Q1 2025 LegalZoom.com Inc Earnings Call
Good day and thank you for standing by.
Welcome to the LegalZoom, 1st quarter, 2025, earned its conference call. At this time, all participants are in this listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will be in here an automated message advising your hand is raised. You will need to press star 2-1 on your phone.
Speaker Change: To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand a conference over to your first pick of today, Madeleine Crane. Head of investor relations, please go ahead.
Speaker Change: Thank you, operator. Welcome to LegalZoom's first quarter, 2025, earning conference calls. Joining me today is Jeff Skible, 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: These risks and uncertainties are referred to in the press release we issued today, and in the risk factor section of our most recent annual report on Form 10K, filed with the Securities and Exchange Commission.
Speaker Change: 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.
Speaker Change: In addition, we will also discuss certain non-GAAP financial measures. We use non-GAAP measures and making decisions regarding our business, and we believe these measures provide helpful information to investors.
Speaker Change: These non-GAAP financial measures are not intended to be considered an isolation or as a substitute for a result prepared in accordance with Gap.
Speaker Change: Reconciliation 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.
Good afternoon everyone.
Speaker Change: We delivered strong first-quarter performance that exceeded our guidance, reflecting progress in our key focus areas.
Speaker Change: We are pleased with our execution in the first quarter, and are reiterating our 2025 outlook, reflecting our continued confidence and our ability to manage our business despite an unpredictable environment. Let's jump in.
Speaker Change: First quarter revenue of 183 million increased 5% year-over-year. We drove strong results despite a weaker than expected macroeconomic environment, where census EIM applications fell 5% year-over-year.
Speaker Change: Subscription revenue grew 8% year-over-year from strength in our compliance related and virtual
Speaker Change: Our growth reflects pricing for the value we provide in shifting toward higher end solutions.
Speaker Change: Importantly, Q1 marks the first time in the past year that our subscription revenue growth has accelerated on a sequential basis.
We believe this change in trajectory is sustainable.
Speaker Change: On the bottom line, first quarter-adjusted EBITDA of 37 million also exceeded our expectations.
Speaker Change: Adjusted EBITDA margin of 20% benefit from our strong revenue performance and ongoing cost
Speaker Change: Throughout the year, the broader macroeconomic environment has been shifting rapidly amid unsk, ongoing uncertainty surrounding potential tariffs and broader policy changes.
Speaker Change: Today, businesses of all sizes are operating with caution as they await greater clarity on the impacts to their operations.
Speaker Change: In response, we've adjusted our assumptions for census EIN applications from flat year over year to down mid to high single digits.
Speaker Change: Despite this, and because of the work we have done to decouple from formations,
Speaker Change: Today, we are reiterating our full-year revenue outlook of 5% year-over-year growth. This includes our expectation for double-digit subscription revenue growth by the fourth quarter.
Speaker Change: Our high degree of assurance is based on two key factors.
Speaker Change: First, as our Q1 performance showed, we can achieve solid results despite weaker than expected business formations by focusing on areas that we can control and driving leverage through
Speaker Change: Second, is our continued execution with respect to stabilizing our business fundamentals, including the success of our pricing initiatives, solid progress from our formation nation integration, and early success from the introduction of higher value subscriptions.
Speaker Change: To that end, we are also reaffirming our Adjusted EBITDA margin outlook of 23%. Reflecting double digit growth and adjusted EBITDA dollars year-over-year.
Speaker Change: Importantly, our adjusted EBITDA guidance implies a full-year adjusted EBITDA of approximately $165 million, which we believe we can achieve irrespective of revenues.
Speaker Change: We have a resilient, dynamic business that gives us flexibility to execute, manage to the bottom line, and drive cash flow generation.
Speaker Change: I'd like to remind everyone of the key differentiators of our business model that position us to navigate a challenging macro environment.
Speaker Change: First, LegalZoom is a leading platform for online small business formations.
We dominate in-category brand awareness.
Speaker Change: and are recognized as a leading authority for online legal services.
During recessions and volatility, small businesses naturally gravitate toward safety.
Speaker Change: We are the dominant brand and safe choice for established small businesses.
Speaker Change: Next, since I joined the CEO last summer, we've been working to the couple ourselves from the Business Formations macro. We are focused on quality share, concentrating on our core competencies of legal and compliance services, and emphasizing subscriptions.
Today, our revenue mix is over 60% subscription base.
Speaker Change: Which is durable as almost 90% of our recurring customers are on annual plans.
This gives us strong visibility and predictability in the future performance.
Speaker Change: Finally, as Noel will detail, we have significant expense leverage and flexibility. This enables us to quickly react to preserve our adjusted EBITDA if the environment deteriorates further.
Speaker Change: We have a strong cash position, zero debt, and healthy free cash flow.
Speaker Change: We will continue to monitor the broader economic backdrop and focus on how LegalZoom can help ensure the success of small businesses, the cornerstone of the US economy.
These are challenging times, but challenges create opportunities.
Speaker Change: We are concentrating on the areas of our business we can control and remain dedicated to managing our company to drive long-term value for our shareholders.
Speaker Change: I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: Turning now to our three key focus areas. First, we're focused on driving subscription adoption within our categories.
Speaker Change: We are continuing to test and roll out pricing changes across our legal and compliance portfolio, from top of funnel to renewals.
