and takes there, but we feel really good about where we are.

One thing to add and just overall as Dan talks about those operational efficiencies through automation and infrastructure investment.

That's what's helping to drive the outperformance that we saw from an adjusted EBITDA.

Dollars and margin standpoint in Q4, and what gives us confidence and visibility into our target.

EBITDA adjusted EBITDA and EBITDA margin for 2023.

I appreciate it.

Thank you.

Please standby for our next question.

Our next question comes from the line of Mario Lu with Barclays. Your line is open.

Hey, there this is Jack on for Mario Thanks for taking my question.

On the topic of generative AI technology I'm, just curious as to maybe how you guys do this.

If it's something you can leverage with your own services or Alternatively, if its maybe more of a potential threat.

In terms of competition moving forward and how this might impact your strategy. Thanks.

Okay. Thanks for the question Jackup.

I always think of these things more from a standpoint of the opportunity.

I have a product background and have lived through multiple platform shifts in technology shifts.

Going back to desktop to web and mobile.

And so I think this is no exception.

I think we could leverage chat GPT as a way to enable our experts to be more productive I mean, if you think about.

If you consider a law firm and the role of apparel legal and a lot of ways. What we tried to do as an expert platform is be apparel legal for our attorneys.

And the function of getting in summarizing data.

Is sort of tailor made for that and helps the expert be much more efficient. So that's that's a good example of how we might leverage it.

What's interesting too from a competitive standpoint or from an impact to our business standpoint. It is a regulated business when youre talking about legal services and an unauthorized practice of laws as a real issue and so we don't see something like chat GPT impacting how we provide expertise through through our attorneys.

And I also feel like from an SCO standpoint, certainly play with it a lot. It's interesting because we have a lot of authority, we actually come back and a lot of the responses around how to form a business. So it looks like another flavor in a way of SCO and if you had asked me I would say ultimately chat.

<unk> will probably be more side by side with search and there'll be different use cases for each and most likely I'm assuming on the consumer side built probably evolve into some sort of advertising model associated with it so maybe a different form of the same type of.

A function of search, but if you step back from all of that.

I think if anything it's just reemphasize is that the biggest brands are going to win.

And that you really need to establish direct traffic.

And when you think about us relative to our competitors and we've talked about this before our awareness level is four to five times. The next closest competitor and so we have a pretty substantial lead there as well so net net I feel like it's good for us it probably isn't good for an offline attorney or.

I don't believe the government will adopt as quickly as we can and so the secretary of state sites, probably won't get as much innovation out of chalk GPT.

So net net I think it's a tailwind.

Great. Thank you.

Thank you Lee.

Please standby for our next question.

Our next.

Comes from the line of Matthew Pfau with William Blair. Your line is open.

Hey, great. Thanks first wanted to ask on the guidance revenue.

Sorry could you help maybe give us some idea of how we should think about the split between subscription revenue and transactional revenue for the year at least at least directionally.

Yes, so we're not providing any specific guidance across both lines, but directionally I think.

With the rollout of freemium as Dan talked about earlier, there is naturally an impact on the transaction side of the business, where we're seeing higher conversion, but that's being offset by <unk>.

And the natural increase in business formation volumes as a result of premium is driving more subscriptions.

So while we expect a slowdown in subscription revenue growth year over year.

<unk>, we're still expecting subscription revenue growth, whereas on the transaction side due to the.

The macro which we talked about our expectations there.

And lower Cam spend and the impact of premium we actually would expect it to be down year over year.

Got it and then with the release or anticipated release of these new products. This year and the products that you have integrated over the past year.

How do you go to market with those products to customers without ramping up marketing spend is it bundling or are there. Other options that you are looking at two to go to market with these products.

Yes, I mean thats, the nice thing about our ecosystem.

Really is a perfect adjacency to the formation transaction.

And it's also a great adjacency for post formation first 30 to 60 days. So we already do a substantial amount of attaching as you go through to form your business.

A good example would be you.

You have to provide a business address.

Talk about how many of our businesses are like a single member business and are working from home or in their car.

They may not want to provide their address.

And so that's a perfect area to cross sell virtual male.

And so that's a good example of how we approach it but but separately once you form.

