Q2 2023 LegalZoom.com Inc Earnings Call
Good day and thank you for standing by welcome to the legal Zoom second quarter 2023 earnings Conference call.
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Please be advised that today's conference is being recorded I would now like turn the conference over to your speaker today Madeleine Crane Investor Relations. Please go ahead.
Thank you operator, Hello, and welcome to legal than second quarter of 2023 earnings Conference call.
And me today is Dan where to call, 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 adult.
Such forward looking statements are based on management's assumptions 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 referred to in the press release, we issued today and in the risk factors section of our most recent annual report on Form 10-K 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.
We use non-GAAP measures and making decisions regarding our business and we believe these measures provide helpful information to investors.
These non-GAAP financial measures are not intended to be consideration in isolation or as a substitute for results prepared in accordance with GAAP.
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 and dotcom.
I'll now turn the call over to Dan.
Good afternoon, everyone and thanks for joining our call.
I am excited to discuss our strong Q2 financial performance and some significant product and platform updates.
Again with a brief summary of our financial results.
Revenue came in at $169 million up.
A 4% year over year.
Adjusted EBITDA was $30 million for the quarter, which equates to an 18% margin.
Because informations for the quarter significantly out performed the market growing 42% year over year, while U S census formations grew 7%.
As a result share for the quarter rose, 33% year over year. These results demonstrated continued momentum after a strong Q1 performance.
Going deeper into the results Q2 subscription revenue of $102 million grew 12% year over year benefiting from both an increase in <unk> and new subscription growth from the premium lineup rollout.
Transactions declined 26% year over year as a result of the premium lineup Q.
Q2 represents the trough of lower year over year, <unk> performance and we expect a reversion of this trend in the back half of the year as we lap the new lineup rollout.
Now I would like to lead with an overview of an important product addition to our portfolio.
Last week, we announced the launch of LG books, which supports all three of our strategic pillars to scale the business build the ecosystem and integrate experts.
One of the biggest challenges our customers face for launching their businesses is navigating the complexities of bookkeeping and taxes.
After being in the market with LD tax for two years, we recognize there is a gap in the market for solar printers.
These businesses have tax questions at formation that require expert they want a simple accounting solutions replaced Tds offline methods like storing bank statements and receipts.
And they wanted integrated and simplified tax experience.
Their main alternative today is to navigate complex and expensive accounting software.
Couple that with an offline accountants.
These solar printers are a key customer demographic for legal zoom.
Based on our recent customer study roughly two thirds of our formation customers, our solar printers, which we define as either single member Llc's for sole proprietors.
Over 90% of our formation customers form with us before they consult a business tax professional and only a little over 5% have established a bookkeeping method prior to forming with us.
We build what we believe to be the most well design solution for this large market with.
With LG books, Youll be able to create your first proposal with access to an attorney if needed.
Send it for digital signature go from invoice to electronic payment download and Adam Auto categorize expenses from your bank account and even more importantly, seamlessly integrate with LTE tax.
During the launch will also be providing free unlimited access to a CPA through the product to introduce and promote the value of our highly vetted network of accountants.
LG books reaches across all of our strategic pillars. Our first strategic pillar is to scale the business and LG books represents a new customer entry point for legal.
LG books, conserve SMB that formed with us already or someone who is not yet formed but is looking for a simpler lower priced alternative to today's bookkeeping solutions.
Our second strategic pillar is to build the ecosystem.
Z books as a tool our customers will leverage beyond the point of formation driving engagement, while also opening up a new financial ecosystem of subscription services.
Our third strategic pillar is to integrate experts and LG books is designed to cohesively integrate with our expert offerings.
Accounting and taxes go hand in hand, and LD box users, who subscribe to LSE tax will be able to transfer their data to our CPA is to simplify tax time.
We believe this represents a meaningful opportunity to naturally upsell, our lz tax service at the moment of need versus selling LTE tax to customers that may not be required to file a return at the time of formation.
In addition to our LNG books announcement, we also continued to make significant progress across our entire subscription ecosystem on.
On prior calls I've noted the lack of an integrated post formation experience.
In line with our second pillar to build the ecosystem the creation of a cohesive experience within miles has been a top priority.
Along with the launch of LG books, we launched a complete redesign of the <unk> experience. This is important for a couple of reasons.
First many of our solutions are more valuable together than apart like forms an esignature is or proposals in attorney consults and now books to taxes, and so the experience needs to be fluid across offerings.
