Q4 2023 LegalZoom.com Inc Earnings Call

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Operator: Good day, and welcome to the LegalZoom fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Good day and welcome to the illegal Sam fourth quarter and full year 2023 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 you will need to press star one one on your telephone you will then hear an audit.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star one one on your telephone. You will then hear an auto-admitted message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Madeline Crane, Head of Investor Relations. Please go ahead.

They didn't message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your speaker today, Madeleine Crane head of Investor Relations.

Ahead.

Madeline Crane: Thank you, Operator. Welcome to LegalZoom's fourth quarter and full year 2023 earnings conference call. Joining me today is Dan Wernikoff, 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 should not be relied upon as a guarantee of future performance or results.

Thank you operator, welcome to legal items fourth quarter and full year 2023 earnings Conference call. Joining me today is Dan <unk>.

Our Chief Executive Officer, and Noel Watson, our Chief Financial Officer.

As a reminder, we'll 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 well intend and similar expressions and are not and should not be relied upon as a guarantee of future performance or results.

Madeline Crane: Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date. However, these forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from those expressed. 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. We use non-GAAP measures in 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 considered in isolation or as a substitute for results prepared in accordance with GAAP.

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 are a breakout 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.

We use non-GAAP measures and making decisions regarding our business and we believe these measures provide helpful information to investors.

non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Madeline Crane: Reconciliations of all non-gap measures to the most directly comparable gap measures are set forth in the investor relations section of our website at investors.legalzoom.com. I will now turn the call over to Dan. Good afternoon, everyone, and thanks for joining our call. 2023 was a pivotal and productive year at LegalZoom. We deployed a new freemium lineup, built out multiple new subscription offerings, and created a unified post-formation experience. All of these accomplishments put us in a strong position as we enter 2024, and I'm excited to share the progress we continue to make against our strategy. But first, I'd like to recap the financial performance for the year, starting with Q4 results. In Q4, revenue came in at $159 million, up 8% year over year. Subscription revenue grew 17% and accounted for over two-thirds of the quarter's revenue. Adjusted EBITDA for the period was $33 million, reaching a 21% margin.

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 <unk> com.

I will now turn the call over to Dan.

Good afternoon, everyone and thanks for joining our call 2023 was a pivotal and productive year at legal Jim we.

We deployed a new freemium lineup built out multiple new subscription offerings to create a unified post formation experience.

All of these accomplishments put us a strong position as we enter 2024 and I am excited to share the progress we continue to make against our strategy.

First I'd like to recap the financial performance for the year, starting with Q4 results.

In Q4 revenue came in at $159 million.

Up 8% year over year.

Subscription revenue grew 17% and accounted for over two thirds of the quarter's revenue.

Adjusted EBITDA for the period was $33 million reaching.

Reaching a 21% margin.

Daniel A. Wernikoff: Formations, as measured by census data, grew 9% in Canada. However, largely as a result of terminating multiple partnerships and our decision to restructure our sales organization at the end of Q3, our total formations declined 2% year-over-year. LLC units sold directly, where our premium lineup is in-market, grew slightly faster than the macro. We have now substantially lapped the impact of the new lineup rollout. For the full year of 2023, we delivered the following business results. Revenue was $661 million, or a 7% increase year-over-year. Subscription revenue grew to $413 million, which represents growth of 15%. Full year adjusted EBITDA increased 86% to $119 million, reaching an 18% margin. The macro remained healthy throughout the year, with census formations up 8% year-over-year.

Formations as measured by census data grew 9% in Q4.

Largely as a result of terminating multiple partnerships and our decision to restructure our sales organization at the end of Q3, our total formations declined 2% year over year.

LLC units sold directly where our premium lineup is end market grew slightly faster than the macro.

We have now substantially lap the impact of the new lineup rollout.

For the full year of 2023, we delivered the following business results.

Revenue was $661 million or 7% increase year over year.

Subscription revenue grew to $413 million, which represents growth of 15% for the year.

Full year, adjusted EBITDA increased to 86% to $119 million, reaching an 18% margin.

The macro remained healthy throughout the year with sensus formations up 8% year over year.

Daniel A. Wernikoff: In 2023, our business formations grew 23%, driving 14% share growth for the year. LegalZoom branded LLC growth was 29% for the year, over three times faster than the maximum. Taking an even longer view of this business from 2019, when I joined at the end of the year, we've seen the formations macro grow at a 12% compounded annual growth rate, while we've had a CAGR for LegalZoom formations of 19%. During this time, the number of businesses that have formed with us annually has doubled to almost 600,000. Equally important, our mix of subscriptions has increased from 51% to 62% of total revenue. Even though we believe very much in the long-term strength of this macro, our goal is to grow independent of it.

In 2023, our business formations grew 23% driving 14% share growth for the year.

Legalzoom branded LLC growth was 29% for the year over three times faster than the macro.

Taking an even longer view of this business from 2019, when I joined at the end of the year, we've seen the formations macro grow at a 12% compounded annual growth rate, while we've had a CAGR for legal zoom formations of 19%.

During this time the number of businesses that are formed with US annually has doubled to almost 600000.

Equally important our mix of subscriptions has increased from 51% to 62% of total revenue.

Even though we believe very much in the long term strength of this macro our goal is to grow independent of it shifting more revenue to subscriptions is the most critical strategy to achieve this dislocation.

Daniel A. Wernikoff: Shifting more revenue to subscriptions is the most critical strategy to achieve this dislocation. As a result of this shift and continued formation growth, we've been able to grow our subscription revenue by 19% CAGR since 2019. We've been steadily recasting LegalZoom as a more modern software player in the legal, compliance, and now financial space. When I joined, we focused on bringing in the right team.

As a result of this shift and continued formations growth, we've been able to grow our subscription revenue by 19% CAGR since 2019.

We've been steadily recasting legalzoom as a more modern software player in the legal compliance and now financial space.

When I joined we focused on bringing the right team as.

Daniel A. Wernikoff: As we built out the broader organization, we invested heavily in infrastructure to enable more product velocity. Modernizing our infrastructure has allowed us to drive better order efficiency, which in turn has enabled the launch of our premium lineup. We committed to being more product-driven and less dependent on marketing spend. We clearly delivered against that objective, reducing our sales and marketing costs by 20% last year while still increasing our SMB product sessions by 25%. This focus is what helped us to achieve a dual goal.

As we built out the broader organization, we invested heavily in infrastructure to enable more product velocity.

Modernizing our infrastructure has allowed us to drive better order efficiency, which in turn enabled the launch of our premium lineup.

We committed to being more product led and less dependent on marketing spend we clearly delivered against that objective, reducing our sales and marketing costs by 20% last year, while still increasing our SMB product sessions by 25%.

This focus is what helped us to achieve a dual goal step function increases in both share and profitability in 2023.

Daniel A. Wernikoff: Step function increases in both share and profitability in 2023, as we deliver this new core lineup and increase efficiencies. We also invested heavily in building out e-signature, books, and business licenses into a completely redesigned MyLG experience. We also released our AI-powered Legal Forms Summary Tool, DocAssist.

As we delivered this new core lineup and increased efficiencies.

We also invested heavily in building out esignature books and business licenses into a completely redesigned miles the experience.

We also released our AI powered legal form some retool dock assessed we fully revamped our legal forms library and we set the foundation for our re imagine legal expert experience.

Daniel A. Wernikoff: We fully revamped our Legal Forms Library, and we set the foundation for a reimagined legal expert experience. We ended the year by launching a new compliance service, LegalZoom's Beneficial Ownership Information Report, or BOIR. This product helps customers satisfy the federally mandated reporting rules under the Corporate Transparency Act, which went into effect on January 1st of this year. This is a new federal compliance requirement by the Financial Crimes Enforcement Network, also known as FinCEN. This compliance requirement will impact roughly 90% of all businesses. Failure to comply with this new law can result in civil and criminal penalties.

We ended the year by launching a new compliance service legal zooms beneficial ownership information report or IR.

This product helps customers satisfy the federally mandated reporting rules under the corporate transparency.

Which went into effect on January one of this year.

This is a new federal compliance requirement by the financial crimes enforcement network also known as Vincent.

This compliance requirement will impact roughly 90% of our business entities.

Failure to comply with this new law can result in civil and criminal penalties.

Daniel A. Wernikoff: It's another example of how dynamic the compliance environment is in the U.S. We were one of the first to market with a solution with pre-sales of the BOIR service launching in early December. To reinforce our position as a customer's trusted partner for legal and compliance matters, we've included the entitlement for our existing total compliance subscribers. We're also marketing this service to our remaining customer base and net new customers who engaged with LegalZoom for the first time as a result of this compliance requirement.

