Q3 2024 LegalZoom.com Inc Earnings Call
Good day and thank you for standing by. Welcome to Legalism's third quarter 2024 earnings conference call. At this time, all participants are an ablistened only mode.
After the speaker's presentation, don't be a question and answer session. To ask a question during a session, you'll need to press star 1-1 on your telephone. You'll then hear an automated 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 turn the conference over to your first speaker today, Madeleine Crane, Head of Investor, Congratulations. Please go ahead.
Madeleine Crane: Thank you operator. Welcome to Legal's in third quarter 2024, Ernene's Conference Call.
Madeleine Crane: Joining me today is Jeff Stibel, our chairman and chief executive officer and Noel Watson, our chief operating officer and chief financial officer.
As a reminder, we will be making forward-looking statements on this call.
He forward-looking statements can be identified at ease of words such as beliefs, sex facts, plans, and to the pay will, intent, and similar expressions, and are not, and should not be relied upon as a guarantee of future performance or result.
Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date.
These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements.
Madeleine Crane: 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.
Madeleine Crane: 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.
Madeleine Crane: 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.legaldoom.com
Speaker Change: I will now turn the call over to Jeff. Good afternoon, everyone, and thank you for joining the call. Today, I'll be providing an overview of our third quarter results before diving into detail on the progress we've made in our three key focus areas.
Speaker Change: During the quarter, we focused on reimagining transactional products towards subscriptions and enhancing the value of our subscription products.
Speaker Change: We also began updating our customer education and pricing to better reflect the value we provide. Our efforts were guided by customer learnings and feedback, as we focused on delivering best-in-class expertise and improving the customer experience.
Speaker Change: If there is a single message we hope to get across during this call, it is that we are focused on driving durable results, improving the predictability of our business by re-accelerating subscription revenue growth and leading the business toward increasing profitability. Let's jump in.
We achieved third quarter revenue at the high end of our guidance of $169 million.
Speaker Change: Our subscription revenue grew 5% year-over-year from strength in our compliance-related subscriptions. Our transaction revenue declined 7% year-over-year, largely due to softer business formations.
Census CIN applications declined 9% year-over-year in Q3, and we saw a decline in our market share of business formations, which was expected as we conducted important testing with a goal of narrowing our focus to high-value customers.
Speaker Change: Market share versus quality share will be a key topic I will be discussing today. Overall, we're pleased with our early progress against shifting our business towards recurring revenue to drive long-term durability.
Speaker Change: We also achieved strong bottom line performance this quarter.
Madeleine Crane: Third quarter adjusted EBITDA came in well above forecast at 47 million dollars which reflected a record 28% margin for us as a public company.
Speaker Change: While the outperformance included the benefit of certain one-time items, which Noel will discuss, it also reflects success in key tests that we ran in support of our goal to acquire customers more efficiently and shift our business towards high-margin subscription offerings.
Speaker Change: This reinforces our conviction that we can drive durable margin expansion in 2025.
Speaker Change: This quarter, we spent considerable time listening to our customers and to our employees who are closest to our customers, particularly in sales, fulfillment, and service. Two things became abundantly clear.
Speaker Change: First, our small business customers are meeting us early in the tenure of their company building. They come to LegalZoom because they don't have time to spend hours researching how to form and maintain a compliant business.
Speaker Change: Similarly, our estate planning customers often come to us before speaking with other experts and are eager to plan ahead for their future.
Speaker Change: They come to LegalZoom because without expensive attorney help, they don't know the steps they need to take to protect their loved ones. Our customers depend on us to guide them through the process.
Speaker Change: As I noted on our last call, the customer experience has been lacking education on the problems we solve and the long-term value we provide. We will weave this education into our technology and our service.
Speaker Change: Prioritizing education will cultivate trust, engagement, and reinforce why customers need LegalZoom to be successful.
Speaker Change: Second, we created the online legal services sector back in 2001, and we continue to be viewed as a leader in this industry. These points roll up to a clear message that our brand promises.
Speaker Change: LegalZoom is a trusted partner of needed legal and compliance services. It represents our core, and in order to succeed,
Speaker Change: We need to embrace this fact.
Speaker Change: Our focus is to build the best core products we can, partner with others who offer best-of-breed ancillary products, and provide service that not only empowers, but wows our customers.
Speaker Change: That will require some changes, and it will take some time. But we are confident that the outcome will drive long-term, sustainable growth. Let's now turn to an update on the progress we made during the quarter.
Speaker Change: In Q3, we made important commercialization changes related to customer education and pricing for the value we provide.
Speaker Change: These will help drive the key goals I laid out in August.
Speaker Change: First, demonstrate the value of our subscription offerings, which will build trust, add value to customers, and support retention. And second, improve the quality of our subscriber base towards high-value customers as we focus on growing lifetime value.
Speaker Change: We know that higher value products attract customers who build stronger businesses.