But equally important as we're creating a central hub for small business compliance. Our goal is to drive engagement that will enable post formation discovery and cross sell.
Our formations channel is incredibly powerful and over time, we believe we can expand our relationship post formation through the miles the experience.
I am excited by the significant redesign and by the realization of our goal of creating a new software category, serving small businesses legal compliance and financial needs in a single destination, which is something that doesn't exist anywhere else today.
And while it's a meaningful first step we will continue to invest in our customers can expect ongoing enhancements as we continue to build out the experience.
Turning to our core business and our first strategic pillar scaled the business in Q2, we drove impressive market share gains while also improving operational efficiencies in our core formation business.
We're benefiting from our infrastructure investments to streamline fulfillment, which are lowering the cost per formation unit, while helping us fulfill orders quicker for our customers.
In the near term these efficiencies will continue to be offset by higher filing fee cost and the scale of our Belgian tax and virtual now.
Our premium offering continues to resonate in the market in Q2, <unk> was down 18% with traffic improving and almost all marketing efficiency measures showing strong results.
Overall user session growth was strong up 13% for the quarter.
Better measure to assess health and intense as SMB product sensors, which was up more than two times our user session growth.
This metric strips out the consumer side of the business as well as lower intent educational traffic and focuses solely on people that begin the product purchase flow.
As a result of increasing traffic. We believe there are more opportunities to improve conversion as we refine the offering to fit this new expanded audience.
Finally regarding our third strategic pillar integrate experts, we continue to make steady progress.
And our first tax season, our focus was on understanding our customers' needs, while beginning to build out an online experience and.
In our second season, we rolled out enhancements to the <unk> product and platform improved commercialization and increased service levels.
As a result, we remain on track to double the number of tax returns we file in 2023.
But as I mentioned in our last earnings call, we remain constructively dissatisfied with the retention rate of this service and.
<unk> of our third tax season, we have identified a clear set of opportunities within our control to make sure that we're getting the right experience to the right customers and retaining them for longer.
Our actions here will focus on driving higher customer consideration of our tax products as.
As we narrow in on the right audience, the resulting impact will likely be a period of lower attach rates, while still experienced higher attrition rates from our existing base.
We expect this will drive long term positive results, but will be a headwind to revenue into 2024 as we work to implement these changes.
We remain confident in the long term opportunities surrounding LTE tax, especially as you consider the most important feature of taxes as integrated bookkeeping, which we now offer.
We're also hard at work to integrate experts with a generative AI powered product by the end of the year, we expect to have a re imagined product and platform that will help small businesses review understand and collaborate with experts on legal documents.
As I've said before generative AI can't replace attorney advice, given challenges with accuracy as well as regulations around the unauthorized practice of law.
We believe that only when coupled with access to an attorney can the full power of Gen. AIB realized legalzoom stands apart from our competitors as a platform with an established network of independent attorneys available to unlock this opportunity.
We believe this platform will drive many growth opportunities recall that legal documents are a very small portion of our business today.
The branded market leader in the SMB legal services space. This is an unrealized opportunity that we feel like is ours to win in.
In addition, it will leverage the power of our ecosystem, our attorney network and E signature offering our core components needed to bring legal forms to life through a very contextual cross sell.
We look forward to providing more details on our efforts here in the coming quarters.
Last quarter, we unveiled our new mission to unleash entrepreneurship and it's clear, we're making significant progress against this goal, we're setting ourselves apart as the sole online platform, providing the solutions small businesses need right at the time of formation and beyond all under one roof.
Product innovation is what drives long term growth I've been mentioning product philosophy is a focus over the last couple of quarters.
<unk> by the pipeline Theres still more to come this year, both in terms of our LD books roadmap and other new product releases in the queue.
In closing I am extremely pleased with our second quarter results. During Q2, we demonstrated solid performance with record share gains and continued fiscal discipline I am excited about the talent we have in place the customer growth, we're achieving and most importantly, the pace of our innovation I'm also excited for what's to come as we are still.
In the early innings of our product evolution.
I'd like to acknowledge and thank all of our <unk> employees for their hard work and dedication towards helping unleash entrepreneurship and with that I'll turn it over to Noel.
Thanks, Dan and good afternoon, everyone.
To discuss our continued strong performance.
We remain focused on re accelerating revenue growth and improving profitability.
