Q4 2024 LegalZoom.com Inc Earnings Call
Good day and thank you for standing by. Welcome to LegalZoom's fourth quarter 2024 earnings call.
At this time, all participants are in a listen-only mode.
After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.
Madeleine Crane: Thank you, Operator. Welcome to LegalZoom's fourth quarter and full year 2024 earnings conference call. Joining me today is Jeff Stibel, our Chairman and Chief Executive Officer, and Noel Watson, our Chief Operating Officer and Chief Financial Officer.
Speaker Change: As a reminder, we will be making forward-looking statements on this call.
Madeleine Crane: These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, and similar expressions, and are not and should not be relied upon as a guarantee of future performance or results.
Madeleine Crane: Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date.
Madeleine Crane: 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.
Madeleine Crane: 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.
Madeleine Crane: We use non-GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors.
Madeleine Crane: 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.legalzoom.com.
I will now turn the call over to Jeff.
Jeff Stibel: Good afternoon everyone. I'm excited to speak with you today about the progress we've made in our three key focus areas. Optimizing our subscription business, reorienting our go-to-market strategy, and leveraging AI to deliver expertise.
Thank you very much.
Jeff Stibel: We are narrowing our focus back to LegalZoom's heritage as a trusted partner of legal and compliant solutions.
Jeff Stibel: In line with our efforts, we are entering 2025 with a new mission rooted in our history.
Jeff Stibel: to transform how businesses and individuals navigate the legal system. Over the last 24 years, LegalZoom has delivered over 9 million legal solutions to businesses and individuals.
Jeff Stibel: We are a leading online platform for legal services at scale, with over 25 in-house attorneys through our own ABS law firm, a nationwide independent attorney network of over 1,000 attorneys,
Jeff Stibel: and approximately 1.8 million active subscriptions of our legal, compliance, and small business management solutions.
Jeff Stibel: We believe our strong technology platform, supported by technology-augmented legal services, represents an even larger opportunity for LegalZoom in the long term.
Jeff Stibel: Our vision is for LegalZoom to serve as the guardian of people's aspirations, lives, and legacies.
Jeff Stibel: Over the last eight months, we've set an executable strategy and are positioning LegalZoom to drive sustainable results.
Jeff Stibel: 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 empowers and delights our customers.
Jeff Stibel: This year, we will continue to focus on the areas of our business we can control. We'll improve predictability by re-accelerating subscription revenue growth and drive the business toward increasing profitability. Let's jump in.
Jeff Stibel: We achieved fourth quarter revenue of $162 million at the high end of our guidance.
Jeff Stibel: Subscription revenue grew 2% year-over-year from strengths in our compliance-related subscriptions.
Jeff Stibel: Q4 marked a critical turning point for us. After four sequential quarters of deceleration,
We expect to re-accelerate subscription revenue growth in 2025.
as we continue shifting our business toward higher value customers.
Jeff Stibel: LegalZoom formations declined faster than overall U.S. business formations in the quarter.
Jeff Stibel: We expect our deliberate focus on quality share will support our goal of driving consistent and sustainable growth. We know that high intent customers, i.e. customers who spend more with us during their initial purchase, build more durable businesses.
Jeff Stibel: In Q4, without removing our free formation offering, we shifted over 10% more customers to our pro and premium packages year over year.
Jeff Stibel: These packages include a mix of compliance solutions, business management subscriptions, one-on-one legal advice, and trials for certain subscription offerings.
Jeff Stibel: Our execution in 2025 will focus on building sustainable revenue performance.
Jeff Stibel: We aim to achieve this by focusing on quality share and concentrating on our core competencies of legal and compliance services, with an emphasis towards subscriptions.
Jeff Stibel: Our actions will include driving greater brand awareness, providing best-in-class service, weaving expertise through our products, and pricing for the value we provide. We are confident these measures will enable us to achieve our 2025 outlook of 5% year-over-year revenue growth.
Jeff Stibel: On the bottom line, we deliver a fourth quarter adjusted EBITDA of $44 million, representing another quarter of strong margin performance.
Jeff Stibel: adjusted EBITDA margins of 27% benefited from ongoing cost deficiencies and a shift to higher margin formations.
Jeff Stibel: As Noel will discuss, our full-year Adjusted EBITDA Margin Outlook reflects double-digit growth in dollars year-over-year and confirms our commitment to drive durable margin expansion in 2025.
Noel Watson: Let's now turn to an update on our key focus areas, beginning with optimizing our subscription business.
Noel Watson: Staying current with legal and compliance requirements is an ongoing obligation.
Noel Watson: Reorienting our products towards subscriptions is key to growing our customers lifetime value. It's also what our customers need from us to succeed.
Speaker Change: As I mentioned earlier, we're continuing to see positive results from changes in our business formation lineup to attract higher intent customers.
Speaker Change: We are also focused on aligning our pricing with the value our services provide, with a goal to attract and retain high-value customers who will grow with LegalZoom over the long term.
Speaker Change: To that end, we've begun to reprice certain products. In September, we returned the entry point pricing of our registered agent product from $199 to $249. We continue to see relatively stable attach rates.
Speaker Change: Looking forward, we will continue to test pricing changes across our portfolio, from top-of-funnel to renewals, to accurately price for the value we provide, whether this be a price increase or decrease.
Speaker Change: with an emphasis on shifting our customers towards recurring subscription offerings.
Speaker Change: Last quarter, I also addressed our efforts to reorient our customers from filing a standalone Beneficial Ownership Information Report, or B.O.R., to a subscription offering.
Speaker Change: This reorientation helped shift customers to our total compliance subscription and gave us a road map out of the circular roundabout many of our competitors are driving through with the recent challenges to the beneficial ownership filing requirement in the court system.