Speaker Change: This also drives a stronger survival rate for businesses and reduced churn for legal firms.
Speaker Change: We see this with our customers. Those who purchase, for example, between $500 to $750 worth of our services during their initial order have over a 10% higher retention rate than our customers who form, by way of example, for between $100 to $250.
Speaker Change: It is clear to us that higher-intent customers are higher-value customers and build more durable businesses.
Speaker Change: In September, we started the process of revamping our formation lineup to attract higher-intent customers through education of the long-term SMV journey and the value of our subscription products.
Speaker Change: The results, while early, were a shift away from freemium purchases to more high-intent products.
Speaker Change: We did so by first updating our $0 or basic formation SKU messaging to make it clear that customers could be left without important tools they need to effectively run their business and remain compliant.
Speaker Change: We also expanded the offerings in our Pro and Premium SKUs and enhanced our messaging on the value these services provide. These SKUs now include a mix of compliance solutions, business management subscriptions, one-on-one legal advice, and trials for some of our subscription offerings.
Speaker Change: We are still testing the right mix, but so far we've seen a mix shift from our $0 basic formation SKU to our $249 pro and $299 premium formation SKUs, which has yielded positive results.
Speaker Change: Next, we reverted to historical pricing on certain compliance solutions with promising outcomes.
Speaker Change: Despite being a market leader in formation and compliance, many of our prices have declined over the past several years while operating in an inflationary economy.
Speaker Change: Pricing is a leading indicator of value and in this case we may have sent an inappropriate message to customers who expect us to be the best in the industry.
Speaker Change: We are testing our way into these changes, and the paradox is with these changes, we expect to see lower revenue churn over time.
Speaker Change: In 2023, we reduced the price of a registered agent product by 20%.
Speaker Change: Just this September, we returned our registered agent subscription to its historic pricing level for new customers with strong initial success.
Speaker Change: Given the value of this product and the peace of mind it provides, our attach rates have remained relatively consistent. Our long-term goal is to have our pricing speak to the value we provide our customers.
Speaker Change: We are actively testing price points across our product portfolio as we focus on attracting high-value customers who will grow with LegalZoom over the long term.
Speaker Change: They're in Q3. We also focused on reimagining transactional products into subscription offerings.
Speaker Change: We ran successful tests to reorient two of our transactional offerings, the Beneficial Ownership Information Report, or BOIR, and business licenses for subscription services by adding more value to these product offerings.
Speaker Change: Reorienting our products towards subscriptions is a key driver of growing the lifetime value of our customers.
Speaker Change: It's also what our customers need from us to succeed.
Speaker Change: Staying current with legal and compliance business requirements is not transactional by nature. It's an ongoing obligation.
Speaker Change: Beginning with the OIR, there is a recurring nature to this report but more importantly, customers see it as a compliance requirement.
Speaker Change: In August, we began testing an online promotion where our BOIR product was integrated with an annual subscription that included BOIR and our compliance subscription alongside a stand-alone BOIR transaction at an equal price.
Speaker Change: To little surprise, we saw a meaningful increase in the attach of our compliance subscription, significantly improving the expected lifetime value of these customers.
Speaker Change: We've also seen similar traction in our sales center, with our sales associates now emphasizing the value of our compliance subscription bundle versus the standalone BOIR transaction when speaking with our customers.
Speaker Change: Another product that lends itself to a subscription offering is business licenses.
Speaker Change: On average, small businesses need over five licenses to operate legally. Remaining compliant is a time-consuming and error-prone process, and failure to comply can materially impact a business through fines or temporary closures.
Speaker Change: Our transactional business license offering, launched in November of 2023, matched a small business profile with relevant licenses and permits using a proprietary database, but through a one-time transactional product.
Speaker Change: This September, we repackaged our business licenses into a subscription offering by adding more value to our customers.
Speaker Change: The new subscription product includes license storage, license sharing, notification of due date renewals, and alerts regarding any changes where a business may no longer be compliant due to changing regulations.
Speaker Change: This is a smaller product offering, but an important test case where we believe the expected lifetime value of these customers will increase as a result of these changes.
Speaker Change: Looking ahead, we'll be rolling out new promotions, products, features, and offerings more broadly across our customer base to enrich our subscription offerings.
Speaker Change: Turning to our consumer channel, over the past few years, we've been singularly focused on our small business opportunity.
Speaker Change: This is a market we have largely neglected as a result, and given our strong historical brand recognition
Speaker Change: and our market position, we feel reinvestment in consumer is warranted. Further, as I noted on our last call, every business has an owner behind it that needs estate planning products.
Speaker Change: In August, we launched a marketing campaign for National Make-A-Will Month, which included a limited-time discount on estate plan products. We saw strong traction during the campaign, including an increase in estate plan sales to our existing small business customer base during the promotion period.
Speaker Change: We're continuing to invest in this area of our business, including a complete redesign of the user experience for our state plan offerings. This includes an improved customer experience via simplified customer intake questionnaires.