In the second quarter, we significantly expanded our adjusted EBITDA margin year over year through continued marketing efficiency and cost discipline, while also growing our topline.
Looking at our second quarter results in more detail.
Total GAAP revenue in the period was $169 million up 4% year over year and exceeded the top end of our guidance range.
Transaction revenue was $60 million down 7% year over year, we experienced strong growth in transaction units offset by a reduction in average order value driven by the full rollout of our new premium lineup in Q1.
Transaction units were 283000 up 26% year over year led by the increase in business formation transactions and partially offset by a decline in consumer and intellectual property transaction.
We completed 160 <unk> hundred thousand business formations in Q2 up 42% compared to the same period last year.
Our market share business formations increased 33% year on year to 11, 4% due to the new lineup.
Looking ahead, while we expect to achieve at least a 15% year over year increase in market share for the full year, we do expect the year over year growth and share gains to moderate in the back half of 2023 as we begin to lap the initial testing and expanding the rollout of our free product and the wind down certain channel partnerships.
Average order value was $214 in the second quarter up sequentially from the first quarter and down 26% year over year, driven by our lower priced lineup.
We expect year over year decline in average order value to improve to low single digit decline by the end of 2023, as we lap our premium rollout and exit certain historical partnerships.
Subscription revenue was $102 million in the quarter up 12% year over year due to an 11% increase in the number of subscriptions and continued improvement in our group.
Looking ahead, we expect subscription revenue growth to decelerate slightly through the remainder of the year as a result of headwinds and <unk> and to a lesser extent the aforementioned changes in our partnership channel.
<unk> came in at $259 up 3% year over year and flat sequentially from the first quarter.
The year over year increase can primarily be attributed to the increased mix of higher priced Tac and virtual enel subscriptions within the total subscription base and pricing improvement in our consumer subscription.
Looking ahead to the back half of 2023, we expect year over year ARPA growth to remain in the low to mid single digits. However, as we launch new products and continue to test and optimize our lineup. We are focused first on solving for the best overall outcome from a customer experience and lifetime value standpoint.
Partnership revenue was $6 million up 2% year over year.
Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis.
Second quarter gross profit margin was 65% compared to 67% in Q2 of last year.
The decline was driven by higher filing fees as a percentage of revenue as a result of increased business formation volumes as well as an increase in revenue mix from LG tact and that will be virtual mail, which are still sub scale in an investment mode.
Sales and marketing costs were $51 million in the second quarter were 30% of revenue an 11 point improvement from Q2 of last year.
This includes an 18% reduction in customer acquisition marketing cost year over year.
We expect sequential declines in can spend in each Q3 and Q4 as we remain focused on marketing efficiency gains.
Technology and development expenses were $14 million in Q2 up $3 million or 25% year over year.
We expect similar year over year growth in this line in the back half as we invest in product and engineering talent.
General and administrative expenses were $15 million in Q2 up $1 million year over year.
Our solid revenue results and continued focus on profitability drove stronger than expected adjusted EBITDA of $30 million for the quarter, reflecting an 18% margin.
This compares to adjusted EBITDA of $18 million or 11% margin in the second quarter of 2022.
Our deferred revenue decreased $2 million from the prior period.
In the second quarter, we continued to execute on our $150 million share repurchase authorization.
Purchased a total of 378000 shares of our common stock at an average price per share of $8 <unk> or a total repurchase of $3 million.
Since inception, we have completed approximately $105 million in buyback with a total of $10 4 million shares repurchased.
As of June 32023, we had cash and cash equivalents of $239 million and no debt outstanding.
I will now provide guidance for the third quarter and full year 2023.
Macro conditions remain a key factor in our performance and outlook as this business formations remained healthy in the second quarter and have been steady year to date.
We've adjusted our outlook to reflect current trends.
Based on these factors. We currently expect third quarter total revenue of 159% to $161 million or 3% year over year growth at the midpoint.
And third quarter, adjusted EBITDA of $26 million to $28 million were 17% of revenue at the midpoint.
For the full year of 2023, we are raising and narrowing our guidance for total revenue to $642 million to $652 million or 4% year over year growth at the midpoint.
As a result, we are also raising our full year adjusted EBITDA to a range of $105 million to $110 million or 17% of revenue at the midpoint.
And with that let's please open the call for questions.
Thank you.
A reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Andrew Boone from JMP Securities.
Thanks, so much for taking my questions.