Speaker Change: As a reminder, we reverted our registered agent pricing from $199 back to our historic $249 pricing in September of 2024 and are continuing to see relatively stable attach rates.
Speaker Change: In Q1, we also began testing registered age of pricing changes and value increases for our existing customers.
Speaker Change: And results have been highly accretive, given the elasticity of this product.
Speaker Change: We've also been hard at work to add more value to the LegalZoom platform.
Speaker Change: Do you want enhancements included the rollout of all new Total Compliance subscription features?
Speaker Change: These include a compliance status badge and more detailed monitoring, leveraging data obtained from steep filing offices to keep customers informed of their business's standing.
Speaker Change: Importantly, for customers with a negative compliance status, we are able to promote and upsell our compliance solutions to help them regain their good standing.
Speaker Change: Finally, we've been introducing new customers to our subscription ecosystem by bundling select entry-level products such as bookkeeping, forms, and e-signatures into our premium information packages.
Speaker Change: This strategy not only encourages customers to move up the line-up, but also familiarizes them with our broader platform from day one.
Speaker Change: These placements contributed to the 20% increase in the number of subscriptions in Q1.
Speaker Change: What we expect lower our poo and renewal rates from these products, this strategy is proving to be an effective way to drive early engagement and ultimately position customers for long-term growth by graduating them into higher value subscriptions over time.
Speaker Change: These bundled products also represent future cross-hell opportunities within the Formation Nation customer base.
Speaker Change: Well, diversifying our go-to-market strategy has been a recurring theme for us. It's now more critical than ever in light of shifting economic conditions.
Speaker Change: This spring, we are launching a new brain campaign that positions LegalZoom as the premier provider of online legal services.
Speaker Change: At the heart of this campaign is a repressed brand message.
Speaker Change: Technology, when consumers want it, and human support when they meet it. Reinforcing LegalZoom as a trusted guardian for our customers.
Speaker Change: As always, our mission remains to make legal services feel accessible, approachable, and within reach.
Speaker Change: This new messaging will be delivered through a robust multi-channel media plan targeting high-emptent audiences across all core product categories.
Speaker Change: It will all be done within our existing budget and complement our performance marketing by expanding into brand media to elevate awareness and perception.
Speaker Change: Additionally, we are accelerating investments in AI-driven search engine optimization, AI platform visibility and integrated partnerships.
Speaker Change: These efforts will further strengthen our leadership position in key channels and continue to diversify our marketing mix.
Speaker Change: Our go-to-market strategy remains focused on quality share acquisition, moving LegalZoom customers the higher-value formation SKUs, including subscription services.
Speaker Change: This led to a continued shift in mix away from free formations at the LegalZoom brand level.
Speaker Change: We accelerated these efforts in anticipation of the acquisition of Formation Nation.
Speaker Change: In the first quarter, LegalZoom's LLC-free formations were under 50 percent of total volume. We are now positioned to leverage the Inc Authority brand to capture those value customers.
Speaker Change: Following the transaction, we began to implement our marketing best practices to help support their customer acquisition efforts.
Speaker Change: While small and absolute dollars, we reallocated our marketing budget to increase formation nation's marketing spend by over 30% with positive net results.
Speaker Change: We are pleased with our early integration efforts with Formation Nation, which contributed brought to late $8.6 million in revenues in the first quarter.
Speaker Change: We are applying the learnings from our early integration efforts across each of our respective businesses.
One example is formation nations do it for me services.
Speaker Change: Formation Nation's White Glove Business Service is helping inform how we support our LegalZoom customers.
Accelerating our goals of providing higher-value expert services
Speaker Change: These products lend themselves to high-intent customers who are willing to pay more than three times our average order values.
Speaker Change: Today, we are testing areas of opportunity within do it for me, compliance and dissolution services, and look forward to providing more details in future quarters.
Speaker Change: These high-end offerings are informing how we will leverage artificial intelligence to augment human expertise and drive efficiency alongside better adoption of our highest value products.
This is our third and final focus area.
Speaker Change: Ultimately, that adoption will be delivered by our technology prowess, so I'm excited to welcome Patrick Mcllwee, Patrick Mcllwee, Patrick Mcllwee, LegalZoom.com.com
Speaker Change: Perfect have a strong record of driving innovation, building businesses with occurring subscription revenues, and scaling technology teams.
Speaker Change: We look forward to benefiting from his experience as he focuses on expanding our technology ecosystem.
Speaker Change: Optimizing platform scalability and leveraging emerging technologies, such as generative AI, to simplify legal processes for individuals and businesses.
Speaker Change: Let me summarize by expressing my strong conviction in our ability to execute and meet our financial goals for 2025.
Speaker Change: We remain confident in our ability to navigate across a wide range of macro outcomes.
to reiterate.
Speaker Change: We are the leading authority in online small business legal services.
Speaker Change: Over 60% of our business is subscription-based, with approximately 90% paying annually.
Our cost structure is roughly 70% variable.
Speaker Change: We are deeply committed to EBITDA growth and we've been focused on further decoupling our business from the formation macro since I joined back in July of last year.
In these respects, we are making solid progress.
Speaker Change: I am grateful for the hard work of our teams and look forward to delivering continued strong execution in the coming quarters.
Speaker Change: Let me now turn the call over to Noel to discuss our first quarter results and outlook in more detail. Noel?