It's another example of how dynamic the compliance environment is in the U S.

We were one of the first to market with the solution with pre sales of <unk> service launching in early December to.

To reinforce our position as our customers' trusted partner for legal and compliance matters. We've included the entitlement for our existing total compliance subscribers.

We're also marketing this service to our remaining customer base and net new customers engage with legal zoom for the first time as a result of this compliance requirement we.

Daniel A. Wernikoff: We expect BOIR to be a contributor to our transaction units and revenue in 2024, but that contribution will be somewhat muted as we include it for free with our most highly engaged subscribers. As we look forward to 2024, as we've done each year since going public, we're establishing an additional area of focus for the new year. While we're still laser focused on gaining share, in 2024, we're putting more emphasis on growing the lifetime value across our base of active customers. We now have all the tools to enable better commercialization of our formation-adjacent offerings and to better monetize our existing base post-formation.

We expect <unk> to be a contributor to our transaction units and revenue in 2024, but that contribution will be somewhat muted as we included for free with our most highly engaged subscribers.

As we look forward to 2024 as we've done each year since going public we are establishing additional area of focus for the year.

While we are still laser focused on gaining share in 2024, we're putting more emphasis on growing the lifetime value across our base of active customers.

We now have all the tools to enable better commercialization of our formation adjacent offerings and to better monetize our existing base post formation.

While we do expect to rebuild share as we lap our partner exits in the back half of 2024, our plan is to balance share gains with stronger revenue per customer.

Daniel A. Wernikoff: While we do expect to rebuild share as we lap our partner exits in the back half of 2024, our plan is to balance share gains with stronger revenue per customer. Let's now turn to an update on progress against our strategy, beginning with the first strategic pillar, scale to business. At the core of what we do, efficiently processing government filings is our most critical priority.

Let's now turn to an update on progress against our strategy beginning with our first strategic pillar scale the business.

At the core of what we do efficiently processing government filings is our most critical priority.

Our investments in automation allowed us to process a material number of SMB orders in 2023 without any agent interaction.

The main beneficiary as our customers as their orders are fulfilled quicker and.

Daniel A. Wernikoff: Our investments in automation allowed us to process a material number of SMB orders in 2023 without any agent interaction. The main beneficiary is our customers, as their orders are fulfilled quicker. In parallel, we continue to introduce integrated support through chat. The combination of both of these investments has meant that, in 2023, we had a nearly 40% year-over-year decrease in voice contacts per order while increasing our customer care net promoter. Put another way, our variable cost per S&B order dropped by over 20% in the year. We're still mid-course in our investment in the fulfillment experience and have expectations for higher efficiencies in 2024. Separately, we continue to actively test our lineup.

In parallel we continue to introduce integrated support through chat.

Combination of both of these investments has meant that in 2023, we had nearly 40% year over year decrease in voice contacts per order, while increasing our customer care net promoter score.

Put it another way our variable cost per SMB order dropped by over 20% in the year.

We're still mid course in our investment in the fulfillment experience and have expectations for higher efficiencies in 2024.

Separately, we continue to actively test our lineup.

Over 60% of our base is now choosing the free formation package as part of their initial purchase.

This has led to a 14% share growth in 2023 slightly below our goal for the year, but a significant improvement.

While we're pleased with the step function improvement our share growth was impacted by the previously communicated partnership exits in the back half of 2023, a headwind that will continue in the first half of 2024.

Daniel A. Wernikoff: Over 60% of our base is now choosing the free formation package as part of their initial purchase. This has led to a 14% share growth in 2023, slightly below our goal for the year but a significant improvement. While we're pleased with the step function improvement, our share growth was impacted by the previously communicated partnership exits in the back half of 2023, a headwind that will continue in the first half of 2024. As a result, we expect full-year market share in 2024 to be slightly lower than full-year 2023, with the back half of the year returning to year-over-year growth.

As a result, we expect full year market share in 2024 to be slightly lower than full year 2023, with the back half of the year returning to year over year growth.

We still have opportunities to improve our formations lineup the adjacent services, we market and the mobile experience for our free customers you.

You should expect to see the free lineup deviate from our premium Skus over the next couple of quarters, along with a more significant mobile experience improvements that will benefit all our customers, but disproportionately free traffic as pre prospect skew more mobile.

We have one additional priority under the strategy of scaling the core since 2021 and post the Covid spike or a state planning business has declined approximately 20%, which has been a background headwind to our overall growth.

Daniel A. Wernikoff: We still have opportunities to improve our lineup, the adjacent services we market, and the mobile experience for our free customers. You should expect to see the free lineup deviate from our premium views over the next couple quarters, along with a more significant mobile experience improvement that will benefit all our customers, but disproportionately benefit free traffic as free prospects skew more mobile. We have one additional priority under the strategy of scaling the core. Since 2021 and post the COVID spike, our estate planning business has declined approximately 20%, which has been a background headwind to our overall growth. The consumer space hasn't been an area of focus, given limited resources and the significant investment opportunities in small business.

Consumer space Hasnt been an area of focus given limited resources and significant investment opportunities in small business, but.

But as we continue to build out our team and increase our infrastructure investments, we now have resources to invest in our consumer business.

Any of the investments in fulfillment and modernizing our questionnaire technology are directly applicable to re imagining our consumer products.

While we Havent talked a lot about it over the past years, we remain a leading player in the consumer legal space with the tip of the spear being a state planning there.

There will be more to talk about here in the coming quarters and also as I unpack our expert strategy in a few minutes. We're excited about the opportunities for growth in both business formations and estate planning with the combination of these markets representing a refresh serviceable addressable market of approximately $13 billion.

Turning to our second key pillar build the ecosystem, where our serviceable addressable market is approximately $15 billion today are registered agent and compliance offerings represented approximately two thirds of our subscription revenue Reggie.

Daniel A. Wernikoff: But as we continue to build out our team and increase our infrastructure investments, we now have resources to invest in our consumer business. Many of the investments in fulfillment and modernizing our questionnaire technology are directly applicable to reimagining our consumer product. While we haven't talked a lot about it over the past years, we remain a leading player in the consumer legal space, with the tip of the spear being estate planning.

Registered agents and compliance are core needs for our customers when they form and we continued to experience healthy attach and stable retention rates were focused on providing superior compliance products and experiences for our customers in order to drive further growth and retention.

Roughly four months after including LG books in our LLC formation flow, we have over 7500 paid subscribers.

Daniel A. Wernikoff: There will be more to talk about here in the coming quarters and also as I unpack our expert strategy in a few minutes. We're excited about the opportunities for growth in both business formations and estate planning, with the combination of these markets representing a refreshed, serviceable, addressable market of approximately $13 billion. Turning to our second key pillar, Build the Ecosystem, where our serviceable addressable market is approximately $15 billion. Today, our registered agent and compliance offerings represent approximately two-thirds of our subscription revenue. Registered agents and compliance are core needs for our customers when they form, and we continue to experience healthy, attached, and stable retention. We're focused on providing superior compliance products and experiences for our customers in order to drive further growth and retention.

As our channel is proving to be healthy our team is focusing on driving active use as soon as our customers become operational.

Most importantly, we continue to innovate in books in the quarter, we focused on tools to promote the benefit of combining Lz books with LG tax in January we added a tax center in LC books to promote our tax expertise.

The Lz books tax center includes estimated tax calculations and easy to Digest view of schedule C deductions and a tax savings widget that allows our customers see the value of LTE books has provided in.

In addition, <unk> customers, who are subscribed to LTE tax are provided a seamless one click experience to share their data with their LTE tax expert.

We've seen overall engagement with books increase following the rollout of our tax prep campaign with active subscriber engagement growing 17% from October to January.

Daniel A. Wernikoff: Roughly four months after including LZ Books in our LLC formation flow, we have over 7,500 paid subscribers. As our channel is proving to be healthy, our team is focusing on driving active use as soon as our customers become operational. Most importantly, we continue to innovate in Boston. In the quarter, we focused on tools to promote the benefit of combining LZBooks with LZTax. In January, we added a tax center in LZBooks to promote our tax tax. The LZBooks Tax Center includes estimated tax calculations, an easy-to-digest view of Schedule C deductions, and a tax savings widget that allows our customers to see the value that LZBooks has provided.

And even though we just launched books in our LLC formation slow at the end of 2023 of the tax customers that have begun the filing process. This season over 10% are using our books product.

This past year, we launched a lot of new products and we now have the ability to grow with our customers. We know that many of our customers form before their operational and their needs continue to evolve with time.