Two please on the books I would like to step back and think about becoming more of a system of record business, Dan what does that on walk in like three to five years. What does this enable you to do as you guys become just have higher touch points with consumers and then secondly, nearer term how do we think about LTE books in 'twenty three 'twenty four.
We think about in terms of timing.
Thanks, so much.
Yes, thanks for the question Andrew.
Yes, <unk> is a big bet for US I mean, I think it's probably worth just stepping back and explain why we entered this space first and then get to the question on engagement, but first principles as we go where our customers take us.
And we just haven't found a solution that maps really well to the core segment of customers that we have that our solar printers.
And these are smaller businesses.
Single member LLC sold props.
Typically don't have employees.
And what we've seen is that most providers use a simple skew more as a teaser to move a customer up the lineup.
Then to really solve that very specific need in and what that means is one of a couple of things happens either.
Sort of limited in terms of the functionality to drive people up the lineup or over time. It just gets floated it gets feature rich and if it gets successful it gets over monetize and so.
Again, two thirds of our base are these types of customers and we just haven't found something thats been purpose built for them.
So when we think about our channel.
95% of our customers they come in without an accounting solution.
We know that a lot of people come in with tax questions.
They don't need a full time account, but they have very specific tax questions that they want to asking two thirds of them have never even spoke to an accountant.
About their business. So this is a group that's being introduced to finances introduced to taxes.
So we felt like we have to be there to get them established right in their books and if you want to do that.
Have to do it in a way that's going to get to the ultimate integration with doing taxes as well.
One of the things that we've been talking about from the beginning is we have this extremely powerful formations channel.
But post formations historically, there hasn't been as big of an investment we're now making that investment in the key opportunity. There is to drive ongoing engagement, which then also opens up the opportunity to expand our relationship with customers in a way that's more organic and natural for them. So even if you take an exam.
<unk> LLC tax.
Mentioned this before almost half of our customers.
They're non operational when they come to us and yet we market in the formation as channel to them.
Because we traditionally haven't had a place to market post formation, so something like LG books really provides ongoing value and engagement and then a much more natural way as it becomes tax time and we've helped you with your books. We can introduce you to an account we can introduce you to lz tax.
In a way that's going to be much more of an expansion of the relationship and that goes well beyond just books in taxes that goes into forms turning into E signatures.
It goes into legal Doc review is turning into.
Attorney consults.
Most of our products want to work together and so that's what we're really trying to do is drive that engagement on an ongoing basis.
And then youre going to take the second one on the revenue yet if that's a forecast question Andrew for 2023, we don't have anything in the forecast for it right now.
We're really just focused on the user experience and learning over the next few months and then that'll help to shape some of our assumptions around that from a monetization standpoint moving forward.
Do you want to learn from our customers there.
It's definitely is that as a business in and of itself, but we also feel like one of the real benefits again is going to be retention on the LSE tax solution in subscription where people we've seen come in they get a couple of questions answered, but they don't necessarily have anymore and its six months from tax season.
And so we see higher attrition as a result of that the idea of driving that ongoing engagement, we think will definitely lead to a better lv tax retention rate as well.
But we really to noel's point, that's not something that were necessarily focused on.
Initially in terms of driving revenue necessarily it's much more let's learn from our customers and then let's build off of that.
Great. Thank you.
Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Ron Josey from Citi.
Great. Thanks for taking the question, maybe a little bit more on the here now and can you just talk a little bit more the NOL around just business formations. It looks like in June there was a change in trajectory overall from what we saw in May and so any thoughts on the updated broader macro picture I'm sure you do.
In terms of how you think about SMB formations and where we stand overall and then maybe just on on the trends in the quarter insights on just the subscription upsell rate, we're seeing benefits in terms of the greater share gains talk just about these newer premium customers what are they buying how are they acting things along those lines. Thank you.
Thanks, Ron This is Noel I'll, just I'll take the first half and then maybe past the second half to Dan So on the macro.
You call that a macro has really been steady.
Year to date, and consistent which is great. We did see some improvement in Q2 and as we said on our prior call we had.
Updated our expectations for the macro for the second quarter relative to the trends that we're seeing and we're doing the same thing here with our third quarter guide looking.
Looking at the recent performance factoring that in and then raising our Q4 expectations as well so overall a bit more bullish given the length of the consistency that we're seeing there we are still leaving some room and embedding some room in terms of caution in our particularly in our fourth quarter.
Our expectation for the macro.