Thanks, Jess, and good afternoon, everyone.
Speaker Change: Our first quarter results reflect solid progress in our key focus areas.
Speaker Change: As we move forward, we will lean into our differentiated market position to advance our initiatives while remaining nimble in response to the macro uncertainty.
Speaker Change: I'll now turn our focus to our first quarter financial performance. Unless otherwise stated, all comparisons will be on a year-over-year basis and all 2025 financial information and key business metrics for the first quarter ended March 31st, 2025 include the acquisition of Formation Nations, which was completed on February 10th of this year.
Total revenue was 183 million for the quarter, up 5%.
Speaker Change: Looking at our revenue performance in more detail, transaction revenue increased 1% to $67 million.
Speaker Change: The increase was due to a $6 million improvement in transaction revenue from our acquisition of Formation Nation, and to a lesser extent, an increase in revenue from greater than expected beneficial ownership information report, or B.O.I.R. filings at a higher price point than a year ago period.
Speaker Change: We do not expect B.O.I.R. to contribute to transaction revenues going forward, following a Finsend ruling on March 21st, that eliminated this filing requirement for U.S. companies.
Speaker Change: We recorded a 1% increase in transaction units to 341,000, primarily due to an increase in annual report filings from our compliance subscriber base.
We recorded 131,000 business formations in the first quarter.
Speaker Change: We are attributing roughly 6% of business formations to formation nation.
Speaker Change: The 6% year-over-year decrease in business formation reflects our ongoing focus on quality share acquisition, as well as a softer business formation's macro, with Census EIN applications falling 5% year-over-year.
Speaker Change: Average order value was $196 for the quarter, down 1% versus the same period last year.
Speaker Change: Turning to subscription revenue, we generated 8% growth to $116 million.
Speaker Change: Our growth reflects strong execution in our efforts to optimize our subscription business and reorient our go-to-market strategy.
Speaker Change: Subscription revenue benefited from our compliance pricing initiatives increases in our virtual e-mail subscriptions from higher customer engagement and our new 1-800-A-Counten partnership.
As a reminder, we are investing in our partner ecosystem.
Speaker Change: This enables us to better reallocate our resources toward our core offerings while benefiting for partnerships with best-in-class providers that serve the ancillary need of our customers.
Speaker Change: These results give us conviction in our ability to achieve double digit subscription revenue growth in the fourth quarter.
We ended the quarter with approximately 1.9 million subscription units.
Speaker Change: The 20% increase was mainly driven by higher forms in e-signature and bookkeeping subscriptions as we bundle these products into certain business formation packages.
Speaker Change: As Jeff noted, we expect this growth to moderate as we experience lower renewal rates from the initial cohorts.
Arpooh was $252 for the quarter, down 7%
Speaker Change: This was primarily driven by a mix shift towards a higher quantity of lower-price subscription offerings, including the forms of the signature and bookkeeping subscriptions mentioned earlier, as well as a decrease in our higher-price tax subscription offering, partially offset by higher prices in our compliance category.
Speaker Change: Finally, deferred revenue increased by 36 million from Q4, reflecting the benefits of our subscription pricing initiatives, the inclusion of formation nation-deferred revenue and the typical seasonality of our business.
Speaker Change: Turning to expensive margins, where all of the following metrics are on a non-GAAP basis.
Speaker Change: First quarter gross margin was 67%, compared to 64% in Q1 2024. The 300 basis point improvement was primarily driven by lower filing fees as a percentage of revenue from lower formation volumes.
Speaker Change: margins were also supported by our decision to transition from an in-house tax solution to a partnership model, as well as automation and process improvements in our service delivery operations.
Speaker Change: Sales and marketing costs were 56 million or 31 percent of revenue, an increase of 9 percent from the prior year.
Speaker Change: We expect him to be down year over year in the second quarter.
Non-CAM sales and marketing fences increased $0.9 million or 8%.
Which includes the addition of the Formation Nation sales team.
Speaker Change: Technology and development costs were 15 million, down 2 million, or 10 percent.
Speaker Change: General and administrative expenses were also $50 million, a decrease of $1 million or $6%.
Speaker Change: Both technology and development and G&A's cost savings were primarily driven by the reduction in force that occurred in the third quarter of last year.
Our execution drove adjusted EBITDA of $37M. [inaudible]
Speaker Change: This represents a 33% year-over-year increase as compared to adjusted EBITDA of $28 million for the same period last year. Adjusted EBITDA margins of 20% increase 400 basis points year-over-year.
Speaker Change: As a reminder, our adjusted EBITDA margins are generally lower in the first half of the year due to higher camspend levels that align with our business's seasonality.
Speaker Change: Free cash flow was 41 million, up to 67%, compared to 25 million for the same period in 2024. Our free cash flow performance exceeded our expectations, primarily due to the improvement in the adjusted EBITDA, and increased subscriptions.
Speaker Change: We ended the quarter with cash and cash equivalents of 210 million.
Speaker Change: We remain debt-free with no outstanding borrowings under our $150 million revolving credit facility.
Speaker Change: This was partially offset by the use of 48 million of cash on hand related to the acquisition of Formation Nation.
Speaker Change: We believe our strong cash position and healthy free cash flow generation will enable us to invest for the long-term health of our business.