Historically, we've had to introduce all of our services in the formation flow because there wasn't a post formation experience.

This year, we will be focusing on post formation engagement commercialization and monetization opportunities with the goal of expanding the lifetime value of our customers.

Today, an immaterial amount of revenue comes from products that are attached after the formation.

Daniel A. Wernikoff: In addition, BOOKS customers who are subscribed to LZTax are provided a seamless one-click experience to share their data with their LZTax accounts. We've seen overall engagement with books increase following the rollout of our tax prep campaign, with active subscriber engagement growing 17% from October to January. And even though we just launched books in our LLC formations flow at the end of 2023, of the tax customers that have begun the filing process this season, over 10% are using our books product. This past year, we launched a lot of new products, and we now have the ability to grow with our customers. We know that many of our customers form before they're operational, and their needs continue to evolve with time. Historically, we've had to introduce all of our services during the formation flow because there wasn't a post-formation experience.

We're seeing continued growth in miles the engagement as we direct more of our activities to the platform since the beginning of 2023, we've seen a 40% increase in returning users with over 75% of active users continuing to visit the site 30 days after their initial formation.

Over the past year, we built the infrastructure that enables a business profile.

This profile of the foundation of better segmentation more effective targeting and faster questionnaire completion.

Also a key component of an omnichannel marketing strategy with higher value opportunities addressed through sales and lower valued solutions targeted through self directed channels like mine LC.

Finally, a key focus for us in the coming year will be setting the foundation for the cross sell of our expert services.

While it's still very early we believe many of our existing products like LG books, Dockets, and our legal forms library, our natural entry points to discover a higher higher value tax and expert services.

Which brings us to our final strategic pillar integrate experts.

Today, we are well into the third season of our LC tax offering and while we are mid course in adjusting our go to market strategy. We're excited about where this product and business is headed.

Daniel A. Wernikoff: This year, we'll be focusing on post-formation engagement, commercialization, and monetization opportunities with the goal of expanding the lifetime value of our customers. Today, an immaterial amount of revenue comes from products that are attached after formation. We're seeing continued growth in Mile-Z engagement as we direct more of our activities to the platform. Since the beginning of 2023, we've seen a 40% increase in returning users, with over 75% of active users continuing to visit the site 30 days after their initial formation. Over the past year, we've built the infrastructure that enables a business profile. This profile is the foundation of better segmentation, more effective targeting, and faster questionnaire completion.

As a reminder, late last summer, we announced the reset of our LC tax strategy in order to better target and routine tax customers.

We expect these changes will result in a four point headwind to subscription revenue growth in fiscal year 2024, We believe it was the best course of action for the long term trajectory of this business.

We expect tax to be accretive to our overall subscription growth in 2025.

Since adjusting our attach strategy intact, we've realigned our sales effort and made significant product and service enhancements based on our learnings from prior seasons.

Our new tax experience includes a simplified tax prep process clear progress tracking matching to a dedicated tax preparer and reviewer and the ability to communicate with these experts quickly indirectly via chat with MLC.

Daniel A. Wernikoff: It's also a key component of an omni-channel marketing strategy with higher value opportunities addressed through sales and lower value solutions targeted through self-directed channels like MyLZ. Finally, a key focus for us in the coming year will be setting the foundation for the cross-sell of our expert service. While it's still very early, we believe many of our existing products like LZBooks, DocAssist, and our Legal Forms Library are natural entry points to discover our higher-value tax and expert services, which brings us to our final strategic pillar, Integrate X. Today, we are well into the third season of our LZ Tax offering, and while we are midway in adjusting our go-to-market strategy, we're excited As a reminder, late last summer, we announced a reset of our LT tax strategy in order to better target and retain tax. While we expect these changes will result in a four-point headwind to subscription revenue growth in fiscal year 2024, we believe it was the best course of action for the long-term trajectory of this business.

While we plan to provide more details on our Lv tax season. During our Q1 earnings call initial feedback from our customers has been very positive.

Our CPE is are also very happy with the changes as we now have the complete process from onboarding up to filing on our own platform.

While this practice management platform is currently being used by our tax experts is also designed and built with our legal experts in mind.

Over time this platform will be used by our attorney network to efficiently and seamlessly collaborate with our legal payer customers.

Currently we believe this can also help us extend beyond the existing services we offer today.

We continue to build a strong network of attorneys invested our own law firm in Arizona build and evolve our AI tools and make critical platform infrastructure improvements the combination will enable us to surface important legal insights and link our customers to experts.

Through this new platform attorneys will become increasingly efficient in performing the work with the goal being to bring down the extra costs and begin to standardize the experience of working with an attorney.

Equally important all the capabilities. We built will also allow us to expand into other legal matters.

Daniel A. Wernikoff: We expect HACS to be accretive to our overall subscription growth in 2025 since adjusting our attach strategy intact. We've realigned our sales effort and made significant product and service enhancements based on our learnings from prior seasons. Our new tax experience includes a simplified tax prep process, clear progress tracking, matching to a dedicated task preparer and reviewer, and the ability to communicate with these experts quickly and directly via chat within MyLG.

The expert opportunities, our largest representing a $23 billion serviceable addressable market and we look to make meaningful progress against it in 2024.

Democratizing La is a cornerstone of legal Zumiez Foundation in history, and we look forward to continuing to innovate on affordable Tech enabled legal services.

I am excited about the progress we continue to make across each of our strategic pillars and the opportunities ahead of us that will drive growth in every area of our business the.

The great strides we are taking in our business are powered by the hard work creativity and innovation throughout our entire organization.

I'd like to thank all of our legal zoom employees for our successful 2023.

Daniel A. Wernikoff: While we plan to provide more details about our LD tax season during our Q1 earnings call, initial feedback from our customers has been very positive. Our CPAs are also very happy with the changes as we now have the complete process from onboarding up to filing on our own platform. Well, this practice management platform is currently being used by our tax experts. It's also designed and built with our legal experts.

I'd also like to specifically, thank rich <unk>, our chief operating officer for his leadership and his significant contributions to legal zoom since joining the company with me in 2019.

As you may have seen in the 8-K filed earlier. This afternoon rich is transitioning from legal zoom at the end of March we wish rich the best in his future pursuits.

And with that let me turn the call over to Noel.

Thanks, Dan and good afternoon, everyone. We had a strong fourth quarter with both revenue and adjusted EBITDA exceeding our expectations.

Daniel A. Wernikoff: Over time, this platform will be used by our attorney network to efficiently and seamlessly collaborate with our legal plan. Importantly, we believe this can also help us extend beyond the existing services we offer today. We continue to build a strong network of attorneys, invest in our own law firm in Arizona, build and evolve our AI tools, and build critical platform infrastructure. The combination will enable us to surface important legal insights and link our customers to experts. Through this new platform, attorneys will become increasingly efficient in performing their work, with the goal being to bring down expert costs and begin to standardize the experience of working with an attorney.

Before I share details on the quarter as well as guidance for Q1, and the full year 2024, I'd like to reflect on the strong execution of our team.

The investments in our infrastructure are paying off as we experienced ongoing efficiency improvements in many areas of our business. Today, we are only halfway through our roadmap of investments in technology and automation, which we expect will support continued margin enhancement in the years ahead.

Next our product delivery, we rolled out a record number of products and services in 2023, providing many new opportunities for commercialization.

Finally, we successfully executed a new business strategy and have experienced stable customer retention during this transition.

Daniel A. Wernikoff: Equally important, all the capabilities we build will also allow us to expand into other legal matters. The Expert Opportunity is our largest, representing a $23 billion serviceable addressable market, and we look to make meaningful progress against it in 2024. Democratizing law is a cornerstone of LegalZoom's foundation in history, and we look forward to continuing to innovate on affordable, tech-enabled legal services.

These efforts are evident in our latest financial performance and support our expectations to deliver both revenue growth and increased profitability in 2024.

I'll now shift to provide additional details on our results for the quarter. Please know all comparisons will be on a year over year basis, unless otherwise stated.

Daniel A. Wernikoff: I'm excited about the progress we continue to make across each of our strategic pillars and the opportunities ahead of us that will drive growth in every area of our business. The great strides we are taking in our business are powered by hard work, creativity, and innovation throughout our entire organization. I'd like to thank all of our LegalZoom employees for our successful 2023. I'd also like to specifically thank Rich Priest, our Chief Operating Officer, for his leadership and his significant contributions to LegalZoom since joining the company with me in 2019. As you may have seen in the 8K filed earlier this afternoon, Rich is transitioning from LegalZoom at the end of March. We wish him the best in his future projects. And with that, I will turn the call over to Noel. Thanks, Dan. And good afternoon, everyone.