Speaker Change: Since December, the filing deadline has been volatile and subject to continued judicial review. As a result, our outlook does not assume the beneficial ownership filing will be a federal requirement in 2025.
Speaker Change: This is a perfect example of the challenges and complexities of remaining compliant as a business owner. It reinforces our commitment to reorient our legal compliance offerings towards subscriptions.
It also reflects a conservative approach to our 2025 guidance.
Let me turn to our second key focus area.
reorienting our go-to-market strategy.
Speaker Change: This year, we will diversify our marketing spend to emphasize our overall LegalZoom brand and lean into our positioning as a premium online legal and compliance services provider.
Speaker Change: We're looking forward to launching a new marketing campaign later this spring to introduce our new mission and vision. Our marketing plan includes more than two times the investment in brand spend we made in 2024 without increasing our overall marketing budget.
Speaker Change: We expect our premium messaging to drive strong returns as we improve overall brand awareness and attract high-value customers.
Speaker Change: Separately, we made the decision to stop investing resources into building non-core products and instead invest in our partner ecosystem.
Speaker Change: In December, we partnered with 1-800-ACCOUNTANT to provide full-service tax and bookkeeping solutions.
Speaker Change: This allows us to continue serving the tax and accounting needs of our customers under a partnership model that retains economics for LegalZoom and allows us to reallocate our time and resources to our core legal and compliance offerings.
Speaker Change: So far, early results are encouraging. The majority of our formation customers are opting in to receive information about 1-800-SERVICES.
Speaker Change: You should expect more updates from us as we continue to build out our partnership channel to provide our customers with access to a curated portfolio of offerings through our LegalZoom platform.
Speaker Change: Turning to our third strategic priority, becoming an expert platform by leveraging AI and our 20 plus years of proprietary data, research and legal expertise to augment human expertise.
Speaker Change: Generative AI alone cannot replace attorney advice. For both business and personal legal decisions, affordable and accessible attorney advice will remain essential to ensure the best legal protection for customers.
Speaker Change: LegalZoom stands apart from our competitors as a technology platform with an established network of independent attorneys and the power of AI to unlock high value for our customers.
Speaker Change: We believe we can deliver powerful AI solutions to our customers, attorney network, and in-house teams to drive growth and efficiencies in our business and provide greater value to our customers.
Speaker Change: We intend to launch more AI-powered tools to help our customers during clear friction points and promote the value and services of our attorney network.
Speaker Change: Following the launch of an AI-powered business name generator, we recently began testing an estate plan AI assistant.
Speaker Change: We're excited to offer certain customers 24-7 access to an AI assistant who can help them navigate this very personal journey. While still early, preliminary behavior of customers who have engaged with the AI assistant
includes purchasing an estate plan and an attorney services plan.
Speaker Change: This aligns with our goal of using AI to promote our attorney network.
Finally, let's now turn to our acquisition of Formation Nation.
Speaker Change: Formation Nation has established itself in the industry as a best-in-class formations and small business service provider under two distinct brands.
Speaker Change: Nevada Corporate Headquarters or NCH is unique in the online formation space as a full-service do-it-for-me white-glove business formation provider.
Speaker Change: Inc. Authority provides value-priced, do-it-yourself formation in small business services and was the first company in our industry to offer free formations.
Speaker Change: The Formation Nation acquisition is expected to positively contribute to adjusted EBITDA in the first year, inclusive of synergies, due to our complementary ecosystem.
Thank you very much. Thank you.
Speaker Change: Our integration efforts are already well underway, and we expect this to drive immediate value.
Speaker Change: We expect Formation Nation to significantly strengthen our customer service profile, expand our portfolio of offerings, and enable us to reach a broader customer base.
Speaker Change: At the same time, we believe Formation Nation will benefit from our strong technology platform, AI products that augment expertise, scaled marketing and fulfillment, and tenured experience shifting businesses from transaction to subscription.
Speaker Change: Finally, we expect both our brands to benefit from cross-selling and up-selling each other's complementary portfolio of products.
We are thrilled to welcome Formation Nation's Senior Leadership Team.
Speaker Change: including CEO Court Christie and CFO Dean Walker, Inc. Authority President Trevor Rowley, and NCH President Raymond Marin, along with their experienced team to the LegalZoom family.
Speaker Change: Let me summarize by saying how grateful I am for the hard work of our teams over the last two quarters, and how excited we are for 2025 and beyond.
Jeff Stibel: Before I turn the call over to Noel to discuss our fourth quarter results, and in particular our 2025 outlook, I want to again express my strong conviction in our ability to execute and meet our financial goals for 2025. Noel?
Thanks, Jeff. And good afternoon, everyone.
Noel Watson: Our financial performance in 2024 reflects the shift in our key focus areas and execution priorities.
Noel Watson: As Jeff noted, over the last two quarters, we have worked hard to lay the groundwork for a return to predictable revenue performance, powered by our emphasis on re-accelerating subscription revenue.
Noel Watson: As we shift our top-line execution to focus on the areas we can best control, our bottom-line performance in 2024 demonstrates an ongoing commitment to adjusted EBITDA margin expansion.
Noel Watson: For the full year 2024, adjusted EBITDA of $148 million grew 25% year-over-year. This improvement highlights the impact of our ongoing efforts to drive automation and generate efficiencies in our operations, as well as our headcount restructuring and reduced hiring plan.
Noel Watson: This restructuring, which was executed in the third quarter of last year, underscored our narrowed focus and resolve to drive growth while delivering a strong margin profile.
Noel Watson: On that front, full-year adjusted EBITDA margins of 22% grew by 380 basis points year-over-year. This builds on our 2023 margin improvement of almost 800 basis points year-over-year versus 2022.
Noel Watson: I'll now turn our focus to our fourth quarter financial performance.
Noel Watson: Unless otherwise stated, all comparisons will be on a year-over-year basis.