Speaker Change: In this environment, we will also look to capitalize on synergistic M&A opportunities that can accelerate our strategic growth plans and bolster our market leadership.
Speaker Change: We did not repurchase any shares in the first quarter. This week, our Board of Directors proved a $100 million increase to our share repurchase program. We now have 150 million remaining under our authorization.
Speaker Change: Moving forward, we will maintain a flexible cash position to support our capital allocation priorities while protecting our balance sheet against an uncertain economic backdrop.
Turning to our outlook.
Speaker Change: We are very pleased to have exceeded our first quarter results without performance and revenue largely dropping to the bottom line.
Speaker Change: While our actions across our key focus areas continue to gain traction, we recognize that we are operating in a dynamic environment.
Speaker Change: This year has been characterized by a rapidly evolving macroeconomic and geopolitical climate, which persisted in April and through the beginning of May.
Speaker Change: These dynamics have driven softer traffic, information volume, in comparison to normal seasonal trends.
Speaker Change: To account for external factors, we are now modeling an expectation for the formation macro to be down mid to high single digits year or year in 2025.
Speaker Change: Since last year, however, we have been focused on the areas of our business we can control and that has positioned us well for these changes.
Speaker Change: This, along with the current underlying performance of the business, gives us assurance in our ability to maintain our full-year expectations of year-over-year revenue growth of approximately 5% and even a margin of 23%.
Speaker Change: This reflects our confidence in our execution, including our expectation to achieve double-digit subscription revenue growth in the fourth quarter.
Speaker Change: Our full-year revenue outlook includes a revised formation macro-estimate of mid-to-high single-digit decline year over year.
and the elimination of B.O.I.R. filing requirements for U.S. companies.
Speaker Change: As well as our decision to discontinue new customer acquisition for our own tax product.
Speaker Change: We estimate the combination of the tax and B O I R filing assumptions represent approximately 4 points of headwind to our revenue growth in 2025.
Speaker Change: For the second quarter, we expect revenue in the range of 181 to 185 million, or 3% year-over-year growth at the midpoint.
Speaker Change: Turning to expenses and profitability. For the full year, we continue to expect an adjusted EBITDA margin of 23%. This translates to approximately 165 million in adjusted EBITDA, which we are committed to generating irrespective of revenue.
Speaker Change: For the second quarter, we expect to achieve adjusted EBITDA in the range of 37 to 41 million, which reflects the 21% margin at the midpoint.
Speaker Change: I'd like to reiterate our high degree assurance in achieving our adjusted EBITDA dollar target. We have a strong grasp on our expense structure and are able to quickly react to changing market trends.
Speaker Change: Our cost of goods sold are highly variable with the majority directly associated with new formations and our staffing model remains highly flexible through our third party partners.
Speaker Change: Cost of good soul, the marketing expenses represent approximately 70% of our total cost structure.
Speaker Change: For CAM, most of our spend is guardrail driven, automatically fluctuating with the man and we have no upfront commitments.
Speaker Change: Beyond this, we will continue to focus on automation and managing fixed costs,
Speaker Change: While we are navigating a changing landscape, our business is well positioned. We have conviction in our ability to execute on the initiatives within our control and have levers within our business to preserve our margins and profitability in a challenging operational environment.
Speaker Change: In closing, I'd like to thank the entire LegalZoom team for their efforts this quarter.
Speaker Change: And with that, let's now open up the call for questions.
Speaker Change: Thank you. At this time, we'll conduct the question and answer session.
Speaker Change: As a reminder, to ask a question, you need to press star 1-1-8 telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press start one one again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Ellis Smith from JP Morgan Chase. Please go ahead.
Ella Smith: Good afternoon. Thank you so much for taking my question. So Noel and Jeff, first I'm talking to ask about the strong subscription unit growth. Could you speak to, again, what the puts and takes are that contributed to the strong subscription unit growth growth number?
Ella Smith: Sure, happy to, and we're incredibly proud, not just of this.
Ella Smith: That's strong numbers that we put out in Q1 on the subscription growth, but also the change in trajectory. So just as a reminder, we were seeing negative subscription growth, so, you know, that that turn.
Ella Smith: Which, you know, which happened quite recently was a function of a couple of things. At the highest level, it was moving. [inaudible]
Ella Smith: Towards quality share, finding better customers. What that meant was we had to reorient our products, our packaging, and our pricing.
Ella Smith: to make sure that we were going after more of these better companies, and in effect what we're doing is we're creating a barbell strategy.
on subscriptions, which is best practices.
Ella Smith: We're trying to bring people in first with transactions because that's how our core model was working, but eventually with lower... [inaudible]
Placed.
Subscriptions.
Ella Smith: And then move them up the value chain and over the value chain. So upsell and crosssell. So we've, you know, we've leveraged some of this through changing our existing products. We've talked about this with registered agent and the pricing changes that we've done there. We've leveraged it with registered agent and some of the product changes. [inaudible]
Ella Smith: So the features that we've done, we've introduced some concierge level do-it-for-me products as well that are higher priced and our expectations as they will also be lower-churn products as well. And then finally we have started to bundle more and more of our lower end subscriptions.
Ella Smith: These subscriptions will inevitably have higher turnbook because they are part of a bundle and because they're a lower priced. But the idea is to wet people's appetite.