Just as we've done year to date, just being cautious as we know things Ken soften and we know theres still some prognostication around the overall economy slowing.
But overall, we've taken up our expectations for the macro.
Yes, maybe just a quick add on the macro I think of macros.
We've talked about Theres, the historical growth in the macro and whether or not theres, a little bit of a trajectory change.
Post COVID-19.
And I think we've given the data before it's just simple to start a business theres little risk of capital lots of platforms. There is.
Tactic.
Reduce barriers gets you get you sort of into a market much quicker at a lower cost and all of that is really pretty incredible and.
And we think durable.
Thing that I think is newer is that.
Work from home dynamic and one of the studies that we recently just put out on our own base showed that over half of our customers.
Started their business with while they were working in their prior employer.
Good portion, we're obviously working from home as well and if you think about the dynamic of people going back to work a lot of that is part part time going back to work versus sort of more of a like a hybrid model and we think that thats, a pretty durable trend as well.
So the macro feels like it's it's strong it's.
It remains stronger than we expected and yet at the same time, we're just cautious that's just kind of how we've been managing it.
On the subscription attach for new customers I would say, it's doing exactly what we'd expected it to do.
Core subscriptions that we look at are the compliance subscriptions as well as our attorney assist subscription.
And they continue to attach at a nice rate the rate again is slightly lower.
Than what it was in the past, but it is overwhelmed by the fact that you are seeing such significant formation growth as well and we're also really starting to track to the retention dynamics of those customers and they look relatively stable relative to the prior prior cohorts that we have although the one thing we would say.
We're going to be kind of cautious in thinking about what that looks like when we get to annual renewal because thats, where the bulk of our customers actually renew and.
Where we're conscious of Theres, many different types of customers in our base and so we will watch that closely.
That's great. Thank you Dan and thank you all.
Thanks, Ron.
Thank you one moment for our next question.
Our next question comes from the line of Matt Pfau from William Blair.
Great. Thanks for taking my questions I wanted to ask around the commentary on the Lv tax changes I think just some more detail there in terms of what youre doing and why it's going to create some additional churn. This year would be helpful to understand that dynamic a bit better.
Yes, thanks for the question Matt.
<unk> said this before taxes, just such a unique business because you get one swing every season and our first season was was one where we relied on people to be the glue and didn't really have.
Lot of software in place to make the process efficient and also make it delightful and I think in the second season, we made a lot of changes a lot of updates.
And improve the experience we're seeing filing.
Increase which is great because we know that ties to better retention.
But we still have a lot of work to do there and if you step back what I'd say is interesting to reflect on I mean, this is a very fast growing business.
In some ways. It grew faster than I think we were capable of supporting that business. As we went through that scale with an incredible experience and now we're sort of right sizing that experience, we're continuing to invest in it.
We're also.
Starting to tamp down attach in a way like we want to get the attach lower because we keep finding that our customers. They know they have a tax question, but they arent really sure what it is and so they sign up for the service and then they may ask that question and then they realized they either don't have more questions, where they don't have a.
Return to file and so we see higher attrition and that churn is something that is expensive for us to support.
It is also not a great customer experience because they have to go through a cancellation process and so what youll start to see US do is make the purchase.
Little bit more considered so we've done this is a monthly subscription we're testing things like doing an annual subscription you might see us pull it out of specific segments of customers not really offered us cross sell.
And the Great news there is we now have other products that we can cross sell that are more relevant like <unk> E books, and we also have a post formation experience, where we can we can actually cross sell with two an engaged customer.
But the reality is what that means is in the short term our attach rates will come down for newer customers and in the near term as well we will still have those higher attrition rates until the new channels pick up and the new motion it hardens. So.
I would say that we're extremely excited about LSE tax, especially when we have lz books in the mix as well.
And it's been a fast grower.
But in some ways, we're taking this opportunity as well to make sure that we create the right experience somewhere and we're focused on long term durable growth versus more episodic growth tied to that the churning customers.
Great and then just was hoping to follow up on the other component of the deceleration in subscription growth in the back half of the year that channel partner component maybe just.
Little bit more commentary on that would be helpful.
Yes, I mean, I think one of the things we've said for a couple of quarters here is that.
Given the share gains that we're starting to realize we felt like this was the right time to reset on some of our partnerships where they werent bilateral.
One moment far next question.
Our next question comes from the line of Jackson Ader from Mofette missing and the same thing.