Total revenue was $162 million for the quarter, up 2%.
Noel Watson: Looking at our revenue performance in more detail, transaction revenue was $53 million, up 2%.
We recorded 241,000 transaction units in the quarter.
Noel Watson: The 12% increase was primarily due to a rise in non-formation business-related transaction products, such as our BOIR offering.
offset by a lower volume of formation units.
Noel Watson: We recorded 96,000 business formations in the fourth quarter, a 15% decline.
Noel Watson: The decrease was due to a combination of a softer business formations macro, with Census EIN applications falling 3% year-over-year, and our ongoing focus on attracting high-value customers.
Noel Watson: Average order value was $220 for the quarter, down 9% due to a higher mix of lower price transactions, including an increase in BOIR, annual reports, and corporate dissolutions.
Noel Watson: Subscription revenue was $109 million, up 2% from stronger compliance-related subscriptions.
Noel Watson: This growth was partially offset by a decline in revenue from our tax offering due to our decision to pause new customer acquisition.
We ended the quarter with approximately 1.8 million subscription units.
Noel Watson: Up 14% from an increase in forms and e-signature in bookkeeping subscriptions due to the bundling of these products into certain business formation packages, as well as an increase in compliance subscriptions.
Our pool is $263 for the quarter, down 5%.
Noel Watson: This was primarily driven by pricing changes to our compliance-related subscriptions and a mixed shift within our virtual mail subscriber base.
Noel Watson: Turning to Expenses and Margins, where all of the following metrics are on a non-GAAP basis.
Noel Watson: Fourth quarter gross margin was 71% compared to 68% in Q4 2023. The year-over-year improvement was primarily driven by lower filing fees as a percentage of revenue from lower formation volumes.
Noel Watson: Margins were also supported by lower headcount expenses associated with our tax offering, as well as continued automation and process improvements in our service delivery operations.
Noel Watson: Sales and marketing costs were $44 million or 27% of revenue, an increase of 1% from the prior year.
Noel Watson: Customer acquisition marketing costs increased 8% primarily due to higher brand marketing spends.
Noel Watson: Non-CAM sales and marketing expense was down $2 million, or 24%, primarily due to lower content production expenses and a decline in personnel costs.
Noel Watson: Technology and development costs were $13 million, down $3 million or 16%.
Noel Watson: General and administrative expenses were $13 million, a decrease of $2 million, or 12%.
Noel Watson: Both technology and development and G&A cost savings were primarily driven by the reduction in force that occurred in the third quarter of last year.
Noel Watson: Our execution drove adjusted even at $44 million, or a 27% margin.
Noel Watson: This represents a 32% year-over-year increase as compared to adjusted even of $33 million for the same period last year.
Noel Watson: As a reminder, our adjusted EBITDA margins are generally higher in the back half of the year due to lower CHAM spend levels that align with our business's seasonality.
Noel Watson: Deferred revenue decreased by 11 million from Q3, which was in line with expectations and the typical seasonality of our business.
Noel Watson: Free cash flow was $36 million compared to $14 million for the same period in 2023. Our free cash flow performance exceeded our expectations, primarily due to the increase in adjusted EBITDA, as well as an improvement in and the timing of working capital changes.
Noel Watson: We ended the quarter with cash in the cash equivalent of $142 million.
Noel Watson: We remain debt-free with no outstanding borrowings under our $150 million revolving credit facility.
Noel Watson: Subsequent to the end of the quarter, in Q1, we used approximately 50 million dollars of cash on hand related to the acquisition of Formation Nation.
Noel Watson: During the fourth quarter, we repurchased 0.4 million shares of our common stock for approximately $2 million.
Noel Watson: For the full year, we returned approximately $165 million to shareholders through share repurchases, repurchasing 19.2 million shares of our common stock at an average price of $8.58 per share, lowering our share count by approximately 10%.
Noel Watson: As of December 31st, 2024, we had approximately $50 million remaining under our $215 million share repurchase program.
Noel Watson: Turning to our capital allocation priorities in 2025, we remain committed to executing against our three key focus areas to drive growth.
Noel Watson: We will utilize our healthy balance sheet and strong cash generation to drive shareholder value.
Noel Watson: We're very pleased to begin the year with the acquisition of Formation Nation, which accelerates many areas of our growth strategy.
Noel Watson: In 2025, we will remain focused on making the right organic investments in our business, namely legal and compliance services and technology to improve our customer experiences and drive organic growth.
Noel Watson: We will also continue to evaluate synergistic M&A opportunities that can accelerate our strategic growth plans and bolster our market leadership.
Noel Watson: Last, we will also continue to opportunistically deploy capital for share repurchases.
© transcript Emily Beynon
Finally, turning to our outlook.
Speaker Change: I will now provide guidance for the first quarter and full year 2025, including the impacts from our recent Formation Nation acquisition on February 10, 2025.
Speaker Change: For the first quarter, we expect revenue in the range of $175 to $179 million, or 2% year-over-year growth at the midpoint.
We expect first quarter revenue performance to reflect
Speaker Change: A year-over-year decline in transaction revenue, in part due to the impact of beneficial ownership filing injunction, and a year-over-year increase in subscription revenue driven by the commercialization of our core business subscriptions, partially offset by a headwind from the discontinuation of new customer acquisition related to our tax offering.
Speaker Change: For the full year, we expect year-over-year revenue growth of approximately 5%.
Speaker Change: This reflects our goal to re-accelerate subscription revenue growth throughout the year.
Speaker Change: We expect to exit the final quarter of 2025 with double-digit growth in subscription revenue.
Speaker Change: Our guidance includes an assumption of a flat macro for business formations as based on census reporting and EIN applications.
Speaker Change: It also reflects our assumption that the beneficial ownership filing requirement will be on a voluntary basis given the rapid changes we have seen to federal rulings.