As announced last quarter, we are no longer reporting partnership revenue as a standalone item beginning this quarter partnership revenue has been incorporated into our transaction and subscription revenue line items.

All prior period comparisons in my remarks today also reflect this change.

Please refer to the supplemental presentation posted on our Investor Relations website for more details.

Total revenue was $159 million for the quarter are up 8%.

We completed 113000 business formations in Q4 down 2%.

Our market share of business formations was nine 7% down sequentially and year over year.

While we continue to see growth in our LLC formation product headwinds from exiting certain partner channel relationships and the impacts from our sales reorganization drove the formation and market share declines.

Transaction revenue was $52 million down, 6% driven by an 8% decline in average order value, partially offset by a 2% increase in transaction units.

Noel Watson: We had a strong fourth quarter with both revenue and adjusted EBITDA exceeding our expectations. Before I share details on the quarter, as well as guidance for Q1 and the full year 2024, I'd like to reflect on the strong execution of our team. The investments in our infrastructure are paying off as we experience ongoing efficiency improvements in many areas of our business.

We recorded 215000 transaction units in the quarter.

A 2% increase was a result of strength in LLC formations and other SMB products such as annual reports.

Set by lower consumer transactions and the impact from partnership exits.

Average order value was $242 for the quarter down 8% due to our lower priced lineup and an increasing mix of our lower price formation and non formation business transaction products.

Noel Watson: Today, we are only halfway through our roadmap of investments in technology and automation, which we expect will support continued margin enhancement in the years ahead. Next, our product delivery. We rolled out a record number of products and services in 2023, providing many new opportunities for commercialization. Finally, we successfully executed a new business strategy and have experienced stable customer retention during this transition.

We expect <unk> to decline in the mid single digits in Q1 2024 with some choppiness in <unk> trends in the following quarters as we lap the impact of partnership exits.

Our timing, where we expect to see higher order volumes in Q1, and even more so in Q4.

The full year, we expect this will translate into a low single digit decline in <unk> compared to the full year 2023.

Subscription revenue was $107 million in the fourth quarter up 17% due to continued growth in our subscription unit base and <unk> expansion.

Noel Watson: The results of these efforts are evident in our latest financial performance and support our expectations to deliver both revenue growth and increased profitability in 2024. I'll now shift to provide additional details on our results for the quarter. Please note all comparisons will be on a year-over-year basis unless otherwise stated.

Subscription revenue outperformed our expectations driven primarily by retention improvements in our compliance subscriptions.

We ended the quarter with over $1 5 million subscription units up 7% on continued strength in core compliance where growth was partially offset by the impact from the exit of legacy partner relationships. We.

Noel Watson: As announced last quarter, we are no longer reporting partnership revenue as a standalone item. Beginning this quarter, partnership revenue has been incorporated into our Transaction and Subscription Revenue line items. All prior period comparisons in my remarks today also reflect this change.

Also saw strength in our virtual male and forms in each signature subscriptions.

Excluding the contribution from partner channel units are subscription units increased 14% year over year Q4.

Our 2024 subscription units will be impacted by the continued roll off of approximately 100000 units from our partner channel exits, which will result in low single digit year over year growth in subscription units in the first half of the year.

Noel Watson: Please refer to the supplemental presentation posted on our investor relations website for more details. Total revenue was $159 million for the quarter, or up 8%. We completed 113,000 business formations in Q4, down 2%. Our market share of business formations was 9.7%, down sequentially and year over year. While we continue to see growth in our LLC formation product, headwinds from exiting certain partner channel relationships and the impact from our sales reorganization drove the formation and market share decline. Transaction revenue was $52 million, down 6%, driven by an 8% decline in average order value, partially offset by a 2% increase in transaction volume.

We expect sequential improvement in subscription unit growth in the back half of the year.

<unk> came in at $277 for the quarter up 7% driven by the transition of lower priced partner channel subscriptions.

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

Fourth quarter gross margin was 68% compared to 70% in Q4 2022.

The year over year decrease was driven by higher filing fees as a percentage of revenue as California reinstated filing fees and third quarter of last year. Following a 12 month pause.

Looking ahead in Q1 2024, we expect to see a similar year over year decline in gross margins due to the aforementioned impact of reinstated California filing fees.

Noel Watson: We recorded 215,000 transaction units in the quarter. The 2% increase was a result of strength in LLC formations and other S&B products, such as annual reports, offset by lower consumer transactions and the impact from partnership exits. Average order value was $242 for the quarter, down 8% due to our lower price lineup and an increasing mix of our lower price formation and non-formation business transaction products. We expect AOV to decline in the mid-single digits in Q1 2024, with some choppiness in AOV trends in the following quarters as we lap the impact of partnership exits and BOIR timing, where we expect to see higher order volumes in Q1 and even more For the full year, we expect this will translate into a low single-digit decline in AOB compared to the full year 2023.

For the full year, we expect our gross margin to be relatively stable versus 2023 with margin improvements in our core business continuing to be offset by lower gross margin services, such as virtual male and LTE tax.

Sales and marketing costs were $43 million in the quarter or 27% of revenue down four percentage points from last year.

Customer acquisition marketing costs were down sequentially due to seasonality, but up by $1 million up 4% from the same time last year.

non-GAAP sales and marketing expense was down $4 million or 27% as a result of ongoing efficiencies we have implemented in our marketing strategy as well as the impact from the reorganization of our sales team.

We expect total sales and marketing costs to remain relatively flat in 2024, as we fully realize the benefits from the sales reorganization, which translates to approximately $8 million of savings for the year.

Noel Watson: Subscription revenue was $107 million in the fourth quarter, up 17% due to continued growth in our subscription unit base and our pool expansion. Subscription revenue outperformed our expectations, driven primarily by retention improvements in our compliance subscription. We ended the quarter with over 1.5 million subscription units, up 7%, a continued strength in core compliance, where growth was partially offset by the impact of the exit of legacy partner relationships. We also saw strength in our virtual mail and forms in each signature subscription. Excluding the contribution from partner channel units, our subscription units increased 14% year-over-year in Q4.

These savings will be more than offset by an increase in cannes, including higher levels of brand spend as we look to optimize our mix of brand and performance spend.

Technology and development costs were $16 million up $2 million or 14%.

As we invest in product and engineering talent.

Looking ahead, we expect full year technology and development expenses to grow at a slightly accelerated rate versus 2023, as we shift further into a product led growth organization.

General and administrative expenses were $15 million or down 5%, we expect a modest increase in G&A expenses in 2024, as we remain committed to expense discipline.

Noel Watson: Our 2024 subscription units will be impacted by the continued roll-off of approximately 100,000 units from our partner channel exits, which will result in low single-digit year-over-year growth in subscription units in the first half of the year. We expect sequential improvement in subscription unit growth in the back half of the year. ARPU came in at $277 for the quarter, up 7%, driven by the transition of lower-priced partner channel subscriptions.

Our strong performance in the fourth quarter resulted in $33 million of adjusted EBITDA or 21% margin compared to $27 million of adjusted EBITDA margin of 18% at the same time last year.

<unk> revenue decreased by $9 million in the quarter.

As of December 31, 2023, our cash and cash equivalents were $226 million.

We had no debt outstanding and no outstanding borrowings under our $150 million revolving credit facility.

We did not repurchase any shares in the fourth quarter under our existing $100 million share repurchase program.

Noel Watson: Turning to expenses and margins, where all of the following metrics are on a non-gap basis, fourth-quarter gross margin was 68% compared to 70% in Q4 2022. The year-over-year decrease was driven by higher filing fees as a percentage of revenue, as California reinstated filing fees in the third quarter of last year following a 12-month pause.

For the full year 2023, we repurchased approximately $5 9 million shares for a total of $55 million or an average cost of $9 35 per share, which represents a reduction of approximately 3% of our prior year fully diluted share count.

Subsequent to year end, we have been active in our share repurchase program and we plan to continue to Opportunistically repurchase shares of our common stock as part of our balanced approach to capital allocation.

Noel Watson: Looking ahead, in Q1 2024, we expect to see a similar year-over-year decline in gross margins due to the aforementioned impact of reinstated California filing fees. For the full year, we expect our gross margin to be relatively stable versus 2023, with margin improvements in our core business continuing to be offset by lower gross margin services, such as virtual mail and LZCAP. Sales and marketing costs were $43 million in the quarter, or 27% of revenue, down four percentage points from last year.

Our 2024 capital allocation priorities remain consistent.