Alright, great. Thanks for taking my questions guys.
Dan you touched on this a little earlier, but can you remind us the mechanics or maybe some numbers around that first year retention rate.
You have traditionally seen in the past from business formation, and maybe subscription customers and then.
Yes, just any color you could think about as we look to 'twenty four and we start to renew this kind of much larger 2023 cohort, what we should be expecting from a different segment.
Yes, we don't share any cohort retention numbers for our.
Our subscriptions at this point and I think we've talked about before one of the challenges we have.
We have a portfolio of subscriptions.
How are they attach their relative nature all of that plays into what we see at the individual level of subscriptions.
So we've recently provided more like an annual churn number.
Slightly improved for the quarter.
What I have said in the past is we obviously are serving.
Small businesses that almost verge on the side of like a consumer behavior.
<unk>.
A good portion almost half of the businesses that form with us are not yet in operation and then at the same time.
Stats are out there that about 30% of businesses fail in the first year and so you can almost assume that just on the failure side alone that's sort of.
The ceiling that you can you can reach of <unk>.
Probably a little bit below 70% on retention.
Okay, Alright got it and then.
Just on LTE tax and E books in compliance and turning all these all these things that are kind of like I think somebody that you.
You are becoming more of a system of record and I'm curious, whether just strategically whether youre thinking at the moment, it's like a bunch of different separate offerings right like 99.
$9 99, a month for this and then a separate thing any thoughts on just one big broad bundle or something or like a package a bunch of different stuff together that might.
Drive additional stickiness.
Yes, it's a really good question actually.
If you think about one of the big announcements we have this quarter. It is a complete redesign of the experience post formation and we call it internally.
Project has grown but externally, it's really just our <unk> experience, which had been.
Most launch of multiple different applications that had very different experiences across.
What you'll see now if you go into the the account experience in miles.
As a uniform experience.
That's the first step of starting to think about how we commercialize all of the post formation applications that we have.
A little bit differently, so that they may be over time, instead of selling an lz books and an lz tax solution separately with esignature, maybe theres a package very specifically is it sort of like a premium SKU tied to book to tax and it includes something like signature or maybe there is something where you are.
Have a good better best lineup that gets into simple legal needs more complex and then premium needs. So the first the first step in being able to even approach commercialization differently than how we've done. It historically is to make the experiences uniform. So that these are they can be.
<unk> integrated solutions and can be packaged differently and that's what we did with this release so I encourage everybody to go log in.
It's a bit night and day I mean, it's a complete redesign of the product and it looks more like a traditional SaaS application.
Awesome alright, great. Thank you.
Thanks.
Thank you.
One moment for our next question.
Our next question comes from the line of Mario Lu from Barclays.
Hi, This is Jack Butler on per Mario Thanks for taking my questions.
Starting out regarding the freemium model. So you've had a great amount of success in the past couple of quarters with 27% and share gains in Q1, I think you said you had around 33% share gains in Q2.
Given the strong performance you have demonstrated these past few quarters are you seeing any signs that the competitive landscape could be changing for the freemium offering moving forward or anything.
Anything like that and then just unrelated I know you've talked about this a bit on prior calls.
Had one announcements earlier in this call about it but in terms of generative AI I was just wondering whether there was any update to how you were thinking about the role that <unk> may play in the business.
Wanted to focus might be an improving current offerings, you have or if there's a way.
The way that AI could expand your offering suite or just.
Maybe anything else about how how the strategy is evolving.
Okay. Thanks for the questions Jack first one on competition I think.
We have seen competitors adjusting price down in response to our new lineup.
And all of that's great for all small businesses. So we encourage prices down, especially on the formation side.
It's worth noting though one thing we haven't seen from competition is a heavy investment in their product experience.
And launching new subscriptions and creating that ecosystem, which is what in our case is helping us fund that that reduction in pricing. So I think it's probably impacting them disproportionately relative to us.
We haven't seen a big change in marketing spend levels, but by competition and I think.
One of the things I would say that is probably.
It goes without saying is the biggest opportunity for us is a little bit more around non consumption.
And going to.
Attracting customers that typically have gone to the secretary of state site themselves and kind of muddled through the experience we know that that has had.
Strong negative net promoter score associated with it and we also know that the customers that visit us have disproportionately visited the secretary of state site before us.