The initial thing that you do post formation as Youre looking at the status of your of your entity.

So we take you to my LT when Youre in miles, we introduced you to different tasks that you should be thinking about as being brand new small business like a perfect example would be you've just established an entity to protect your personal assets that you probably haven't yet protected your business assets.

Business insurance is a really important component of that so we'll start to lay out these different types of ecosystem solutions for you directly in that experience when youre starting to think through all of those formation services. So it's a it's a.

Pretty.

Unique channel and that it's a pretty captured channel.

Part of our experience already they're part of the formations workflow.

So we don't need real marketing cost.

The cost associated with some of these subscriptions is more inbound sales, where if you are a complex service like Lv tax you may want to talk to a salesperson to understand what's included where you would fall a package you should you should actually be purchasing but it doesn't require any.

External cam or anything like that because it's directly within our ecosystem.

Got it.

Thanks for taking my questions.

Sure. Thank you.

Thank you please standby for our next question.

Our next question comes from the line of Brent Thill with.

It's Jefferies.

Jeffrey Your line is open.

Hi. Thank you. This is John Byun on behalf of Brookdale too.

Two questions.

Information you took a lot of share at 12% versus minus one.

Wandering.

Why you are taking so much share is at the premium lineup.

The reasons, it's just accumulate.

In fact of all the improvements you've made and then second on the freemium offering.

When we look at some of the Kpis and results I mean, where will we see that show up the most is it.

<unk>.

Yeah, Hi information then.

Should we assume that thank you.

Yes, thanks for the questions John .

Yes, so freemium was a big component of the of the share gains partner Channel also was a contributor to the market share gains.

So I think those were really the two biggest pieces.

I'd also just note that werent fully deployed in Q4.

So yes, our obviously our intention is to do better on share going forward and then in terms of Kpis will be most impacted on the freedom to lineup. The way to think about premium is there is a certain number of our customers that are attaching a free SKU and Thats free SKU is really just the formation transaction that's now.

Free.

Which used to be at the low end. It was charged $79. So you see an impact on <unk> based off of that reduction.

But we also see attach of some transactions.

Like an operating agreement or an <unk> or a business license and so that offsets a portion of it but overall the <unk> will go down and then you see slightly lower attach rates, but the number of formations to attached to on the subscription line will go up.

And so you end up seeing in the aggregate.

A better subscription revenue over time and that obviously, we will start to build.

Because we're talking about most of those being our all those being ratable.

To build up over time, so that's the main way that it'll show up in the lines I don't know if I missed anything at all.

Okay.

Yeah.

Great. Thanks very much.

Thanks, Sean.

Thank you please standby for our next question.

Our next question comes from the line of Jackson Ader with Moffett Nathan Your line is open.

Great. Thanks for taking our questions guys.

First one is on.

I can spend and maybe its impact on future.

Future revenue growth right I know, it's too early to start talking about 2024, but like what should we be thinking about in terms of can spend being down so much and what that might mean for kind of steady state revenue growth either on the transaction side or on the subscription side as we move forward.

Yeah. Thanks, Thanks for the question and the Cam side, we saw a bit of a steeper decline in Q4 as we were lapping some more material spend that was non seasonal typically we don't do a lot of brand spending in Q4.

But in 2021, we did test it we didn't like the yield on it and so we would plan on doing it again, but we've also just sort of declined the full <unk>.

Brand spend bucket.

I don't think you'd see going forward.

Denticle reduction, you'll see a more muted reduction, but the bigger point would be that as soon as we deploy the premium lineup. That's when we'll probably start to build up our marketing spend again and optimize it around.

Clearly different positioning in the lineup and it also opens up some new channels and we don't want to go into all the details of what our plans are to do on the on the marketing side, because obviously, our competitors listen and they've been emulating some of our strategies.

But we do think that theres going to be some opportunities to spend a bit more over time.

What I would say, though again, what's really going to.

The longer term driver of growth in our business is going to be the subscription ecosystem and it's hard to sort of step back and just think about this but we're now seeing multiple years of or multiple periods of decline in the macro and we still are showing.

Strong growth in our subscription side of our business, what we would expect us at some point and we're not going to try and predict one that is that the macro goes back to its historical level of growth, which is 5% and it's going to amplify the model, it's going to you're going to start to see the leverage built out on not just the mix going to.