First prioritize organic investments in the business, followed by strategic acquisitions, and lastly, stockholder returns by our repurchases of our common stock.

Our strong cash position enables us flexibility to execute against all three of these priorities simultaneously.

I will now provide guidance for the first quarter and full year 2024.

Noel Watson: Customer acquisition marketing costs were down sequentially due to seasonality, but up by $1 million, or 4%, from the same time last year. Non-KM sales and marketing expense was down $4 million, or 27%, as a result of ongoing efficiencies we have implemented in our marketing strategy, as well as the impact from the reorganization of our sales team. We expect total sales and marketing costs to remain relatively flat in 2024 as we fully realize the benefits of the sales organization, which translates to approximately $8 million of savings for the year. However, these savings will be more than offset by an increase in CAM, including higher levels of brand spend as we look to optimize our mix of brand and performance spend. Technology and development costs of $16 million, up $2 million, or 14%, as we invest in product and engineering talent. Looking ahead, we expect full-year technology and development expenses to grow at a slightly accelerated rate versus 2023, as we shift further into a product-led growth organization. General and administrative expenses were $15 million, or down 5%.

The first quarter of 2024, we expect total revenue of $172 million to $176 million or 5% year over year growth at the midpoint.

We expect first quarter, adjusted EBITDA of 25% to $27 million or 15% margin at the midpoint.

For the full year 2024, we expect total revenue of $700 million to $720 million or 7% year over year growth at the midpoint.

This includes the following drivers.

A four point headwind to subscription revenue growth from the shift in our algae tax strategy, which is more pronounced in the first half of the year.

The roll off of approximately 100000 subscription units from the wind down of certain partner channel relationships, which will also be more pronounced in the first half of the year we.

We expect the rollout to be fully completed by the end of 2024.

We are also projecting a slower macro census, cin growth relative to the 8% growth we experienced in 2023.

Our guidance philosophy continues to incorporate current quarter trends and.

Then in conservatism in the following quarters.

Based on the trends we are seeing today, we expect low single digit growth in formations macro in Q1.

For the full year, we currently expect flat to low single digit growth in the formations macro which translates into some deterioration versus Q1 levels for the remainder of the year.

Noel Watson: We expect a modest increase in G&A expenses in 2024 as we remain committed to expense discipline. Our strong performance in the fourth quarter resulted in $33 million of adjusted EBITDA, or a 21% margin, compared to $27 million of adjusted EBITDA, a margin of 18%, the same time last year. Deferred revenue decreased by $9 million in the quarter. As of December 31st, 2023, our cash and cash equivalents were $226 million. We had no debt outstanding and no outstanding borrowings under our $150 million revolving credit facility.

As a reminder, the macro showed strong acceleration in the back half of 2023, creating a more challenging comparison.

We expect full year, adjusted EBITDA of $135 million to $145 million or 20% margin at the midpoint.

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

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.

Noel Watson: We did not repurchase any shares in the fourth quarter under our existing $100 million share repurchase program. For the full year 2023, we repurchased approximately 5.9 million shares for a total of $55 million, or an average cost of $9.35 per share, which represents a reduction of approximately 3% of our prior year fully diluted share count. Subsequent to year end, we have been active in our share repurchase program, and we plan to continue to opportunistically purchase shares of our common stock as part of our balanced approach to capital allocation. Our 2024 capital allocation priorities remain consistent. We will first prioritize organic investments in the business, followed by strategic acquisitions, and lastly, stockholder returns via repurchases of our common stock. Our strong cash position enables us the flexibility to execute against all three of these priorities simultaneously.

Our first question comes from Ron Josey with Citi. Your line is open.

Hey, guys. This is Jake on for Ron Thanks for taking the question.

I wanted to ask about.

Yep.

Basically I wanted to ask about the bundling.

Test and iterate approach that you guys took in <unk>.

What are your top learnings regarding your pricing lineup any any plans there to make pricing or bundling changes more permanent.

And then second is really more on.

Mobile App optimization I wanted to just get a sense for any progress you've made optimizing mobile for the further freemium approach and the opportunity there. Thanks so much.

Great. Thanks for the question Jake.

Yes.

First point on testing, we've been pretty clear that that's an ongoing effort that will have and really if you think about what's happened over the last year.

A portion of our customers and the majority of our customers are coming in through our free Skus, which changes some of the behavior around some of the subscriptions that we also market within the formation as flow and so we've done lots of different tests.

Noel Watson: I will now provide guidance for the first quarter and full year 2024. For the first quarter of 2024, we expect total revenue of $172 to $176 million, or 5% year-over-year growth at the midpoint. We expect first quarter adjusted EBITDA of $25 to $27 million, or a 15% margin at the midpoint. For the full year 2024, we expect total revenue of $700 to $720 million, or 7% year-over-year growth at the midpoint. This includes the following drivers:

To remind you.

The goals of those tests, we kind of look at it as a one year bookings our one year return.

We always lean towards the mix of subscriptions if all other things are neutral.

We also prefer to have more customers coming into our ecosystem because we we feel confident that over time, we're going to get better and better at post formation monetization.

And so if you step back it's sort of the rubric. We have is that we want the transactional cost upfront to be as low as possible to get that mix to subscription.

Noel Watson: A four-point headwind to subscription revenue growth from the shift in our LG tax strategy, which is more pronounced in the first half of the year. The roll-off of approximately 100,000 subscription units from the wind-down of certain partner-channel relationships, which will also be more pronounced in the first half of the year. We expect the roll-off to be fully completed by the end of 2024. However, we are also projecting a slower macro Census EIN growth relative to the 8% growth we experienced in 2023.

And the more we have success in the post formation monetization side, the more just beads that flywheel and allows us to take less less upfront pricing from our customers. So most of the testing that we do is sort of aligned with that strategy.

We learn something every single time, we do one of these tests.

We will continue to do it but there is nothing to announce about what we are changing and we also.

Noel Watson: Our guidance philosophy continues to incorporate current quarter trends and conservatism in the following quarters. Based on the trends we are seeing today, we expect low single-digit growth in formations macro in Q1. For the full year, we currently expect flat to low single-digit growth in the formations macro, which translates into some deterioration versus Q1 levels for the remainder of the year. As a reminder, the macro showed strong acceleration in the back half of 2023, creating a more challenging comparison. We expect full-year adjusted EBITDA of $135 to $145 million, or a 20% margin at the midpoint.

Operator: And with that, let's please open up the call for questions. Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Thanks, So much for taking my questions I wanted to go back to business formations and your guys'. His thoughts on 2024, it's a little bit hard to parse thinking about share gains understood branded Lz is taking share, but how do we think about share gains for 2024, and how you guys were thinking about that and.

Operator: One moment for our first question. Our first question comes from Ron Josie with Citi. Your line is open. Hey guys, this is Jake on for Ron.

Daniel A. Wernikoff: Thanks for taking the question. Basically, I wanted to ask about the bundling test and iterate approach that you guys took in 4Q. What were your top learnings regarding your pricing lineup? Are there any plans there to make pricing or bundling changes more permanent? And then the second was really more on mobile app optimization. I wanted to just get a sense for any progress you've made optimizing mobile for the freemium approach and the opportunity there. Thanks so much.

And then the beneficial ownership report it seems like a significant opportunity I think you guys said 90 per cent plus of U S businesses are available now for this report can you just help us understand the size of this opportunity and how you guys are approaching in 2024 and when exactly this should start to hit the model is it more of a four Q thing or should have rolled through the year.

[noise] so much.

Yeah, Thanks for the questions Andrew.

Yeah on the market share side, you know there are a lot of moving parts here and just to.

Daniel A. Wernikoff: Great. Thanks for the question, Jake. Yeah, on the first point about testing, we've been pretty clear that that's an ongoing effort that we'll have. And really, if you think about what happened over the last year, a portion of our customers, the majority of our customers are coming in through our free SKUs, which changes some of the behavior around some of the subscriptions that we also market within the Formations Flow. And so, you know, we've done lots of different tests.

Say it one more time the partnership exits are are really making that a little bit more cloudy as well as us making structural changes in our sales organization. So in the near term as we think about the first half of next year, we expect the overall number to be lower than it was in the <unk>.

Prior year, what we start to see at the end of the year, though as we'll start to see a rebuilding of the share gains as more of a mixed in the compares the right against our direct business.

Daniel A. Wernikoff: Just to remind you, the goals of those tests, we kind of look at them as a one-year bookings or one-year return. We always lean towards the mix of subscriptions if all other things are neutral. We also prefer to have more customers coming into our ecosystem because we feel confident that over time, we're going to get better and better at post-formation monetization. And so, if you step back, it's sort of the rubric we have is that we want the transactional costs upfront to be as low as possible to get that mix to subscription. And the more we have success on the post-formation monetization side, the more it just feeds that flywheel and allows us to take less upfront pricing from our customers.