Ella Smith: Who are in at the lower end through our formation channel, and then ultimately migrate the ones who are most successful as businesses up that value chain.
Ella Smith: Yeah, and just to build on that, Ella, in terms of the subscription unit gross specifically, that Jeff was alluding to the bundling of our e-forms, forms in e-signature.
Ella Smith: Subscriptions as well as our bookkeeping subscriptions and our Chrome premium skew, which we started to roll out so the last year added greatly to the subscription count because they are lower price.
Ella Smith: Throughout this year we'll start to see that growth subside. I'll reiterate what Noel said, it's a really important point. It's a two-fold strategy. One is to drive subscriber.
Speaker Change: to subscriptions. And, you know, those tend to be slightly more fleeting customers at a lower end. And then you cross sell and up sell and value price.
A subset of those.
Speaker Change: To be your highest price, highest value customers, and that often drives your revenues forward.
Speaker Change: So, I think we have done a good... [inaudible]
Speaker Change: A good amount of work to start orchestrating that strategy. And over the next few quarters and upcoming years, you're going to see more of that. And it's what ultimately gives us confidence that we can drive towards that double digit number.
Speaker Change: That makes a lot of fun. Thank you so much. And as a quick follow-up, I want to ask about Formation Nation. Can you speak to the process of integrating that business and your vision to drive that business forward?
Speaker Change: Sure, and it is very similar in terms of what we were talking about with subscription with that twofold model. What we had in this case with our brand
Speaker Change: was the leader in the brand going after value pricing and value products. And we actually created a race to the bottom at LegalZoom.
Speaker Change: So, what we've done is we bought the leader in value-priced products. This is...
Speaker Change: Formation Nations Inc Authority. They actually created the first reformation product offering that we knew of. So what we are trying to do with this integration is we're trying to decouple what we had done historically at LegalZoom.
from offering both free products to high-value products.
Speaker Change: And now our hope and expectations that we'll be able to push the lower end customers. The customers aren't quite ready.
Speaker Change: to deeply engage in our business over formation nation where there's more handholding and a better ability to move people up the value chain over time while starting with a free offer.
Speaker Change: And, you know, in doing so, and this is one of the reasons why we discouraged anyone from looking at formation nation as a segment of our business.
Speaker Change: Separate from LegalZoom. As we do that, we're going to want to remove and reduce the revenues that we're coming through our free formation sites. So, we're equally proud of the work that we have done on our end. We're calling that part of the integration. So, let's move on to the next question.
to deprioritize our free business.
Speaker Change: And, you know, as you saw that, you know, the two stats...
Speaker Change: That are really, really important and valuable here above and beyond the fact that we're moving up the value chain is that as a percentage of total formations, we now have our free formations below 50%.
Speaker Change: and that we were able to increase formation nation's marketing cost effectively.
Speaker Change: To drive at least some subset of those customers over to now our associated sister brand, Inc Authority, so that we can normalize that and not fully cannibalize as we move up the value chain.
Speaker Change: And as a reminder, the formation of nation business is largely a transactional business in nature, so it affords us the opportunity.
Speaker Change: to look to bring some of the subscription prowess and strategy that we've been enabling on our side to shift towards subscription to those offerings as well.
Speaker Change: And I know we wouldn't have done what we did on the LegalZoom side, at least as quickly as we did, and I don't know if we would have ultimately been successful without having that in authority brand.
Speaker Change: Makes a lot of sense. Thank you both so much. You bet. Thank you, Ronald.
Thank you.
Pat McEwee: Our next question comes from Pat Mcllwee, from William Blair, please go ahead.
Hi team and thanks for taking my questions.
Pat McEwee: My first question, you know, you talked about launching a new brand campaign, some SEO and also stepping up the marketing spend information nation this year. So, my question really is, should we expect...
Pat McEwee: To see overall marketing spend elevated, going forward, or are there any off-sense we should be thinking about there?
Pat McEwee: I will start by saying no, and Noel can elaborate on that in terms of the financial profile. What we're really talking about is a shift in marketing spend, more than an increase in marketing spend. We're trying to be more efficient in a number of different areas, and we're leveraging brand.
We're leveraging that to help drive authority.
Pat McEwee: into our business. We're at a pretty unique period of time as we enter into minimally this economic uncertainty, maximally potentially a recession. And typically when you see these periods, the strongest brands.
Pat McEwee: Ten to Thrive in those periods. So what we're trying to do is reorient ourselves.
as the Guardian. [inaudible]
Pat McEwee: for our customers. We are the company that you go to because we are the safe choice.
Pat McEwee: Such that if you're a strong going concern, you're going to want to switch to us for compliance.
Pat McEwee: You're going to want to switch to us for registered agent services.
Pat McEwee: Or for virtual mail. And if you're thinking about starting a business either because you lost your job or now feels like the right time, where else to go than the best? We are still orders of magnitude cheaper than a law firm, but a premium provider relative to other online technology firms. And to do that and do it well, we need to shift the way that we think about and spend on our marketing. And then finally so that we
We don't lose!
Pat McEwee: Some of those customers that we are willing to give up on the LegalZoom side because they were not margin-a-creative to our core business and they were deleterious to our brand. We wanted to shift sufficient spend over to formation nation so that they could capture those customers.