Speaker Change: We believe enhancements, such as data validation tools, will result in higher completion rates and instantaneous document generations.
Speaker Change: Saving our customers time.
Speaker Change: This will also drive increased efficiency with our fulfillment and service centers.
Speaker Change: Our long-term goal is to better lean these products toward subscription offerings to help our customers over their lifetimes.
Speaker Change: This is a market where we believe we can create an enduring subscription channel that can be used to offset periods of weakness in small business starts.
Speaker Change: Finally, I'd like to provide an update on our AI efforts.
Speaker Change: The first prong of our AI strategy is to build a foundation from which we can leverage our 20 plus years of legal documents and business formation experience.
Speaker Change: LegalZoom has robust data that we can utilize across nearly 4.3 million estate planning documents and over four and a half million business formations.
Speaker Change: We are working to capitalize on this in an ethical way by first scrubbing personally identified data using privacy-enhancing technology.
Speaker Change: The outcome will enable our artificial intelligence engines to
Speaker Change: to leverage a vast number of legal documents.
Speaker Change: that have worked for our customers over many, many years.
Speaker Change: alongside Edith.
Speaker Change: changes, and the legal nuances that come only from having a rich historical record dating back to our founding in 2001.
Speaker Change: Our service and fulfillment teams will leverage these tools with a goal of providing faster, more efficient, and personalized customer service. And over time, our goal is to use this intelligence and other AI tools to empower our own law firm.
Speaker Change: LegalZoom Legal Services, as well as our network of over a thousand independent attorneys who support our customers.
Speaker Change: This will require more time and care to ensure that we are empowering and not displacing the experts that drive our business forward. But, once unlocked, we believe these tools can drive significant efficiencies for our legal experts and faster, more cost-effective legal services for our customers.
Speaker Change: It is important to remember that generative AI alone cannot replace attorney advice.
Speaker Change: LegalZoom stands apart from our competitors as a technology platform that sits alongside an established network of independent attorneys available to leverage the power of AI to unlock what we believe is a massive opportunity.
Speaker Change: Finally, we're working on launching more AI-powered tools to help our customers.
Speaker Change: We know that finding a valid and available business name is a clear point of friction.
Speaker Change: Last month, we introduced an AI-powered business name generator to help our customers with this important and often difficult first step. As this product rolls out and is perfected, we expect it to help increase close rates and become a natural path to cross-selling other products, such as trademarks and website domains.
Speaker Change: In closing, I'm very pleased with the hard work we've accomplished during a very short period of time in just about a quarter.
Speaker Change: I am proud of our teams for embracing our new priorities and driving immediate, tangible results.
Speaker Change: As a final word, I want to follow up on our ongoing commitment to transparency and communication.
Speaker Change: Despite hitting the top end of our revenue guidance, our year-over-year revenue growth was still only 1% this quarter.
Speaker Change: I'm nevertheless proud of the team for delivering at the top end.
Speaker Change: But we still have a long way to go.
Speaker Change: We are early in our roadmap of execution against our new initiatives and laying the foundation for the future trajectory of our business.
Speaker Change: This includes changes in our execution to enable us to disconnect from our dependence on small business formations for growth and accelerate our subscription revenue.
Speaker Change: both of which will improve predictability of our business and drive continued margin expansion over time.
Speaker Change: We will continue to communicate with you openly and transparently on our progress driving durable results.
Speaker Change: With that, I will hand the call over to Noel to discuss our third quarter results and outlook in more detail. Noel?
Noel Watson: Thanks, Jeff, and good afternoon, everyone. I'll now turn our focus to our third quarter financial performance.
Noel Watson: Please note, all comparisons will be on a year-over-year basis unless otherwise stated.
Noel Watson: Total revenue was $169 million for the quarter, or up 1%.
Speaker Change: Our results met the high end of our outlook with strength coming from subscription revenue.
Speaker Change: Looking at our revenue performance in more detail.
Speaker Change: Transaction revenue was 58 million, down 7%. We recorded 255,000 transaction units in the quarter.
Speaker Change: The 8% increase was primarily due to an increase in non-formation business-related transaction products, such as our new BOIR offering, offset by a lower volume of formation units.
Speaker Change: We recorded 113,000 business formations in the quarter, an 18% decline year-over-year.
Speaker Change: The decrease was due to a softer business formations macro, with Census EIN applications falling 9% year-over-year.
Speaker Change: In addition, we performed important testing related to our go-to-market strategy, which also pressured our formations as we focused on attracting high-value customers.
Speaker Change: Average order value was $227 for the quarter, down 13% year-over-year due to a higher mix of lower price transactions including BOIR.
Speaker Change: We expect a similar trend for AOV in the fourth quarter and continue to expect a high single-digit decline in AOV for the full year 2024 versus 2023.