Speaker Change: It includes the impact of shifting the commercialization of our LZ tax product for new customers.
Speaker Change: We expect 2025 to be the final year of headwind to our revenue performance from changes in our LZ tax commercialization strategy.
Speaker Change: We estimate the combination of LZTax and our beneficial ownership filing assumptions represent over four points of headwind to our revenue growth in 2025. However, the LZTax headwinds will be partially offset by revenue generated from our new 1-800 Accounting Partnership.
Speaker Change: Turning to adjusted EBITDA, we expect to achieve adjusted EBITDA in the range of $33 million to $36 million in the first quarter, which reflects a 19.5% margin at the midpoint.
Speaker Change: For the full year, we expect an adjusted EBITDA margin of approximately 23%.
Speaker Change: This reflects higher gross margins driven by an increase in subscription mix and operational efficiency.
Speaker Change: Annualized OPEC savings of approximately $13 million following our reduction in force and reduced hiring plan we executed in Q3 of 2024.
Speaker Change: A stable level of CAM investment, assuming the macro conditions align with our assumption.
Speaker Change: and hire other sales and marketing expenses following the acquisition of Formation Nation's skilled small business service experts.
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Speaker Change: In closing, I'd like to thank the entire LegalZoom team for their contributions this quarter and welcome Formation Nation to LegalZoom.
Speaker Change: Our Q4 performance and 2025 outlook reflect continued progress toward improving the performance of our core legal and compliance business and re-accelerating our subscription revenue performance.
Speaker Change: We feel confident in our ability to achieve our 2025 outlook as we maintain our focus on building sustainable growth, driving operating efficiencies, and delivering strong margins. Now, I'll turn the call back to Jeff for closing remarks.
Jeff Stibel: Thank you, Noel. I want to reiterate the strong confidence we have in our ability to meet our 2025 outlook.
Jeff Stibel: Achievement will reflect the success of our three key focus areas and the prioritization of positioning LegalZoom to drive recurring predictable subscription revenue.
Jeff Stibel: We are focused on the areas of our business we can control. We are executing against a narrowed focus on our core legal and compliance competencies, and an emphasis on quality customer acquisition, and a deep emphasis on subscription economics.
Jeff Stibel: This is a measured approach that will take time to execute, but we expect it will drive compounding returns over the longer term.
Jeff Stibel: We believe these changes will solidify our market position as a premium service provider, improve customer attention and lifetime value, and drive ongoing growth and predictability in our business in the years to follow.
Jeff Stibel: I'd like to thank all of our LegalZoom employees who have been working diligently to execute against our new focus areas.
Jeff Stibel: and I'm once again thrilled to welcome the Formation Nation team to LegalZoom. I am confident that we are building a stronger, more durable LegalZoom, and look forward to providing you with continued updates on our progress in the coming quarters. With that, let's now open up the call for questions.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Ella Smith with JPMC. Your line is now open.
Ella Smith: Good evening, thank you so much for taking my question. So Jeff, maybe first for you, you mentioned raising the registered agent price. I think it was from $199 to $249. I was wondering if you can update us on how that's going and maybe how LegalZoom differentiates that product versus your competitors.
Sure. So first off, philosophically, we
Ella Smith: We think that many of our products are much stronger than our competitors, in part because of the historical context.
Ella Smith: having, you know, been doing this, you know, for the entirety of 24 years and then RA's case, you know, for almost that long.
Ella Smith: The registered agent product is something that needs to work when you need it. And, you know, having LegalZoom behind that instead of a copycat competitor alone speaks volumes.
Ella Smith: So that is one piece of why we are trying to align pricing with what our offerings are. The second is to remind people that we are trying to move up market and we are trying to leverage what we are doing on the product side to offer real value to customers. And herein you will see some changes that speak to what it means to build product.
Ella Smith: and, you know, historically in a lot of companies, and I think we're not that different, we equate product with technology, but they're not synonymous.
Ella Smith: Product is a function of technology plus service, and that's what our registered agent product does so much better than others. We have really strong
Ella Smith: for scale, and then we have a service element that helps give people peace of mind.
Ella Smith: And, you know, as an example of that for, you know, for some registered agent customers who need this, we're now offering unlimited 24-7 support for those customers.
Ella Smith: And, you know, that is something that we don't think anyone else in our space offers.
Ella Smith: We did it quietly, we did it in part with a realignment on price.
Ella Smith: And as a result, we believe that we're actually having a positive impact.
Ella Smith: Specific to your question, Ella, we're actually pleased with the price change. By the way, it was a price change back...
Ella Smith: to where we were at prior periods. So while the rest of the market and world was inflating, we were actually in a race to the bottom. So we actually only returned our pricing back to where we were historically.
Ella Smith: So we think that there might be even more inelasticity ahead. And we're looking at that as a measured approach to make sure that we're offering value above and beyond what our customers would expect. So that as we do this, we can increase retention as well and ultimately drive long-term value.
Jeff Stibel: That makes a lot of sense. Thank you so much, Jeff.
Speaker Change: the top end of your guidance by $15 million or so. Do you have any comments about maybe what happened in the quarter and any thoughts about maybe free cash flow to EBITDA conversion moving forward?
Speaker Change: Yeah, thanks for the question, Ella, and thank you for pointing that out. We're happy with the performance that we saw in Q4. We're happy with our free cash flow performance for the year. We think our adjusted EBITDA is...
Speaker Change: converting really well into free cash flow. Q4 in particular, I think there's a number of factors or a few factors. One...
Speaker Change: Our adjusted EBITDA was at the top end of our expectations, so that sort of exceeded our expectations a bit.
We also saw a deferred revenue outcome.
exceeded our expectation somewhat as well.
and then just with working capital changes.