Pat McEwee: Yeah, and Jeff's right. I think we're expecting a similar level of camspin this year. There'll be some puts and takes.
Pat McEwee: on the quarters, just relative to how we rolled out some of our brand spend last year. The good news is, you know, our spend is...
Pat McEwee: largely performance oriented. So it adjusts quickly given the commentary on an uncertain macro. Our performance marketing will adjust to changes in demand.
Pat McEwee: And from a brand-spend standpoint, we've steered clear of upfront commitment, so we have flexibility to adjust to a different environment as well. And it's an important question, Pat, so I'm glad you raised it. More generally, we're being incredibly cost-
Pat McEwee: Conscious and sensitive to the fact that we know that the economic situation can change, so we're I think being appropriately prudent.
In general. Okay.
Speaker Change: Got it. Very clear. Thank you, both. And then the second is just more quantitative. You shared in the press release that formation nation contributed. Thank you, David.
Speaker Change: Right about a million, eight million and a half and revenue this quarter. You know, given the mid-quarter close to that, is that fair to kind of assume that type of run rate contribution going forward or should we expect that to? Yeah.
Speaker Change: Grow, and then also kind of a mix between transactional subscription, changing, going forward.
Speaker Change: Good question. Let me unpack that qualitatively first, and then Noel can take the quantitative bit. If you think qualitatively, this is really important to understand. We are not running
Speaker Change: This business in a segmented way, it is highly integrated and the more revenues we can push to formation nation, particularly if they're able to grow with healthier margins we are going to do and we're going to continue to do so you know those numbers are convoluted to some extent regardless. Thank you very much.
Speaker Change: The example we gave in terms of increasing that marketing spend, we are happy to do that and spend to grow their business if they're growing efficiently and profitably. We're also happy to pull from their business.
Speaker Change: If it accretes to LegalZoom as a whole because we can manage it more effectively and we're looking at areas where we can do that as well. There's also a lot of cross-learning where we're able to cross-sell and upsell products. The last thing I'm going to think about is where it should be placed. The last thing I'm going to think about is where it should be placed, where it should be placed, where it should be placed.
Speaker Change: Within one versus the other so that we have to force something down a different billing system or a different accounting system just so we can manage to one number or another. I say that because we are execution driven and that's what we're focused on mostly predominantly and we don't want to put the kind of accounting cart before the operating horse.
Speaker Change: We've got a lot of ground to cover here. I would say you can use those numbers directly, but they're not a good indicator of how one business or the other is doing. The indicator there is the combined business. Second to that, as you know, there's a lot of seasonality in our business, that's true with formationation as well. Q1 is a seasonal high period, so it would be significantly lower. If, you know, if you try to extrapolate.
Make that half of a quarter into Q2. [inaudible]
Speaker Change: Yeah, that's right. Because it's much more transaction-oriented, it has a heavier seasonality than LegalZoom, so I wouldn't do a pure extrapolation and to Jeff's other point as we look for opportunities to, you know...
Speaker Change: Given trade, give and take between the businesses and do some transition to subscription.
That could have some impact on near-term revenue expectations.
Speaker Change: for the the medium to long-term benefit. Yeah, and and again within one of those segments, but but as a whole we're you know we're managing the growth crossbow.
Okay, great. Thank you both for the call. You bet.
Thank you.
Speaker Change: Our next question comes from Brent Thiel, from Jeffries, please go ahead.
Speaker Change: Hi, this is John Bianca-Brenzel. Two questions for me. On the macro, I mean, other than business formations, just wondering what you're seeing in behavior, maybe across some of the other products or some of the KPIs you see as you went through the recorder mark, you know, January February March as well as through Apple May, and then I have a follow-up. Thank you.
Speaker Change: It's a good question. We were perseverating on this point, as is any good operating team. There's a lot of uncertainty.
Speaker Change: And, you know, what we're doing, which we think is the right approach, is we're running a variety of scenarios.
Whether things could stabilize, get worse. [inaudible]
Speaker Change: Get better. How the different macros, remember we're subject to many of them, interplay with one another. How macros that don't necessarily directly affect us, like tariffs, could indirectly affect us as well. And I think we're taking the appropriate steps.
Speaker Change: Both to model our business and to manage our business under a far wider range or bans than we would otherwise and you know and that's where we come to that mid to high single digit.
Speaker Change: that were managing into so that we know that we can hit our numbers irrespective of a change.
Speaker Change: But to answer the question directly, we saw some negative pressure into Q1 and that has continued to date, and that pressure is compounded by uncertainty because you're seeing policy changing, changes happen at record volume.
Speaker Change: Yeah, and that pressure, as Jeff mentioned, is in the range of assumptions that we laid out in the script as well as in our, you know, it's incorporated into our financial guidance for the year.
Speaker Change: Okay, great. And then, that's helpful. And then, you know, I know you're starting to integrate some information together. It's going to be harder to separate them, but in Q1, if you explore 8.6 million, I guess.
Speaker Change: The organic business was a bad slap in revenue, and I guess some of that is LZTAC, some of its BOR, but anything else to read in terms of dynamics if you look at the business, excluding the information in Q1.
Speaker Change: Look from an operating perspective. I would argue it's the wrong way to look at it or read it. You know, as you saw, we were able to drive some margin efficiency. A lot of the. [inaudible]
Speaker Change: Revenues that came out of LegalZoom in Q1, just as in Q4, as we started to do this, were, you know, we're empty calorie revenues. A free formation in and of itself loses money for LegalZoom.