Speaker Change: Subscription revenue was $111 million, up 5% year-over-year from stronger compliance-related subscriptions and legal advisory subscriptions.
Speaker Change: This growth was partially offset by our tax product due to our decision to pause new customer acquisition, as well as the exit of certain channel partners in Q3 of 2023.
Speaker Change: We ended the quarter with over 1.7 million subscription units, up 10% year-over-year, as we saw an increase in forms and e-signature and bookkeeping subscriptions due to the bundling of these products into certain business formation offerings, as well as growth in virtual mail subscriptions.
Speaker Change: This growth was partially offset by the impact from the exit of legacy partner relationships, which have now largely transitioned from our platform.
Speaker Change: Our pool came in at $264 for the quarter, down 1%.
Speaker Change: Looking at our subscription performance on a sequential basis, subscription revenue increased 2%, primarily due to a 7% increase in units from the bundling of forms, e-signature, and bookkeeping subscriptions into certain business formation offerings, as well as higher compliance-related subscriptions.
Speaker Change: Turning to Expenses and Margins, where all of the following metrics are on a non-GAAP basis.
Speaker Change: Third quarter gross margin was 71%
Speaker Change: The year-over-year improvement was primarily driven by lower filing fees and the percentage of revenue due to the lower information volumes.
Speaker Change: Margins were also supported by lower headcount expenses associated with our tax product as well as automation and process improvements in our service delivery operations.
Speaker Change: Sales and marketing costs were $43 million or 26% of revenue, a decline of 10% from last year.
Speaker Change: Customer acquisition marketing costs declined 4%. During the quarter we executed several performance marketing spend tests to better understand incremental efficiencies.
Speaker Change: This helps us further optimize our marketing spend levels and allows us to reallocate certain investments to longer-term brand initiatives.
Speaker Change: Non-CAM sales and marketing expense was down $3 million, or 25%.
Speaker Change: due to the impact from our sales reorganization in Q4 of last year.
Speaker Change: Technology and development costs were $15 million, down $1 million, or 5%.
Speaker Change: General Administrative expenses were $14 million, a decrease of $1 million or 4%.
Speaker Change: Our performance drove adjusted EBITDA of 47 million or a 28% margin. This represents a 40% year-over-year increase as compared to adjusted EBITDA of 34 million for the same period last year.
Speaker Change: As a reminder, our adjusted EBITDA margins are seasonally higher in the back half of the year due to lower volume of business formations.
Speaker Change: Adjusted EBITDA was supported by our revenue performance, which came in at the higher end of our expectations. Additionally, we saw a 300 basis point increase in our subscription revenue mix, which supports our performance given the higher margin nature of these products.
Speaker Change: These results were also driven by certain one-time factors, including lower CAM spend from the aforementioned testing, and better than expected savings from our reduction in force last quarter.
Speaker Change: Excluding these factors, adjusted EBITDA would still have exceeded the high end of our outlook due to the solid revenue performance and as we drive ongoing efficiencies in our business.
Speaker Change: Deferred revenue decreased by $3 million in the quarter, which was in line with our expectations and the typical seasonality of our business.
Speaker Change: Pre-cash flow was $22 million compared to $19 million for the same period in 2023. We ended the quarter with cash in equivalence of $112 million. We remain debt-free with no outstanding borrowings under our $150 million revolving credit facility.
Speaker Change: During the third quarter, we repurchased 3.8 million shares of our common stock for a total of $25 million. This reduced our share count by approximately 2%.
Speaker Change: Since our first share repurchase program beginning in the first quarter of 2022, we have returned approximately $313 million to shareholders in the form of share repurchases, reducing our share count prior to the program by approximately 17%.
Speaker Change: Subsequent to the end of the quarter, our board of directors approved a $40 million increase in our share repurchase program authorization, bringing the total amount authorized to $215 million. Following the increase, we had approximately $50 million available under the share repurchase authorization as of today.
Speaker Change: We are continuing to balance our share repurchase program alongside maintaining a flexible cash position to support our capital allocation priorities.
Speaker Change: Finally, turning to our outlook. We are updating all components of our outlook today to reflect three quarters of actual financial results and our latest expectations regarding macro trends and business initiatives in the fourth quarter.
Speaker Change: By the fourth quarter, we expect revenue in the range of $158 to $162 million, or 1% year-over-year growth at the midpoint.
Speaker Change: On a sequential basis, we expect fourth quarter revenue performance to reflect a sequential improvement in transaction revenue growth, driven by an anticipated increase of BOIR filings in advance of the December 31st deadline, as well as fulfillment timing.
Speaker Change: and a sequential deceleration in subscription revenue growth due to headwinds in our tax product following our decision to pause new customer acquisitions.
Speaker Change: For the full year, we expect revenue in the range of $678 million to $682 million, or 3% year-over-year growth at the midpoint.
Speaker Change: Our revenue outlook continues to reflect the impact from a mid- to high-single-digit decline in the Census EIN formations macro for the full year 2024.