So that's something that I think over time, it's going to right itself, we expect to exit the year and.

From a standpoint of our direct channel Ah up year over year on share, albeit slightly and I think the thing that we continue to do though is we balance monetization I mean, if you were to go back thematic Lee and think about last year, we specifically provided shared goals.

Partially because we were also providing profitability goals and we wanted people to understand that this was not just about profitability, but it is about customer growth now that we've got a much larger base of customers.

We're starting to think more and more about monetization and also just deviating the base of of customers into free customers, who are highly price sensitive, but we still have a lot of premium customers as well and so we want to focus our energy there are as well. So there's there's a lot of things to consider here, especially as that customer count.

Daniel A. Wernikoff: So most of the testing that we do is sort of aligned with that strategy. We learn something every single time we do one of these tests, and we'll continue to do it, but there's nothing to announce about what we're changing. And we also are in a competitive environment, so we don't like to flag exactly what we're going to change in the upcoming quarter. Mobile is a huge focus for us, you know; roughly half of our sessions today that come in to traffic with prospects are through mobile. It converts about a third of what our desktop does, so right off the bat, you know that there's an opportunity there.

Gets larger over time.

Compounds, when we think about new products, which which also dovetails with your question may beyond B O B y R.

B O Y ours are really interesting opportunity.

Daniel A. Wernikoff: That's also a place where as you continue to increase free messaging, you see the mix increase as well in terms of the prospects that come in through mobile. And so that's a place where you will see us do multiple things starting in the next quarter where I think you'll see a new experience around mobile from us that is really addressing some of the concerns we have around conversion. One moment for our next question. The next question comes from Andrew Boone with J&P Securities. Your line is open.

We very purposely included entitlement to this offering with our existing compliance customers and we felt like if you have a subscription called total compliance.

And someone's previously bought it that it should include entitlements and new compliance requirements that are coming out and so that is something that actually mute the opportunity a little bit.

Daniel A. Wernikoff: Thanks so much for taking my questions. I wanted to go back to business formations and your guys' thoughts on 2024. It's a little bit hard to parse, thinking about share gains. Understandably, branded LZ is taking share, but how do we think about share gains for 2024 and how are you guys thinking about that? And then the Beneficial Ownership Report seems like a significant opportunity. I think you guys said 90% plus of U.S. businesses are available now for this report. Can you just help us understand the size of this opportunity and how you guys are approaching it in 2024 and when exactly this should start to hit the model? Is it more of a 4Q thing, or should it roll through the year? Thanks so much.

But we also feel like it's an opportunity to acquire new customers into our franchise and we still have other customers, who don't subscribe to the compliance bundle. So this gives us an opportunity to either upsell them into that bundle or help them just specifically with this this one compliance requirement now the interesting thing here is this is a brand new.

New requirements and the rollout is going relatively slow with Vince and I think at this point, they've they've said that they've got about 500000 customers who have complied with the with the requirement.

It's our expectation is that it'll be heavily backloaded that the <unk>.

Daniel A. Wernikoff: Yeah, thanks for the questions, Andrew. Yeah, on the market share side, there are a lot of moving parts here, and just to, you know, Let's say it one more time: the partnership exits are really making that a little bit more cloudy, as well as us, you know, making structural changes in our sales organization. So in the near term, as we think about the first half of next year, we expect the overall number to be, you know, lower than it was in the prior year. But what we start to see at the end of the year, though, is we'll start to see a rebuilding of the share gains as, you know, more of the mix and the comparisons are right against our direct business. And so that's something that I think, you know, over time, it's going to right itself.

Most likely that most of these these customers come in at the fourth quarter. When you start to see the requirement probably being message more aggressively by Vincent.

And again, we're trying to get as many of our customers.

Compliant as soon as possible. The requirement also for new formations is 90 days posts formation for those that are formed in 2024.

So you'll see it integrated into our lineup.

As well so there's there's a lot of moving parts. There I will say that we have a pretty modest expectation for this year because of all those moving parts, but that could be a place where we surprised ourselves a little bit.

[noise]. Thank you.

One moment, Okay. Our next question.

Daniel A. Wernikoff: We expect to exit the year, you know, from a standpoint of our direct channel up year-over-year on share, albeit slightly. And I think the thing that we continue to do, though, is balance monetization. I mean, if you were to go back thematically and think about last year, we specifically provided share goals partially because we were also providing profitability goals.

Our next question comes from Max out with William Blair. Your line is open.

Hey, Great Wonder, perhaps follow up and the last question a little bit maybe just help us understand why it's a trade off between focusing on L. T V. And then market share gains does it have to do with how you allocate marketing dollars or what's sort of behind that.

Daniel A. Wernikoff: We wanted people to understand that, you know, this was not just about profitability, but it was about customer growth. Now that we've got a much larger base of customers, we're starting to think more and more about monetization and also just deviating the base of customers into free customers who are highly price sensitive. But we still have a lot of premium customers as well, and so we want to focus our energy there as well. So there's a lot of things to consider here, especially as that customer count gets larger over time. It compounds when we think about new products, which also dovetails with your question, perhaps, on BOIR. So BOIR is a really interesting opportunity.

It's really customer behavior, I mean, what we what we see from our customers, especially in their initial purchase that the more we bundle into the initial purchase the lower the conversion rate. So it's not that people start to drop things out of the carpet they actually <unk>.

Leave the the the car entirely and probably start to consider other alternatives. Because you. What you have to remember is most people who are forming a business don't fully understand what the suite of products and services they need to stay compliance as an entity are and through that discovery.

Process, you see some businesses fall off so so the the concern is primarily just on that initial card purchase the opportunity is if we can get that card size down.

Daniel A. Wernikoff: You know, we purposefully included entitlement to this offering with our existing compliance customers. We felt like, you know, if you have a subscription called Total Compliance and someone has previously bought it, it should include entitlement to new compliance requirements that are coming out. And so, you know, that actually mutes the opportunity a little bit, but we also feel like it's an opportunity to acquire new customers into our franchise, and we still have other customers who don't subscribe to the compliance bundle. So this gives us an opportunity to either upsell them into that bundle or help them just specifically with this one compliance requirement. Now, the interesting thing here is this is, you know, a brand-new requirement, and the rollout is going relatively slow with Incent. I think at this point, they've said that they have about 500,000 customers who have complied with the requirement.

And bring our customer base up and increase the size of the customer base, we can actually monetize them posts formation. So a lot of our investment over the last couple of years, both in terms of creating new subscriptions, but also creating this cohesive experienced in my L. Z. It's all centered on the idea that you.

Don't need to buy all these things the moment that you are forming your entity historically, we have done that because that's been the place where we have had their attention, but now we're starting to shift to that into the post formation experience, which is which is really a very large opportunity for us over the long term.

And something that we're still really early stages into and we have a fair amount of resources invested in dedicated to enhancing that experience, which is an important opportunity for us.

Some in this year, but even more meaningful as we look into 25 and beyond.

Got it it makes sense and then well can you give us any directional guidance for how to think about the split between transaction and subscription revenue growth for 24.

Daniel A. Wernikoff: Our expectation is that it'll be heavily backloaded, and it's most likely that most of these customers will come in during the fourth quarter when you start to see the requirement probably being messaged more aggressively by FinCEN. And again, we're trying to get as many of our customers compliant as soon as possible. The requirement also for new formations is 90 days post-formation for those that are formed in 2024.

Yeah, I would say that we are you know continue to focus on where we can driving is Dan was speaking to the shift from transaction into subscription.

I think on the subscription side, obviously as we've indicated the last couple of quarters.

The tax is going to be a headwind for us in 2024, particularly in the first half of the year. So we'll see some of that Hedwig and we gave you and the prepared remarks on specifics around four.

Daniel A. Wernikoff: So you'll see it integrated into our lineup as well. So there's a lot of moving parts there. I will say that we have pretty modest expectations for this year because of all those moving parts, but that could be a place where we surprise ourselves a little.

Daniel A. Wernikoff: Thank you. One moment for our next question. Our next question comes from Matt Pfau with William Blair. Your line is open.

Four point headwind on subscription growth alone.

So, let's see some moderation there.