Speaker Change: some structural improvements that benefited us in the quarter and will benefit us moving forward.
Speaker Change: And then a bit of it was just the natural timing of working capitals. So you see that ebb and flow from quarter to quarter, a little bit better in Q4. That'll
Speaker Change: create a little bit of a headwind in Q1. But overall, I think it speaks well to how we're converting free cash flow. As it relates to how we think about it looking forward for 2025, I would expect that we'll continue to see strong conversion from adjusted EBITDA into free cash flow.
Speaker Change: probably, you know, I would say at the same level or slightly better than what we were able to deliver in 2024.
Great, thank you both so much.
Thank you. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Trevor Young with Barclays. Your line is now open.
Trevor Young: Great, thank you. First on the Formation Nation acquisition, can you quantify specifically how much revenue in EBITDA is baked in for fiscal 25 before any of the synergies? And then how should we think about layering that in from a modeling perspective across transaction and subscription revenue?
That's my first question.
Noel Watson: Hey Trevor, this is Noel. Thank you for the question. I think first just want to reiterate our excitement about the acquisition. We're happy to welcome the team. It's a
Noel Watson: a seasoned and accomplished executive team. It's a highly dedicated and capable employee base. So.
Noel Watson: We're happy to have them as part of the LegalZoom family. I would say our Q1 and full-year guidance includes the impact of Formation Nation. You know, our plan with them, we are...
Noel Watson: We're already sort of working quickly to implement an integration plan. And so we're moving fast there and exploring opportunities to really
Noel Watson: identify and action the synergies that are available to us with the complementary nature of the other two businesses. I will say
Noel Watson: It's going to get messy as we're jumping in. We're going to disrupt some things. We know that business is largely transactional. We want to shift them toward subscription, kind of take them on the same journey we've been on with LegalZoom. That's going to impact some of the performance this year. We're going to point some of their sales team at our products. We're going to.
cross-sell products.
that we have.
And so...
Noel Watson: Really, we're looking at the blended performance of the two businesses because there's going to be impact on both sides. And so we've included that, and it gives us the flexibility to sort of manage the outcome and how deep and how aggressive we get on some of those transitions and integrations to the expectation that we're setting within that constraint for guidance.
Speaker Change: expanding on on that point which it's it's a good question to be asking Trevor and we've sort of struggled with this
Speaker Change: ourselves, because as we start to look at integrating this business, we can either keep it
Speaker Change: somewhat separate and segmented, or we can do what we think is the right approach, which is really lean in on integrating this business quickly, so we can take advantage of a number of key things.
Noel Watson: Noel already brought up one of them, which is an aggressive approach to pivoting from a transactional business, which they largely are, as we were at one point as well, to subscription. Leveraging our technology, number two,
Noel Watson: really deeply integrating a cross-cell and up-cell approach where we're not thinking about how to separate things but how to unite them.
Noel Watson: and combine so that we can sell some of their products into our base. They can sell ours into into theirs. But more importantly, they can call into our base and vice versa. And then finally, on marketing, brand and positioning, we've effectively.
acquired a
low, you know, oriented value brand.
Noel Watson: as well as a very high touch do it for me.
Noel Watson: product, something that is White Glove. We don't have either of those. We've been right in the middle. And any time we had to compete, either down market or up market, we had to leverage the exact same brand.
Noel Watson: We now have the opportunity to go after the lower end of the market, as an example, such as free formations, but not dilute our brand. We can only do that by full, tight
Noel Watson: deep integration and doing that aggressively. And the opposite is true as well. As we think about some of these higher-end products and services that we've been testing with success in market that, you know, are priced orders of magnitude higher than what we offer, being able to do that by leveraging their expert service force.
Noel Watson: is going to benefit us significantly. So we've taken the approach of looking at these companies on a combined basis, on a go forward basis.
Speaker Change: That's really helpful detail. Thanks both on that. Jeff, just back to your comments on pricing, some potential increases, but maybe also some decreases, as you push towards more of that subscription mix. How do we bridge that with the overall full year guide? How much is baked in in terms of pricing lift in that, you know, 5% revenue growth for the full year?
So the way that we've approached this guide
Speaker Change: is to make sure that we as a team have confidence in the numbers. And, you know, and you saw a number of elements.
Speaker Change: that Noel brought up that we layered in, where there could be potential upside, but we're taking, you know, we're taking an approach on...
Speaker Change: focusing on the things that we can control. And when it comes to price, the same is true there as well. While we believe in...
Speaker Change: the pricing model, and we think that there is real inelasticity both in the
Speaker Change: with new customers and our existing base, what we're focused on first and foremost...
is driving towards that double-digit subscription growth.
That's what's going to deliver us.
Speaker Change: into the future in a predictable and consistent way, and it is something that we had lost previously.
Speaker Change: and we have now earned the right to have that back and we're not going to lose sight of that. So first and foremost, we're actually focused more on long-term than the immediate term, which expresses some conservatism in the early periods.
Speaker Change: which gives us confidence over the over the long run. So I think that there is a lot of opportunity. We have, you know, we have priced
Speaker Change: into our guide, what we think is reasonable to do on pricing. But we don't think that we're being aggressive on pricing either. So it gives us levers and leverage in the business to the extent that we need it.
Great, thank you.
Thank you.
Speaker Change: Our next question comes from the line of Andrew Boone with Citizens. Your line is now open.
Speaker Change: Thanks so much for taking my questions. One tactical and one more strategic.
Speaker Change: Can you talk about the very strong subscription net unit ads that we've seen kind of in the back half of 2024? The attach rate if I think about that compared to kind of business formations has just been much higher than we've seen historically. Can you talk about the drivers of that and then how do we think about the drivers of that for 2025?
Speaker Change: and then a little bit more strategically, Jeff, can you just touch on a partnership strategy? Where does that go over the next kind of two to three years? What does that help you guys unlock?