Speaker Change: Turning to adjusted EBITDA, we expect to achieve adjusted EBITDA at the range of 40 to 44 million dollars in the fourth quarter, which reflects a 26% margin at the midpoint.
Speaker Change: For the full year, we've raised our adjusted EBITDA expectation to be in the range of $144 million to $148 million, or a margin of 21% at the midpoint.
Speaker Change: Finally, we expect free cash flow to be
Speaker Change: In closing, I'd like to thank the entire LegalZoom team for their hard work this quarter. We are beginning to see evidence of the positive trends our key execution priorities are having in our business, and I look forward to updating you on our continued progress in the coming quarters.
Speaker Change: And with that, let's please open the call for questions.
Speaker Change: Thank you. As mentioned at this time, we'll now conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Our first question comes to the line of Andrew Boone with JMP Securities. Your line is now open.
Andrew Boone: Thanks so much for taking my questions.
Speaker Change: Jeff, I wanted to ask a little bit about the pricing test that you talked about in the quarter. Can you talk about where pricing could go going forward? And then just related to the larger move across the industry of moving to free that we've seen over the last couple years. And then for my second question, can you talk about the broader opportunity with Mile Z and some of the components of selling subscription after the core formation?
Speaker Change: How do we think about conversion later in entrepreneurs' life cycle as it relates to LegalZoom? Thanks so much.
Speaker Change: Sure thing. Let me take the first question about pricing first and unpack that a bit.
Speaker Change: In terms of where we think pricing can go, again, it's not a function of higher or lower necessarily. It's a function of matching pricing to the value that we're offering and the value and the promise that our brand derives.
Speaker Change: So, we have done a series of price tests, higher and lower, and this is not dissimilar to what you see with many different companies.
Speaker Change: I think that there is a lot more opportunity for price on the high end for certain products, particularly we're offering higher value added services.
Speaker Change: and where we're mapping both our product to the expertise that we deliver. And there are going to be some areas where pricing can be lower. And, you know, a good example of that is with our free product, which we did not shut down.
Speaker Change: We just started repositioning so that our customers knew exactly what they were getting. With respect to the competitive landscape, just to be clear, some...
Speaker Change: companies offer a free product. But I put quotes around that free product. Some offer a free product, which is really just a 12 month trial, and then you run into a subscription. Some offer a free product, so long as you're a member, and you have to subscribe to that membership. And then others offer a free product, alongside an attachment to other products and services.
Speaker Change: So, it's a bit of a misnomer to think that the market is going towards free and, you know,
Speaker Change: Customers need to be aware that you get what you pay for.
Speaker Change: And with respect to free, that is an important thing to understand. And we get what we pay for. You know, we've seen some Secretary of State's go...
Speaker Change: to free, only to find out that they're ending up with a lot of fraud and bad actors and then stopping that. So we're hypersensitive to how we're looking at pricing and making sure that it matches to what we're trying to deliver strategically.
Speaker Change: With respect to the second question and MyLZ, I mean MyLZ for us is a platform
Speaker Change: Customers will buy a LegalZoom product or service.
Speaker Change: and we will want to meet those customers where they do business. In some cases, that means we're pushing to them. In some cases, that means we will be on the phone with them, if that's what they feel is best.
Speaker Change: But where we can, we want to deliver those services on our platform.
Speaker Change: and that's what myLZ was designed for and, you know, we are leveraging life-cycle marketing and management.
Speaker Change: to bring more and more customers over time to MyLC. And our strong belief is that will, in part, help us to deliver greater upsells and cross-sells post-formation. And while we're in the early innings of that, because it wasn't a core focus, we expect to be able to deliver more post-formation and post-initial purchase because of the MyLC platform, because of future investments in other things like mobile and our sales force and other areas where we can offer more value-added services to our customers who are clamoring for these over time.
Speaker Change: And just to build on that, Andrew, one example where we've seen the benefit of Mile-Z in terms of helping us monetize customers post-formation is with the Beneficial Ownership Information Reports, or BIR, where we primarily monetize it through the Mile-Z experience.
Speaker Change: So to Jeff's point, it is still early innings. There's more that we can do there, but we are seeing examples where it's creating a benefit.
Speaker Change: in addition to the benefits that it creates around helping customers through our process. So where they can get status updates, there's other benefits that they see beyond just monetization that helps with the overall customer experience.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you
Speaker Change: Our next question comes from the line of Ron Josie with Citi. Your line is now open.
Ron Josie: Great. Thanks for taking the question. Jeff, I wanted to talk a little bit more, understand your comments on market share versus quality share.
Speaker Change: and just understand just how we're going to market.
Speaker Change: overall how the business is shifting the subscriptions and maybe how this might impact market share going forward and that metric in particular. And then Noel on on sales and marketing you know we heard on the call both both you and Jeff talked about more efficiently acquiring customers, executing more tests to get there. Any insights on on what's going what you're doing here to the more efficiently acquire customers would be helpful. Thank you guys.