Daniel A. Wernikoff: Hey Greg, I wanted to perhaps follow up on that last question a little bit and maybe just help us understand why it's a tradeoff between focusing on LTV and then market share gains. Does it have to do with how you allocate marketing dollars, or what's sort of behind that? It's really customer behavior. I mean, what we see from our customers, especially in their initial purchase, is that the more we bundle into the initial purchase, the lower the conversion rate. So it's not that people start to drop things out of the cart, but they actually leave the cart entirely and probably start to consider other alternatives. Because what you have to remember is most people who are forming a business don't fully understand what the suite of products and services they need to stay compliant as an entity are.

And then the transaction side is going to be largely a function of our you know a combination of the macro our ability to take share in all of the commercialization testing that we're doing incorporating new products into the lineup testing card size and balancing.

Conversion.

Pushing customers into subscription.

Got it thank you I appreciate it.

One moment Alright next question.

Our next question comes from Brian with Jeffries Joanna is open.

Hi. Thank you. This is <unk> I have two questions, one <unk> and not really be Frank information, but just an S. M B health and behavior I wanted to see you know what.

<unk> from your date and then second you know you you lost a lot of new Protestant twenty-three just wanted to see how would you say the response is among the most meaningful Monday and what would you want it the most exciting of those products for 24. Thank you.

Daniel A. Wernikoff: And through that discovery process, you see some businesses fall off. So the concern is primarily just about that initial cart purchase. The opportunity is if we can get that cart size down and bring our customer base up and increase the size of the customer base, we can actually monetize them post formation. So a lot of our investment over the last couple of years, both in terms of creating new subscriptions but also creating this cohesive experience in MyLZ, it's all centered on the idea that you don't need to buy all these things the moment that you're forming your entity Historically, we have done that because that's been the place where we've had their attention, but now we're starting to shift that into the post-formation experience, which is really a very large opportunity for us over the long term. And something that we're still really early stages into, and we have a fair amount of resources invested and dedicated to enhancing that experience, which is an important opportunity for us. You know, some in this year, but even more meaningful as we look into 25.

Yeah, Thanks for the questions John.

Near the macro it's interesting coming out of last year, where we saw the macro grow 8%.

You know, we're entering this year a little bit more cautiously.

Year to date, where we're sort of looking at very low single digits right now in terms of growth, but one of the interesting things that we always see is when the calendar flips, there's some volatility and so we're not necessarily calling a week macro but we're just always planning for a week or macro because we feel like that's the right way to approach.

<unk>.

Resource allocation and just thinking through how we can be responsive dependent on what's happening in the environment.

In queue for we were a little bit surprised by the strength and retention across a lot of our subscriptions, which would point to some some nice nice health and small business and then you know it was.

Noel Watson: Got it, it makes sense. And Noel, can you give us any directional guidance for how to think about the split between transaction and subscription revenue growth for 24? Yeah, I would say that we are, you know, continuing to focus on where we can drive, as Dan was speaking about, the shift from transaction to subscription. I think on the subscription side, obviously, as we've indicated in the last couple of quarters, the LZ tax is going to be a headwind for us in 2024, particularly in the first half of the year. So we'll see some of that headwind.

It was also interesting because we saw elevated dissolution as well.

So I'd say, it's a pretty muddled market and macro at this point.

We're ready for whatever direction. It turns and we don't have significant expectations around the macro for this year in terms of our guide.

On your second question on how new product launches are going what are we excited about and I'd call. It a couple of different things here, I mean, obviously books and taxes sort of.

I think of it as peanut butter and jelly I mean, we were out with tax before but the reality is most of the customers who come into our ecosystem. They actually want to get tax insights first.

Noel Watson: And we gave you, in the prepared remarks, some specifics around the four-point headwind on subscription growth alone. So we'll see some moderation there, and then the transaction side is going to be largely a function of our, you know, combination of the macro, our ability to take share, and all of the commercialization testing that we're doing, incorporating new products into the lineup, testing card size, and balancing, you know, conversion with pushing customer demand. I got it.

And often times, they have that need well before.

They have the actual tax filing requirement and so books is really that product that helps give them a sense of how.

How they're doing from a tax perspective, as a brand new business and helps them get organized and think about managing their business appropriately as a as a brand new small business I'd.

Noel Watson: Thank you. Appreciate it. One moment for our next question. Our next question comes from Brent Phil with Jeffrey's. Your line is open. Hi, thank you. This is John again for Brentel.

I'd say business licenses is just core to what we're doing as a as a as a sort of a compliance related egos.

Daniel A. Wernikoff: I have two questions. One is on macro and not really referring to formations, but just SMB health and behavior. I wanted to see, you know, what you're seeing from your base. And then second, you know, you've launched a lot of new products in 23. I just wanted to see, you know, how would you say the early response is among the most meaningful ones and which one is the most exciting of those products for 24. Thank you.

Ecosystem and so that one you'll see some some new releases coming out probably in the next quarter.

That I think will provide a little bit more clarity about how we're approaching that from a go to market standpoint, and probably the biggest opportunity that we don't talk a lot about is the consumer space and also becoming a platform for people to interact with attorneys.

Daniel A. Wernikoff: Yeah, thanks for the questions, John. You know, the macro, it's interesting coming out of last year, where we saw the macro grow 8%. You know, we're entering this year a little bit more cautiously. You know, year to date, we're sort of looking at, you know, very low single digits right now in terms of growth. But one of the interesting things that we always see is when the calendar flips; there's some volatility.

And so a lot of the things that we've done on a small business side are absolutely analogous to what we need to do on the consumer side as well as what we need to do from a platform perspective to provide experts to our small businesses and a really low cost efficient way.

Daniel A. Wernikoff: And so we're not necessarily calling this a weak macro, but we're just always planning for a weaker macro because we feel like that's the right way to approach resource allocation and just thinking through how we can be responsive, depending on what's happening in the environment. In Q4, we were a little bit surprised by the strength and retention across a lot of our subscriptions, which would point to some good healthy small business. And then, you know, it was also interesting because we saw, you know, elevated dissolution as well.

And so you'll start to see some of those things coming out in the next couple of quarters as well. So we have a lot on the docket is one of the exciting things is the velocity that we had the back half of last year is continuing through the beginning of this year.

Alright, thanks very much.

Your next question.

Your next question comes from Elizabeth Porter like Morgan Stanley Caroline is open.

Alrighty. Thank you very much yeah, I just wanted to ask on.

And then that can take your making an additional channels after cutting back on submitted direct sales heads you can increase can and into 2024 I just wanted to double click on kind of a strategy there where you're looking to make other investments in customer application, where you see the biggest opportunity. Thank you.

Daniel A. Wernikoff: So I'd say it's a pretty muddled market or macro at this point, but, you know, we're ready for whatever direction it turns, and we don't have significant expectations around the macro for this year in terms of our guide. On your second question about how new product launches are going, what are we excited about? I mean, I'd call it a couple different things here.

Yeah. Thanks for the question was with.

We've been a little bit centered on performance marketing over the last year and we.

Daniel A. Wernikoff: I mean, obviously, Books and Tax is sort of, you know, I think of it as peanut butter and jelly. I mean, you know, we were out with Tax before, but the reality is most of the customers who come into our ecosystem actually want to get tax insights first, and oftentimes, they have that need well before they have the actual tax filing requirement. And so Books is really that product that helps give them a sense of how they're doing from a tax perspective as a brand-new business and helps them get organized and think about managing their business appropriately as a brand-new small business. I'd say business licenses are just core to what we're doing as a sort of compliance-related ecosystem, and so that one, you know, you'll see some new releases coming out probably in the next quarter that I think will provide a little bit more clarity about how we're approaching that from a go-to-market standpoint.

Coming out of 2021, and 22, where we had a heavy brand investments.

At this point, we now have our model pretty well tuned against to premium and I think we're starting to branch out into <unk>.

Channels like social and video.

But also will do a lighter brand investment as well the brand new investment this time will be much more actionable.

Because you know again the model to convert is kind of tuned against those those those different customers that we're trying to reach.

And then I'd also say I just wanted to call out while we restructured the sales team. We also believe that that's going to be an opportunity as we start to go through the year. Because this is where we now have.

Better a better view of our customers and segmentation and we're building propensity models and we have a multichannel approach, including my Lz, which can now do dynamic targeting for our customers.

Daniel A. Wernikoff: And probably the biggest opportunity that we don't talk a lot about is the consumer space and also becoming a platform for people to interact with lawyers. And so a lot of the things that we've done on the small business side are absolutely analogous to what we need to do on the consumer side, as well as what we need to do from a platform perspective to provide experts to our small businesses in a really low-cost, efficient way. And so you'll start to see some of those things coming out in the next couple of quarters, as well. So we have a lot on the docket.