Subscription, but the number of subscriptions that we offer and that really is where our business model kick in it's very difficult to see that in the throes of declining macro volume, but it wont be when we see that turnaround.

Yes.

Jackson.

No I'll just add to that one of the obviously the macro has a factor on our level of Kim spend as well and we talked about our expectations for the macro for the full year, we've taken a pretty conservative approach to how we're thinking about what will happen in the macro we have a sort of.

<unk> declined through the back half of the year.

Early in the year, thus far the macro has been.

Pretty healthy overall relative to our plan assumptions and so if that continues then that would obviously impact the level of spend we have around cam for the year as well. So we haven't seen kind of the signals of the macro continuing to deteriorate, but we do have those assumptions in our plan today.

Yeah, that's a good point I mean, even as we think about January .

And normally I don't speculate forward, but even as we look at February .

The macro has been a bit healthier than we would have expected and I actually wouldn't be surprised if you see growth in the macro in February .

That's one area, where again, we're leading with conservatism because we know we can move very fast on the cam side and respond and react if we need to.

Okay.

That makes a ton of sense, if we switch to the Lz tax side nice small business tax you've got a brand new competitor this year with Intuit.

Im curious if youre seeing any.

Some early learnings whether some of the moves that some other competitors have made it surprised you how youre reacting to them.

It's early goings for both of you and it's kind of.

Swimming in parallel.

Yeah.

Fair question I'd say.

If I step back and I'm, obviously familiar with that competitor.

Familiar with the offering because it sort of.

Led that was we were building it.

I'd say, we're doing something a little bit different here.

If you think about most small business returns they really are coming from independent accountants.

There are some players that I would almost consider mass market and starting from a consumer standpoint that are sort of amending their consumer offering and creating a seasonal tax products for small businesses.

It's very different than what we're doing it's almost like if you were building in.

In SUV and you started out with the chassis of the sedan.

And you are trying to sort of bend it to do different things in our case like we are starting with a customer oftentimes before they have revenue or have a return.

And so that's a different channel and a different market to go after and we're starting more from an advisory standpoint that crescendo in AR.

In a filing.

And so that when you when you think about how you design that and you think about the product that you need to deliver against that it's much more of a year round service.

Also have to be able to identify these types of prospects through a pretty unique channel. So we havent really bumped up against anybody that I feel like is taking customers from our existing channel or base.

A more material way this season like we'd like our attach rates, we think the volume of customers that we have coming is good.

Never discount any competitor at all and there's a lot of great competitors out there, but we really feel like we're doing something different like we are going after much smaller businesses, we're going after them in a very early portion of their lifecycle and we're focused heavily on advisory.

Got it alright, great. Thank you very much.

Thank you.

I'm showing no further questions in the queue.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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Hello, and thank you for standing by.

Welcome to <unk> fourth quarter full year 2022 earnings conference call at.

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I would now like to hand, the conference over to your speaker for today, Sara Glenn you may begin.

Thank you operator, Hello, and welcome to legal <unk> fourth quarter and full year 2022 earnings Conference call. Joining me today is Dan <unk>, Our Chief Executive Officer, and Noel Watson, our Chief Financial Officer.

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.

Forward looking statements are based on management's assumptions and expectations and information available to us as of today's date.

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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.

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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, Sarah and good afternoon, everyone.

Let me jump right in by sharing our Q4 performance.

Revenue came in at $147 million up 3% year over year transaction revenue was down 10% and subscription revenue was up 13%.

Adjusted EBITDA was $26 million for the quarter and an 18% margin.

These results are reflective of our freemium test ramping and.

Under an early indication of the opportunity we have to drive meaningful share gains.

As we make the product more accessible we will continue to see improvements in conversion, allowing us to reduce our marketing spend.

In Q4, <unk> was lowered by a third contributing to our margin expansion for the period.

We remain confident in the target provided on our Q2 2022 call of growing share by 15%, while also expanding our adjusted EBITDA margin to 50% in 2023.

<unk> revenue that's attached at the time of formation.

As a result of those two factors, we expect revenue growth in 2023, 2%.