Speaker Change: Yvette, thank you. And I'll take that first part, which is an important question, because this concept of market share and how we define it is very narrow. It's limited to
Speaker Change: our share of formations that come in, you know, through the United States.
Speaker Change: and, you know, the reality is there is a certain amount of formations that aren't going to generate high value for a group like LegalZoom. You know, in the end, we are providing legal and business services to customers.
Speaker Change: So if you have someone who's
Speaker Change: forming an LLC for no other reason than to try to protect an asset.
Speaker Change: It is unlikely that that will turn into a recurring revenue customer or a customer who is buying anything more.
Speaker Change: There is also more fraud when you focus purely on free. And then you end up with a lot more transients as well, which tends to clog your systems, even if it is a customer who might be intending to start a business, by way of example, but doesn't actually form that business or doesn't engage deeply in that business.
Speaker Change: So we are deeply focused on quality, Sharon. It's one of the things that I learned in my first 90 days, and perhaps one of the most important things, which is once you understand our customers, they are looking on to us for quality.
Speaker Change: and in return we should be looking for those quality customers. Customers who will stay with us and endure with us and will grow with us.
Speaker Change: So, we are again early in this journey and life cycle, but we've already seen pretty strong green shades.
Speaker Change: of shifting positively to focusing on quality by education, by pricing, by packaging, and by launching some new products that would innerve particularly to customers who are high intent.
Speaker Change: Yeah, and then, Ron, on the sales and marketing side, so I'm starting with marketing, I think
Speaker Change: primarily
Speaker Change: And then also looking at spending into newer channels to us and testing different formats there. So things like radio and direct mail and spending more on social and in different formats.
Speaker Change: there. So I think the combination of those two things, alongside doing some reinvesting in our brand as well and testing different messages around our brand.
Speaker Change: And then also on the sales side, implementing various tests to help us optimize there. I think we're still, there's still a lot of training that we're investing in there.
Speaker Change: you know, testing different top structures, expanding our upsell capabilities. So those are all things that we're regularly advancing and looking to to generate more effectiveness and efficiency from. And Rob, to add to what Noel was saying,
Rob: From any good marketer's perspective, all marketing is performance marketing if it's done well. So we're looking at ways to complement the marketing we're already doing, and then really testing the assumptions on the pure performance marketing in terms of the last dollars.
Speaker Change: So, you know, what you would see from the outside in is us doing some pretty deep testing on Pulse advertising, Pulse marketing, how we deliver customers to the website and to our sales force.
Speaker Change: and making sure that we are bringing in the right customers who are going to be able to be upsold and cross-sell their subscriptions over the long term.
Speaker Change: Thank you, Jess. Thank you, Noel.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Our next question comes in the line of Josh Beck with Raymond James. Your line is now open.
Speaker Change: Hi there, this is Kishan Patel, I'm for Josh Beck.
Speaker Change: As you looked across S&B, how would you characterize the competitive environment with some others like Zen Business and then maybe also who is more relevant on the consumer side? And in addition, can you discuss the macro environment as it relates to current customer spending patterns?
Speaker Change: Sure, why don't I take the first part from, you know, I think the most important thing to focus on is what is that competitive set?
Speaker Change: When you look at our addressable market, or TAM, it is inclusive of companies like a Zen Business, as you mentioned. But the majority of share is actually going to lawyers. These are small law firms and small individual attorneys.
Speaker Change: who are picking up most of Main Street and the consumer market. That's the real focus. It was historically, it always should be. So rather than us...
Speaker Change: fighting on price.
Speaker Change: looking at, you know, someone who is an online competitor, I would much rather be inclined towards going after that larger TAM with the higher value added products and services where we can build enduring relationships with customers.
Speaker Change: at a much lower price.
Speaker Change: than what they would get by going down the street and into a individual attorney. And, you know, in many cases, our businesses uniquely
Speaker Change: Shut up
Speaker Change: to tackle that addressable market because we have rich and robust technology that makes it sufficient, but we also have a law firm and a legal network of attorneys that can provide that expert advice.
Speaker Change: which I think is a combination that no one else...
Speaker Change: can offer or afford. So as you see what we are doing to reposition our business and our company, it really is focused and based on the customer learnings that we've gathered to actually address their problems as opposed to just selling them a product.
Speaker Change: Thank you.
Noel Watson: You want to take the macro question, Noel? Sure. As it relates to the macro...
Noel Watson: Obviously, the macro is very difficult to predict and project.
Noel Watson: and there's there's been lots of change and even this morning you know news of new change and unclear as to exactly how it'll impact it.
Noel Watson: Overall, the macro thus far this year is softer than last year, right? And it started off, it was down 2% in Q1, and then 6% in Q2, and now 9% in Q3. So we're in a generally soft environment relative to prior year, but structurally, materially higher than pre-pandemic levels.