Much more so than any of our competitive alternatives. So I think a lot of what we're doing on the pricing side is actually pulling from people who may have tried to navigate those sites on their own and get all of their questions answered done a lot of research and different disparate spots. We've just made that whole experience much more simple and take.
The decision point away.
By reducing that price so that they could form with us and then when they form with us they're being introduced to a lot of new subscriptions. So I think I think that's probably the bulk of the trend that we're seeing.
On the generative AI side.
We talked about this last call we don't want to.
For Shadow product releases before they're out there I think the thing I'd say is that we're making steady progress we're trying to do something a little bit different than I think most of the alternatives in the market and that we wanted to serve small businesses directly youre seeing a lot of G&A products. Gen. AI products that are built very specifically for attorneys and law firm.
And so there's some things that we need to work through to make that possible, but it will most likely be integrated in a way where you start to think about how people interact with docs.
How they interact with their attorneys through documents and how they get insights out of their documents and so it's very similar to what I said last quarter, making good progress and you'll hear some announcements in the next quarter or two.
Great. Thanks, that's really helpful.
Yeah.
Thank you.
One moment for our next question.
Our next question comes from the line of Brent Thill from Jefferies.
Hi, This is John again for Brent Thill. Thanks.
The question, obviously, you've done very well with the inflammation premium product the high court.
42%.
It's also very fast with 26%, but obviously there is a delta in <unk>.
Wondering how you're thinking about.
That delta is that according to your expectations.
How do you expect a lot.
Those don't actually end up.
Attaching to convert over time.
If there's a certain cadence.
And then second I'm wondering how you're managing to weighed on the gross margin from filing fees.
Yes, great Great question, John Yes.
Yeah on the first one what ways down some of the aggregate transaction growth. It was really the consumer side of the business and we've been clear that we've been prioritizing.
Pretty aggressively on the small business side relative to consumer one of the interesting things, though is the foundation of our consumer business our forms.
And so the nice thing about making the investment that we're currently making that is both an integration of gen AI capabilities as well as attorneys directly onto a new forms platform should ultimately translate into reinvigorating of our of our consumer side of our.
And we have nothing new to announce at this point or any.
This year I would say on the consumer side, but I will say that it's the first time there has been an investment there in probably almost a decade.
And so I would expect that we will start to turn that corner hopefully in the next year or so.
On the on the margin side, you want to take that and I'll sure. Yeah on the margin side. So as you mentioned I think at the beginning of your questions on the the business formation growth that we saw.
In the quarter or 42% that higher volume is driving higher filing fees and so that's what we're seeing impact margins as filing fees as a percentage of revenue have increased.
We also have two businesses that are growing fast that are still sub scale.
In Taxane virtual male that have slightly different margin profile and as those kind of take up a bigger share it weighs on margins a bit.
We are excited about the fact that we continue to make progress on the core business in terms of the efficiencies that we're driving.
And delivering the services so over time as those businesses.
Faster growing businesses start to get to scale and we get more leverage.
We'll see some margin improvement in support of the efficiencies, we're driving on the core the core side of our margin profile.
Okay. Thank you.
Thank you one moment far next question.
Yeah.
Our next question comes from the line of Elizabeth border from Morgan Stanley .
Hi, Good evening, everybody. This is Dan Hynes umbrella this quarter. Thank you for taking my question.
Wanted to ask on the channel partner side of the business where are we in resetting that side of the business any view on what adding more karelian and longer term sort of what the vision is for that part of the business on a go forward basis.
Just for clarity do you mean, the like the partnerships, where we're marketing third parties or the partnerships, where we're distributing our service through our channel.
I guess an update on both would be very helpful.
Okay, Yeah on the partner channel side, we mentioned it.
Upfront that we're currently exiting a couple of relationships because they are they have dilutive economics.
We're not just focused on share, but we're also focused on profitability and.
And so that will lead to a deceleration in growth in the back half on share gains.
But on the on the partner side, where we're distributing third parties through our platform that is going extremely well.
And there's a couple moving parts there we've exited some partnerships that we talked about at the beginning of the year.
While at the same time, we have newer partnerships, where we're actually seeing growth that is exceeding the growth of our core business is just at a very very small base. At this time. So we're excited about it over time again, we have a incredibly powerful channel.
And our customers are quite actively asking us what are best in breed solutions, and we're getting better and better at targeting.
What we offer specific customers. So we'd expect that to continue to accelerate but again off a much much smaller base than the core business.
Understood. Thank you for the question.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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