Speaker Change: When you look at it on the other side, on the formation nation side, because they have such a strong onboarding process and veteran representative service reps who call on every free formation customer, they're able to make money with those customers.
Speaker Change: So all you're seeing is us accelerating that transformation at LegalZoom to higher value customers.
Speaker Change: So, I think that that would be the wrong way to look at what we're doing as we integrate this business. Instead, what we're trying to do is accelerate the repositioning of LegalZoom as the higher value, in fact, highest value in category.
Brandt.
Speaker Change: And then, you know, the second thing, which is probably as important, we were able to lean in more on subscribers.
Instead of transactions.
Speaker Change: And you saw a big shift this quarter that probably wouldn't have been possible, at least not to that extent.
Speaker Change: Without us knowing that we were going to be able to get this Formation Nation acquisition done.
Speaker Change: And, you know, formation nation is largely transactional. So, at some point we'll be able to turn to that business and look for ways.
Speaker Change: to accrete subscribers on that side as well.
Speaker Change: So, I really would discourage you from trying to look at the business piecemeal because this was a strategic initiative. We looked at doing it organically. We hesitated to do it because we thought that it would look disingenuous to customers to build our own discount brand.
Speaker Change: So we acquired and moved quickly. In fact, I should say we moved in advance of acquiring because we knew we were going to be able to get this steel done. So I think that that's the better way to look at it. And it certainly is the way that we are and we're pleased with how it's gone today.
Okay, thanks so much. Be back.
Thank you.
Speaker Change: Our next question comes from Ron Josey from City. Please go ahead.
Speaker Change: Hey, this is Jake Antaran, thanks for the question. So in recorder, we saw that you expanded virtual mail to consumers, you know, previously being only offered on the B2B side. Wanted to just hear like, if you could double-click on the key priorities on the consumer side of the business, and how you're viewing those efforts as
Speaker Change: Part and parcel to your overall approach, given examples like this with virtual mail. Thanks.
Speaker Change: You bet. And great question, Jake. The way that we're looking at the business generally is from the customer lens. And what does the customer expect of us?
Speaker Change: as a large legal services provider. And, you know, and consumer particularly a state planning is a legal service that, you know, that people demand. And, you know, as we looked out and asked others.
Speaker Change: How they saw us as a trusted provider, as a protector, as a guardian and what else they would they would like to see from us we kept hearing over and over again that virtual male was something that was very interesting to you know to the consumer side you hear this a lot from business owners who of course are also consumers. [inaudible]
Speaker Change: And, you know, I'll speak personally since I have a...
Relatively easy lift.
Speaker Change: For us to build, and in fact, the company that we acquired had a product that appealed to consumers, and we knew that there was demand for it, and virtual mail is fully subscription and it is largely subscription anyways, and it is one of our, you know, one of our bright spots in terms of...
Subtraction Group.
Speaker Change: So, you know, we launched it in quarter and we've got high hopes for that helping to drive consumer.
Speaker Change: What I will say is apart from that, it's those strategic pillars that we've outlined previously.
Speaker Change: That matter from the standpoint of consumer. Can we leverage consumer to to diversify our go-to-market answers clearly? Yes, we will do that. Can we leverage consumer to drive increasing subscriptions and subscribers into our business? The answer is yes, and you will see more of that here as well. And then can we leverage expertise and artificial intelligence? Yes, we will do that.
Speaker Change: to offer a better service at scale. And we think the answer is yes to that as well. So it feels like that is a competency that we need to offer next to that core competency of small business services.
Thanks a lot. Take care.
Do that. Great question, Jake.
Thank you.
Speaker Change: Our next question comes from Andrew Boone. From Citizens, please go ahead.
Andrew Bone: Thanks so much for taking the questions. Jeff, I want you to go to the subscription guidance and talk about the double digit subscription growth rate as we think about exiting 2025. Talk about the key inputs there to ensure that you guys hit that target. And then going back to some of the conversation or information nation and business formations. Thank you very much.
Andrew Bone: Jeff, you came on board in July of 24. And as we think about exiting 25...
Andrew Bone: How do we think about continued share loss? Should we expect you guys to kind of be in line with the market as we set up the end of 25 and into 26? How should we think about these as as progress in terms of getting rid of kind of the empty calorie business formations that are on the platform? Thanks so much.
Speaker Change: You've got both great and important questions to enter today. On the subscription growth, I know
That double-digit number out last quarter is—
Speaker Change: I suspect it felt premature to people outside of the company. It did not to us.
Speaker Change: Because we were looking at the role forward and where we were towards the end of the year and what we were launching.
Speaker Change: in Q1. I think what you're seeing now with this 8% print in Q1 shows you the path to us getting there. And the bigger question is whether it will be sustainable and that's on us to make sure that we deliver that.
Speaker Change: So, I have every degree of confidence that we will get to that double digit subscription growth number that we've been talking about, and the reason for it is because of how we reoriented the business.
Speaker Change: And part of that gets to your second question around market share. We were so focused on market share at all cost, we failed to realize that we were bringing in on the one hand empty calories, unprofitable formations.
Speaker Change: Second, and this is probably the opposite counter, customers who had no intention of being upsold, cross-held, or wanted to be subscribers.