Speaker Change: including remote work, the fact that it's never been easier to get a business operational with very low cost of capital and with enterprise-like capabilities.
Speaker Change: and then at the same time...
Noel Watson: You know, there's the fact that the growth rate that we've experienced in formations overall in the last four years has been higher than the historical CAGR, so there's the potential for it to regress towards.
Noel Watson: that mean? So all in all, to say it's very hard to project. We're kind of taking a middle-of-the-road view on it right now and waiting to see until we have some more data points.
Noel Watson: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes in line of Patrick Millway with William Blair. Your line is now open.
Patrick Millway: Hi team, thanks for taking my questions. So, further to the changes on pricing for your compliance products.
Noel Watson: Just understanding that those are a sizable portion of your subscription revenue, how should we think about the timing and?
Noel Watson: potential eventual impact of those changes to your overall subscription revenue.
Speaker Change: Sure, Pat. So we're still in the process of unpacking this now, both with the
Speaker Change: New pricing out on the website, the pricing that we're testing with the Salesforce and then
Noel Watson: potential pricing changes to the existing base.
Noel Watson: You know, in all cases, we think it will be a net positive.
Noel Watson: to Revenue and EBITDA. But this is relatively new, so we have to make sure that we're doing it in a way that is accretive to the business and to our customers. So, you know, we're making sure that we're adding.
Noel Watson: both pricing changes and value changes, and that we're accreting again to what we were saying earlier, which is quality share versus market share.
Noel Watson: And, you know, that's a lot to unpack, knowing that we really, you know, just launched this about 45 days ago. So, I suspect we'll have more to say.
Noel Watson: at the next earnings call on this one. And you shouldn't think of this as limited specifically to compliance because, you know, we're looking across our entire
Noel Watson: base of customers and product offerings to make sure that we're matching pricing to value and matching our brand and reputation to everything that we're doing.
Speaker Change: Thank you.
Speaker Change: Okay, I understand that it's early so that's that's helpful. Thanks Jeff. And then just on rebuilding the consumer channel...
Speaker Change: You know, the strategy makes total sense given what you've all talked through today, but just in contrast to what we saw this quarter, I mean, should we expect a re-ramp in the CAM spend as you pursue that initiative, or how should we think about the implications of that push?
Speaker Change: I don't think the implications are going to be spending money on marketing.
Speaker Change: And to the extent that we do, again, that marketing budget is largely fungible because when you're spending on consumer, you're effectively spending on brand and it should inert to the SMB side as well.
Speaker Change: and as we've said repeatedly and believe deeply, well, it's a fact, of course we believe it deeply, all small businesses have an owner behind them and those owners need wills and trusts and a very small percentage of consumers actually have a will or trust.
Speaker Change: So I think we have everything that we need to go to market from a marketing perspective. However, what we do need to do is refresh the products that we offer in two respects. Number one, they need to be best in class.
Speaker Change: and then number two, they need to be recurring in nature. And I'm not just specifically speaking to the business model. I mean, we can't leave customers stranded and a will cannot be done in a vacuum and then left alone. So that's the real focus. And the way in which that we're going to drive that home is with what we were saying on the call, which is through real expertise.
Speaker Change: That's the clear focus and the number one thing that was lacking before we were we were over automating to a fault
Speaker Change: and you know we in some cases will need to slow down the process so that our consumers can get a better understanding and knowledge and education of what it is they need to be buying and then once they buy what it is they need to do to ultimately be successful with these products.
Speaker Change: Understood. Thanks, Jeff. Appreciate it.
Jeff Stibel: You bet.
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, press star 11 on your telephone and wait for your name to be announced.
Speaker Change: Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.
Speaker Change: Great, thanks. This is Katie Kuser for Elizabeth Tonight.
Speaker Change: I wanted to double click on the customer education piece. What are some of the initiatives that have been most impactful to broadening out the scope of the portfolio to the broader customer base? Is there a specific point in the formations flow where education has been most successful? And kind of looking ahead when customers are more engaged, kind of in practice, what's that first tangible step in moving from discovery to monetization? Thanks a lot.
Speaker Change: Thank you, Katie. I'll give you three high-level pieces, and then, Noel, if you want to jump in more specifically, especially from a historical perspective.
Speaker Change: But the three areas where we've had the most success is first, during the initial sign up. So, in the formation process, that's in our questionnaire.
Speaker Change: and we introduce other products and services.
Speaker Change: Through education in that flow, you know, the probably archetype case studies would be compliance, which is in our first questionnaire, and we introduced that as part of something that is necessary when you form a, you know, a company. The second is a registered agent service, and we put that in the second questionnaire, at least for now, and that is required whether you are doing it or whether we do it on your behalf as well. So we educate about what that is and why you need it and what the value is.