But also the high value customers moving more towards specifically in sales. So we can do it a little bit more efficiently than we've done historically so I'd.

I'd say, we're moving much more into like an omnichannel strategy, but still heavily.

He reflexive and being able to respond quickly with performance marketing as well as the at the core.

Great and then just as a follow up yeah, I believe when you sleep unexpected subscription revenue growth is slowing in queue for but you actually did that day and changing commercial Saturday with all the tax, but we actually got a nice acceleration and growth in that segment. So what surprised you in the corner I know you mentioned and get a good return Chamberlain to any anything else to call.

Daniel A. Wernikoff: One of the exciting things is that the velocity that we had in the back half of last year is continuing through the beginning of this. Thanks very much. One moment for our next question. Your next question comes from Elizabeth Porter with Morgan Stanley. Your line is open.

At their thanks.

Yeah. So we were really happy with our revenue performance in the corner and particularly on the subscription side and.

Noel Watson: Great, thank you very much. I just wanted to ask about the investment that you're making in additional channels after cutting back on some of the direct sales heads, you know, some increased CAM and into 2024. So, I just wanted to double-click on kind of a strategy there where you're looking to make other investments and customer acquisition where you see the biggest opportunity. Thank you.

We saw the strength across multiple products in the corner really Elizabeth and virtual Mayo Lz taxed a bit as well, but primarily in our core compliance subscriptions, where we saw really improved retention that exceeded our expectations for the quarter and allowed us to outperform.

The guide that we had for it we had set for two four.

Daniel A. Wernikoff: You know, we've been a little bit centered on performance marketing over the last year. And, you know, coming out of 2021 and 22, where we had heavy brand investments, at this point, we now have our model pretty well tuned against premium.

Great. Thank you.

One moment to the next question.

Our next question comes from Alice Smith J P. M. C. Your line is open.

Hi, Thank you so much for taking my question.

My first question is I think you called out 7500, <unk> subscribers I was hoping you could either call. It typically are <unk> subscribers for example had missed them.

Daniel A. Wernikoff: And I think we're starting to branch out into, you know, channels like social and video, but we'll also do a lighter brand investment as well. The brand investment this time will be much more actionable because, you know, again, the model to convert is kind of tuned against those different customers that we're trying to reach. And then I'd also say, I just want to call out, while we restructured the sales team, we also believe that that's going to be an opportunity as we start to go through the year because this is where we now have, you know, a better view of our customers and segmentation, and we're building propensity models, and we have a multi-channel approach, including MileZ, which can now do dynamic targeting for our customers So we can do it a little bit more efficiently than we have done historically.

L D before and are they crossed the patch with any other products.

Yeah. So the the the data point there is 7500 subscribers for for Lz books.

And they're all coming from our ecosystem. So we really didn't deploy initially we deployed this ah just through my Lz and so was krossel posts formation.

And then as we proved out the experienced and starting to get customer feedback, we decided to put it also into our formation flow, which we really did right at the end of October.

And we've seen strong attach I think the things that we're looking for right now is good activation.

Our customers oftentimes come in before their operational and purchase things and then they need to sort of have the income or the expenses before they start to use the products and so we're we're.

Daniel A. Wernikoff: So I'd say we're moving much more into an omni-channel strategy, but still heavily reflexive and being able to respond quickly with performance marketing as well at the core. And then just as a follow-up, you know, I believe initially you expected subscription revenue growth to slow in Q4, but you actually, due to that change in commercial strategy with LZ Tax, but we actually got a nice acceleration in growth in that segment. So, you know, what surprised you in the quarter?

A lot of activities decked against that and we're also really watching the upsell motion into tax, especially with tax season right now going on so that's where I think we get really excited.

As you are going through your taxes, if you use lz tax I mean, it's a single click to upload all your data directly in it.

And then also as you finished taxes if he didn't have a way to organize your books.

Noel Watson: I know you mentioned good retention, but was there anything else to call out there? Yeah, so we were really happy with our revenue performance in the quarter, particularly on the subscription side. And we saw strength across multiple products in the quarter, really, Elizabeth, and virtual mail, LZTax a bit as well, but primarily in our core compliance subscriptions, where we saw really improved retention that exceeded our expectations for the quarter and allowed us to meet the guide that we had set for you. Great, thank you. One moment for our next question. The next question comes from Ella Smith with JPMC. Your line is open.

It's a very simple cross sell back the other direction to introduce you to Lz books and so it's really built its custom built as a single platform that works all the way across from just managing your expenses are connecting your banks and sending invoices all the way through to filing.

Got it that's very helpful. Thank you.

And for a quick follow up I am curious when thinking about the restructuring changes in your sales operation, which you can ask <unk> what are the biggest key changes now or in person. It's what we see that link will take it in the past.

Yeah, I mean, historically, because we didn't have a great view of our customer.

Daniel A. Wernikoff: Hi, thank you so much for taking my question. My first question is, I think you called out 7,500 LZ Book subscribers. I was hoping you could either qualitatively or quantitatively profile those subscribers. For example, have most of them used LZ before, and are they cross-patching any other products?

We contacted just about all of our customers through sales and you know it starts and we would do it abandoned our program and we would do Onboarding and then we would do continuous cross sell depending on you know sometimes seasonal needs like tax.

And it's a pretty inefficient motion right. If you think about that that's indiscriminate. So we're marketing to you in the formations flow, we're marketing to you an E mail and we're and we're calling you as well.

Daniel A. Wernikoff: Thanks. Yeah, so the data point there is 7,500 subscribers for LZBooks, and they are all coming from our ecosystem. So we really didn't deploy, initially, we deployed this just through MyLZ, and so it was cross-sold post-formation. And then, as we proved out the experience and started to get customer feedback, we decided to put it also into our formation flow, which we really did right at the end of October. And we've seen a strong attach.

Which.

There are a segment of our customers that are extremely high value that we can identify now and we have a propensity models that we're building. So that we're only targeting those customers with a very consultative sales experience. That's much more tailor made to them and then driving the other customers towards our lower cost self directed channels like E Mail.

And miles each so I.

Daniel A. Wernikoff: I think the thing that we're looking for right now is good activation. You know, our customers oftentimes come in before they're operational and purchase things, and then, you know, they need to sort of have the income or the expenses before they start to use the products. And so we're, you know, have a lot of activities decked against that. And we're also really watching the upsell motion into tax, especially with tax season right now, going on. So that's where I think we get really excited.

I would say that we're moving from more blunt force until like a much more scientific approach to how we market to our customers.

And one thing just to reiterate I think Dan said it earlier, but we are actively managing our reinvestment in sales head count.

And we have a targeted Roy and if we are able to exceed that are white and we will.

Continued to invest in that organization and.

That would have an impact on our top line versus our plan as well.

Great. Thank you so much.

Think so.

Daniel A. Wernikoff: As you are going through your taxes, if you use LZTax, I mean, it's a single click to upload all your data directly into it. And then also, as you finish your taxes, if you didn't have a way to organize your books, it's a very, you know, simple cross-sell in the other direction to introduce you to LZBooks. And so it's really built, it's custom built as a single platform that works all the way across from just managing your expenses and connecting your banks and sending invoices all the way through to filing. Got it. That's very helpful. Thank you. And for a quick follow-up, I am curious, when thinking about the restructuring changes in your sales operations which you've enacted in the past few years, what are the biggest key changes now and moving forward versus what we've seen at LegalZoom in the past?

Thank you there are no further questions at this time. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

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Daniel A. Wernikoff: Yeah, I mean, historically, because we didn't have a great view of our customers, we contacted just about all of our customers through sales. And, you know, it starts with, you know, we would do an abandoner program, and we would do onboarding, and then we would do continuous cross-sell, depending on, you know, sometimes seasonal needs like tax. And it's a pretty inefficient motion, right? If you think about that, it's indiscriminate.

Daniel A. Wernikoff: So we're marketing to you in the form flow, we're marketing to you in email, and we're calling you as well. There is a segment of our customers that are extremely high value that we can identify now, and we have propensity models that we're building so that we're only targeting those customers with a very consultative sales experience that's much more tailored-made to them, and then driving the other customers towards our lower-cost So I would say that we're moving from a more blunt force into, like, a much more scientific approach to how we market to our customers. And one thing just to reiterate, I think Dan said it earlier, but we're actively managing our reinvestment in sales headcount, and we have a targeted ROI. And if we are able to exceed that ROI, then we will continue to invest in that organization. And that would have an impact on our top line versus our plan as well.

Daniel A. Wernikoff: Great, thanks a lot. Thank you. There are no further questions at this time. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

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