Speaker Change: both internally in terms of more resources as well as then touching new partners and bringing new services onto the platform. Thanks so much.
Noel Watson: Thanks, Andrew. This is Noel. I'll take the first one and I'll pass it to you, Jeff.
The first one on the net sub ads.
I think it's a combination of things.
Noel Watson: First, we started bundling certain subscriptions into our pro and premium SKUs as we continue to look to differentiate the higher-end SKUs and seek out a higher-quality, higher-value customers.
Noel Watson: So, we included our forms and e-signature subscription, and then subsequently we also started including our bookkeeping subscription in those SKUs. And so...
Noel Watson: As folks are buying into those packages, they're automatically getting those subscriptions and that's creating the ads.
Noel Watson: We're really focused with those additions on creating activation, creating engagement, so we can ensure that we're driving some meaningful level of retention and renewal of those subscriptions. The other thing I'll point out is
Noel Watson: our compliance subscriptions, we've done a better job. We talked a lot last year about BOIR and the impact that it had from a transaction unit standpoint, but also in the back half of the year, we really started leveraging.
Noel Watson: BOIR into our compliance subscription to ensure that the customers, as they learn that the environment is getting more complex,
Noel Watson: that we have an offering that can keep that can help keep them applying across the board rather than just addressing the single point related to BOIR. So I think those are the factors. We'll obviously start to lap.
Noel Watson: the inclusion of these additional subscriptions in those packages. We just started lapping this quarter, the forms and e-signature, and then by the end of Q3, we'll start lapping the bookkeeping inclusion.
Noel Watson: And the only thing I'll add there, Andrew, is this is a test and learn strategy in terms of how we drive first subscription units, which increases our funnel, and then the ability to upsell and cross sell and increase price and value to those products and services.
Noel Watson: pushing people from BOIR to our total compliance package before all of the lawsuits came up with BOIR. So, you know, we ended up creating some amount of friction in BOIR before the, you know, the deadline started to unwind. So we didn't see quite the yo-yo that I suspect some of our other competitors have and some of these government agencies have had because what we what we have done is we've used some of these transactions as engagement tools to
Noel Watson: to help educate customers on why they need a full-service, full-suite product.
Noel Watson: that endures over time. I'm not going to tell you that we feel as if our compliance product is where it needs to be. I think we can get much better on the product side there, but it just shows that we can move people into these higher offering subscriptions.
Noel Watson: and over time add value that helps retain and ultimately increase price. Switching over to your partnership question, which happens to be I think a good one and very, very strategically important, so I'm glad you put it in the strategy camp.
Noel Watson: My answer is less about partnership specifically. It's more about go-to-market and making sure that we're insulating ourselves.
from the risks of the concentration that we had before.
Noel Watson: we were focused exclusively at the top of funnel on bringing people in through formations and then cross-selling and upselling. And the goal was bring people in to that funnel very cost-effectively, so lower marketing costs by offering formations for free and then upselling them other SMB products.
Noel Watson: We have shifted that strategy now to look at the larger addressable market in the legal services space.
going after that by doing what we do best.
Noel Watson: and then being able to bring people in across different channels.
whether that's affiliates.
Noel Watson: our core top-of-funnel partners, even M&A, as we saw with Formation Nation, in this case, where it makes sense opportunistically. And, you know, in order to do that well, we need to have the best products in category. And we believe we do, and those will continue to get better. And then we partner on the ancillary side, and that will provide us that insulation. So you saw that with 1-800, you saw that earlier with Wix.
Noel Watson: and you will continue to see partnership channel as an ecosystem becoming more and more core to what we do because that will be the thing that a customer wants from us next.
Noel Watson: We, you know, in the, you know, in the business side, we incorporate a customer. We make sure that they're compliant. We get them a registered agent. The next question is going to be things like, where do I get a bank account?
Where do I get...
Noel Watson: credit? How do I build my business credit versus my personal credit? Something I know really well from my early career. How do I form a website and get a web presence?
Noel Watson: our partnership with Wix. And then ultimately, how do I pay taxes in the most advantageous way with my business vis-a-vis my, you know, what I'm doing personally? And, you know, it is that where this partnership ecosystem can be really, really valuable.
Noel Watson: to driving higher value opportunities to our customer base without us having to tax our technology and product teams. And then secondly, which I think is going to be equally important, if not more, leaning on partners to drive customers to us into our core business.
Noel Watson: And that is something that we haven't done in a significant manner historically, but it's something we're gonna lean in on this year and beyond. Because we think that there is a world of opportunity where we can lean on partners to start bringing customers into our SMB ecosystem and consumer ecosystem.
A great question, Andrew.
Thank you. One moment for our next question.
Speaker Change: Our next question is from Patrick McGilvey with William Blair. Your line is now open.
Hi team, thanks for taking my questions.
Patrick McGilvey: So, your implied market share stepped down by another point this quarter, and I know you're focused more so on customer quality versus market share at this point, but I just wanted to ask how we should think about your share going forward.
Speaker Change: And if there's a certain level or critical mass of formations you hope to maintain, and further, how material formation nation is in terms of volumes.
Speaker Change: the way we define market share, or at least the way to measure market share, is with formations or the proxy for formations, EINs. What you end up is with a bunch of noise in that system.
Speaker Change: whether, you know, whether that's fraud, whether that's bulk, whether that's high volume, there are a large number of incorporations that really aren't valuable to us.
and we have been focused.
Speaker Change: too much on that market share number. And, you know, and I think we've said over the last couple of quarters that we are going to reorient to focus on quality share, even if it means at the cost
of
Speaker Change: perceived market share versus real market share. I don't think we're significantly impacting our market share, because I think what we're doing is we're driving higher value customers.
into our flow.