Speaker Change: and we'll continue to do more. The second is through something we talked about earlier, which is MyLZ or our platform slash platforms. So once we have someone onboarded, while they are using our products, when we see what they are doing and how they are doing it, we will offer other value-added products and services to them. And then the final piece.
Speaker Change: where I think that there is a lot of opportunity and we are in the early innings again in but have historically been very strong is with regards to our sales, service, and legal expert team.
Speaker Change: And, you know, each one of these individual groups provides a level of expertise. So whether someone is calling in with a customer service need, whether they're calling in because they need a new product or service, or they're calling to talk to a lawyer or an accountant. In each of these cases, we have the opportunity to educate and then upsell and cross-sell. That is an area of deep focus right now because we think that has huge opportunity to not just drive cross-sell and upsell, but to bring our customers up the value chain.
Speaker Change: Yeah, the only thing I build on there is to add personalization, which is an area we're investing in and doing some testing around now to early kind of success, which is between identifying by industry or by the questions that are answered by the entrepreneur on the site.
Speaker Change: We then provide them more specific copy related to educating them in areas that are meaningful and or showing them products that are more appropriate for them that we think they would need to remain compliant. So really getting specific throughout that questionnaire flow, depending on what the customer is telling us and being smart about what we're showing them from an education standpoint in terms of the material and from a product standpoint.
Speaker Change: And that's a great case study and example, Noel, because this is something new that we have recently introduced, and you can see it if you go through our formation flow right now. There are certain categories where we have them highly targeted and highly personalized so that they're actually getting a different set of questions, a different set of educational tools.
Speaker Change: And that's yielding success, again, early in testing, but success with up-cell, cross-cell and conversion.
Speaker Change: Super helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes to the line of Ella Smith with JPMC. Your line is now open.
Ella Smith: Good evening. Thank you for taking my question. So, Jeff, first for you, you continue to see strength in your compliance subscriptions, but of course the overall business formation environment right now is challenged. I would think that compliance subscriptions are generally cross-attached at formation, so can you please help me unpack the strength and compliance subscriptions in the current environment?
Speaker Change: Sure, I think it's really just a function of the calculus of our business.
Ella Smith: falling TAM, in this case, falling formations, you can still increase your business and you can do it one of two ways. You go after market share.
Ella Smith: or you can go after quality share. And in this case, that was a leading question. I appreciate it, Ella. In this case, what we have done is we have pivoted from trying to bring in
Ella Smith: free customers just to increase share, share, you know, at the, you know, at the expense of other things, to trying to educate customers right out of the gate and saying, if you're coming to us,
Ella Smith: Our expectations of you as a customer is that you're trying to, again, in this case...
Ella Smith: build a viable going concern in business.
Ella Smith: And if you do, you need to be compliant. And that is difficult and challenging so that if you don't have your own general counsel, if you don't have an outside law firm, you should leverage our products and services because they are going to be far more cost effective.
Ella Smith: then ending up being fined down the road, or worse, being shut down temporarily or permanently.
Ella Smith: and, you know, we've had early success in that respect.
Ella Smith: pivoting some of these customers both to our higher value formation products and upselling and moving them into compliance at higher prices.
Speaker Change: Yeah, just to build on that, one of the ways that we've done that is leveraging BYR, for example. So, you know, BYR is an example of how remaining compliant for a business owner is becoming increasingly complex.
Ella Smith: And so the fact that they're paying attention to this new requirement that's come up has allowed us to also provide additional education on the other compliance-related products that we offer and be able to shift some of those customers into those subscriptions.
Speaker Change: That's really helpful. Thank you so much, Noel and Jeff. And as a quick follow-up, I know you talked about testing higher price points with a few products, one of which was registered agent service. Are there any other products and services that you call out that you think there might be some pricing power in?
Speaker Change: Thank you.
Speaker Change: All of them.
Speaker Change: If I can be blunt, it's not just about the elasticity curve in this business. It's about the value that we're driving and the
Speaker Change: way we want our business to be considered by our customers and it's what our customers are telling us as well.
Speaker Change: What we deliver is peace of mind.
Speaker Change: And there's huge value in going with the industry leader to get that peace of mind. We are way cheaper, and probably always will be than going to a law firm. And you know, we have we have been in a race to the bottom for far too long. And we don't think it's doing
Speaker Change: our company a service. It's, you know, it is cheapening our brand.
Speaker Change: So I think we are looking at this in almost all cases. That doesn't mean that there aren't going to be certain areas where we want lower pricing, you know, whether that's from a marketing perspective or because we think that that's the right value to price equation.
Speaker Change: But, you know, for the most part, we're more inclined to be the value-priced provider, not the low-cost provider.
Speaker Change: That's really helpful, Jeff. Thanks so much.
Speaker Change: Be back. Thank you, everyone.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time, so I'd like to thank everyone for your participation in today's conference. Since the program is concluded, you may now disconnect. Thank you.