Speaker Change: And I think this quarter we, to some extent, proved that by being able to pivot over 10% of the customers that were coming in and looking to form companies, going from our free formation
Speaker Change: to one of our higher-end premium and pro formations and that was done organically through education. Don't get me wrong, plenty of others fell out of the funnel, but the ones who fell out of the funnel I don't think they were
Speaker Change: high-intent customers or had high propensity for up-sell, cross-sell, or to buy something down the line.
So we're pleased for now with
Speaker Change: with the work that we're doing on market share versus quality share. Because again, we don't think it is impacting our actual market share as much as it might be impacting perceived market share. That said, this will stabilize over time. This is going to take a couple of quarters for us to get right. And then we'll probably tick and tack back to those EIN numbers.
Speaker Change: Yeah, I think you hit the point that I was going to bring up on the stabilization at, you know, at some point.
Speaker Change: to the extent of which is unclear at this point. And so we're looking at it again in totality.
Speaker Change: I'm getting good at stealing Noel's thunder. The one thing I'll add with Formation Nation...
is, you know, Ink Authority.
originated.
to, my understanding, the free formation model.
Speaker Change: and, frankly, we copied from them. And I can say that now that we own them. You know, we were behind the ball on it. And, you know, in our urgency,
Speaker Change: to try to catch up, I think we may have done some damage to our brand.
Speaker Change: So the other side of the equation with this Formation Nation acquisition is we can now leverage Ink Authority as this free-to-pay brand. And I think that that will help us in two ways. Number one, it will shore up the lower end of the market that are still quality customers.
Speaker Change: And number two, it will do so in a manner that won't devalue the legal zumbra.
Speaker Change: Right, okay. That's all very helpful. Thank you both. And then, just one more, if I may. Jeff, in recent quarters, you know, you've talked a little bit more about your strategy with AI.
Speaker Change: leveraging your library of documents to power the capabilities on your platform. And, you know, you've launched a couple of new products recently, but I just wanted to ask if you could quickly touch on your longer-term vision for what other products or capabilities could look like with that technology.
Speaker Change: Yeah, great, great question. And what I would say is long term, the strategy and goal is to leverage AI to augment expertise.
Speaker Change: And again, Formation Nation is a critical component here because they have that 100 plus, 140 plus, you know, service experts that we can leverage. You know, when you look at our two competitive sets, on the one hand, you have mom and pop lawyers.
Speaker Change: who are very adept, have great expertise, but can't scale because they lack the technology prowess. On the other, you've got the online, largely formation companies in the period.
Speaker Change: They have great technology, and that technology is designed to replace expertise. We are unique in the sense that we have
Speaker Change: deep expertise in the form of lawyers, paralegals, legal network, and now these service experts.
Speaker Change: and we're the leader in the space on the technology side.
Speaker Change: So, the idea here is to take artificial intelligence, and particularly generative artificial intelligence,
Speaker Change: and make things easier and simpler for our customers, for our agents, for our experts, and for our lawyers to help customers at scale. And for us, I think that that is a key differentiator and that will pull more and more customers off of Main Street.
to our online platform.
Speaker Change: Yeah, I think just to build on that there's there's an operational efficiency side of that equation as well. We talked about augmenting our
Speaker Change: our attorneys, and our sales teams, and our developers, but also on the fulfillment side of our business, we have a really broad.
Speaker Change: and long-tail product set, many of which still require manual steps in the process, and we think there's still a meaningful opportunity to leverage AI to help us make that much more efficient.
Very helpful. Thank you both for the thoughts.
Thank you. Thank you.
Elizabeth Porter: Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.
Elizabeth Porter: Great, thank you so much. I wanted to ask about the marketing piece a little bit more. I was hoping you could just unpack the strategy around building out more of the education and increasing brand spend, I think you said 2x, but without increasing the marketing budget.
Elizabeth Porter: So first, just where are some of the offsets, and secondly, what are you doing differently in terms of the messaging or the channels now compared to when you were last leaning in on marketing after the IPO? Thank you.
Speaker Change: You bet. Good question. I'll take it to a high level if you want to jump in, Noel, on some of the numbers.
Noel Watson: Our go-to-market strategy historically has been pretty uniform, and it has been leveraging search probably to a point that is too extreme.
Noel Watson: And, you know, unfortunately, when you're leveraging search and then your brand is the high-end brand in the market but is offering a free product, you effectively race to the bottom. And, you know, the only ones who win are the people you're buying marketing from because you're competing against like substitutes.
Noel Watson: So as you think about how we move forward, the first thing, and I've talked about this earlier, is we will have a multi-brand strategy that will allow us to take our value-oriented products
Noel Watson: that are priced lower and offer that using a different brand, in this case, Ink Authority, our premium brand services, meaning, you know, being LegalZoom, move those further and further upmarket.
and, you know, and having those two brands.
Noel Watson: and that model will actually allow us to bifurcate our marketing spend.
and do much more targeting both
Noel Watson: in our core, in terms of the way that we've done, and using other ancillary marketing vehicles, such as affiliates and partnership channels.
Noel Watson: Secondly, on brand, the way we went about brand marketing, and since we IPO-ed, we actually did early on spend a significant amount of money on brand marketing, it just wasn't effective.
Noel Watson: We were going after the market with a claim that we were...
an SMB player.
Noel Watson: not that we were focused on legal services and being a technology-augmented provider. And because of that, we were diluting our message, and it just wasn't effective. So we, in large part, stopped doing that spend, I believe, late in 2023.
Noel Watson: and really haven't come back. I think now that we're focused on being the industry leader that we are in our space, it allows us to leverage our brand messaging.
Noel Watson: to be around education. Because if you educate properly and customers know what they're getting and they know the risk of going with a subpar provider, they will inevitably come back to LegalZoom over and over again. And that really is the core focus.
Noel Watson: of what we're going to be doing as we pivot how we're going to market with our marketing messages, Elizabeth.
Elizabeth Porter: Yeah, I guess I'll probably reiterate a little bit of what you said, but just to say it again, the brand message now encompasses a broader
suite of services and better encapsulates our full offering.
while not reducing the relevancy to SMBs.
Elizabeth Porter: allows us to capture a broader audience with our brand message and do it more efficiently. And therefore, we can replace some of the lowest efficiency portions of our performance spend. And that's how we get to kind of holding spend relatively flat on a year-over-year basis. And I'll give you a specific case study so we're tangible here. When we launched our tax product,
Elizabeth Porter: a number of years ago, we effectively changed our brand name from LegalZoom to LZ.
because we couldn't sell LegalZoom tax.
So we started marketing as an acronym.
And, you know, an acronym is not a brand.
Elizabeth Porter: And, you know, that was entirely ineffectual and it might have actually been counterproductive to the way in which we were going to market.
So, now that we are owning and embracing...
legal symptoms.
Elizabeth Porter: as the guardian for our customers. It makes it so much easier because this company has spent an inordinate amount of money over the last 24 years building that brand. So we're able to draft off of that, I think, quite effectively.
Great, no, that's super helpful context.
and then just as a follow-up.
Speaker Change: I wanted to dig in on the subscription revenue guidance. You know, I know there's a lot of moving pieces, but could you help us just understand the bridge better from 2% in Q4 of 2024 to double digits, you know, exiting 2025?
How much is just driven by the fact that...
Speaker Change: Year-over-year comps are materially easing, kind of the contribution from Formation Nation, one in a hundred accountants, you know, you have price in there.
Speaker Change: also just demand changes in the core. So I know there's a couple moving pieces, but any sort of like
factors or ranking would be super helpful for us.
Speaker Change: Yeah, I mean, I think there's a number of factors, and you've obviously called out a handful of them, all sort of contributing to our view on the reacceleration. I think a couple of central ones, one is,
The
Speaker Change: the job that we've done in terms of shifting the value across our SKUs and starting to attract higher quality customers that then are attaching more products and will retain longer, thus driving higher LTV. So we started that
Speaker Change: a couple of quarters ago, and we'll start to see the benefit of that this year.
Speaker Change: Also, Jeff talked earlier about some of the pricing changes, pricing changes on the front end as folks come in through the funnel.
Speaker Change: as well as some pricing changes on renewals on subscriptions as well.
and that...
Speaker Change: You know, as you're price changing renewals, that cohort builds throughout the year and thus provides some momentum in terms of the growth re-acceleration.
Speaker Change: Yeah, and the thing I'll add, and you can see this in our numbers, we were watching deferred revenue decline.
Speaker Change: And, you know, and that is that is now going to change. That's that's a key forward looking metric. And it speaks to you to subscription growth or, you know, or lack thereof.
Speaker Change: So, it's something that we've been focused on, you know, intently for the last six months and something we're going to continue to focus on because, ultimately, that's what drives stability and allows you to go into future periods with, you know, with the wind at your back instead of headwind.
Speaker Change: Thank you so much. You bet. Thank you. As a reminder, to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced.
Speaker Change: Our next question comes from the line of Josh Beck with Raymond James. Your line is now open.
Speaker Change: largely been in place. And then, you know, to this discussion really around, you know, the formation number itself.
Speaker Change: It seems like it's much more about the cohort value of the customers that you're bringing on. So just, you know, over time, does the actual, you know, market share and business formation number, you know, that you print maybe mean less? Just, you know, we'd love to hear your thoughts there.
Speaker Change: It's a good question and I mean, I've got relatively high confidence that
Speaker Change: almost directly on to your point. As we head into the summer, we're gonna have a really good handle on this business. It's going to look more like a recurring revenue business.
Speaker Change: and it's going to tack to that recurring revenue number such that we've got more flexibility.
and, you know, and freedom within how we operate.
Speaker Change: so that we're not running the risk of a change because the government decides not to do BOIR next week, as an example.
or the macro shifts massively.
Speaker Change: or, you know, or we see small business starts, you know, turn in a wrong way or EINs get turned off for two weeks, you know, like we've seen recently. All of these things are
Speaker Change: and should be manageable. And once you have that, you have a business that's not necessarily good or bad, but it's predictable. And that's a business that can be managed. So for me, a lot of what we're doing strategically is, first and foremost,
designed to build predictability in the business.
Speaker Change: and we do that by focusing on the things in our control and minimizing what is out of our control. And, you know, finally and ultimately, once we do that, we're going to build and lay that path, you know, towards success and we're going to start carving through it.
Super helpful. Thank you.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Stephen Ju with UBS. Your line is now open.
Speaker Change: Hi, this is Vanessa on for Steven. So your customer acquisition spend has remained fairly steady over the last two quarters, but now you've got Formation Nation through the door. Presumably, you know, that helps with the top of funnel. So should we be expecting any meaningful changes to your marketing spend through 2025? Thank you.
Speaker Change: Now, as I mentioned earlier, we expect our marketing spend to be relatively flat year over year. So that's inclusive of Formation Nation.
Speaker Change: Yeah, and remember, you know, we're going to get some benefits for sure from Formation Nation, to your point, but they were also spending on marketing as well. So I think when you look at that on a combined basis, being flat is pretty meaningful improvement.
Speaker Change: Yeah, the one other thing I'll mention around that is just our assumption in our plan and our guide is for a flat macro.
next year.
Speaker Change: And so, our marketing spend is dynamic and reacts to market changes very quickly. So, if we see a really healthy and strong macro, we would expect to be spending more and vice versa if we see some softness.
Thank you.
Vanessa: Thank you. Thank you, Vanessa. There are no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.