Speaker Change: And then when you put those two together, what it meant was we were building a business that wasn't long-term sustainable.
Speaker Change: And that's what we've been really focused on over the past, call it, nine months and you know, and probably throughout my first year, making sure that the customers we bring in.
Speaker Change: are really, really well-educated for what we expect of them and what we will deliver to them to help them succeed.
In return.
Speaker Change: And we're looking for customers who are going to grow.
Speaker Change: Who believe in their business, who have a viable going concern? Yes, they're entrepreneurs, they're taking a chance, we will take that risk with them. But we want to grow alongside them. We don't want to bring in stagnant businesses, lucky lose. People who are doing it because it's cheap.
Speaker Change: For free, or building a wrapper around the vacation home.
Speaker Change: So we've we've seeded that market and I think we're happy to do that.
So, what that means over the medium term...
Speaker Change: We're going to ring that out of our business. It means market share deterioration from the standpoint of formations.
Speaker Change: But we actually think that if you look at the quality formations, we are increasing share. I think we are starting to prove that because when we look at our core subscription products, we're seeing our poo rise.
Speaker Change: When we look at our answering subscription products, these are the ones that we're bringing people into at first.
We're seeing large adoption.
Speaker Change: And you know, I think that's something that is proof positive that the strategy will work in the long run. But as you as you hear from a lot of counterparts in the SMB space.
Speaker Change: Everyone's moving to quality share now, because that's what you do when you're under macro pressure and when you're under uncertainty.
Speaker Change: We've been doing it for the last year, and I think we've been doing it quite successfully. So eventually...
Speaker Change: This will start to normalize out and then the macro will be a decent enough proxy for our market share because we won't be looking to necessarily grow that market share at the cost of bringing in bad customers.
Does that make sense?
Pat McEwee: The one thing I'd add to that is just-
Pat McEwee: If you look at our free cash flow, the quarter was really strong, 42 million up from 25 million last year. We're coming off of a really strong free cash flow quarter in Q4, and one of the important drivers of the strength in free cash flow was the improvement in deferred revenues. So that ties to which Jeff's talking about in terms of the predictability or visibility that we have into our subscription revenue as we move throughout the year.
Pat McEwee: And just as a reminder for people, babies, it's easily lost when you're looking at multiple companies. Our free product.
has a cost to it to customers.
They still have to pay the filing fees.
Pat McEwee: We pass 100% of that on to the Secretary of State, which means we're taking on revenues with exactly zero margin. And then we're fulfilling it, which means there's actual real cost to it. No matter how little that cost is, it is putting margin pressure on our business. No matter how little that cost is, it is putting margin pressure on our business.
Pat McEwee: So, if we can't convert those customers, we don't want them. And this speaks to why that formation nation acquisition was so important, because we were able to quickly accelerate the e-adoption of those free customers from LegalZoom over to Incathority. And that is a creating positively to our business as a whole, but in particular, you see that on a free cash flow line.
Thank you.
Do that.
Speaker Change: Thank you. As a reminder, to ask a question, you need to press star 111 on your telephone and wait for your name to be announced.
Moderator: Our next question comes from Elizabeth Porter from Morgan Stanley . Please go ahead.
Speaker Change: Great, thank you so much for the question. I wanted to follow up on some of the pricing changes. You know where you noted some better than expected retention and elastic demand, which is really encouraging to see. So just given some of the positive reaction to pricing, does this increase your confidence to expand pricing changes to other parts of the portfolio? And just how should we think about it as a lever going forward? Yeah, that's a great question. Thank you.
Thank you.
Right answer is, it is clearly a lever.
There is-
Speaker Change: Clear elasticity in a number of our products with a number of our customers. We're still in the early innings.
Speaker Change: We, you know, we did the first pricing changes to new customers towards the end of last year and, you know, and then we are still in the process of testing in particular registered agent.
Speaker Change: But because of that success, it does give us greater confidence. And I think that there are other areas where we see higher value in those products.
Speaker Change: Reluctant, personally, and I think the team shares this view to increase price without increasing value. I think we owe that to our customers.
Speaker Change: So we have to make sure that we govern what we're doing on pricing.
Speaker Change: Alongside what we're doing with product development. So with registered agent, we had a couple of very clear things that we could do to drive increasing value to our customers.
That was, you know, that was a relatively quick...
Speaker Change: And effective, so we were able to do that as, you know, as a first test. We now have to look to other products like virtual male compliance. [inaudible]
Speaker Change: are legal plans on the consumer side and on the business side. But I think you will likely see more of this over time, because I do think that this is sustainable, I think it's scalable, and I think it's a lever that we can use.
Speaker Change: It's one that we should because the hidden benefit, the one that I am probably even more excited about, is it sends a message to our customers into the market that we are not.
Sheep.
Speaker Change: You get what you pay for, and that is probably most true in legal services and the medical profession.
Speaker Change: And we want people to know that we are the best solution if you're not going direct to a law firm on Main Street. And I don't think that we have delivered that message effectively in the past.
Great. And then just as my follow-up.
Speaker Change: I wanted to get an update on just the progress of what a hundred accountants. [inaudible]
Speaker Change: I know that initially it was an expectation that that could partially offset some of the headwind from taking your own product out of the lineup. So just one, how is that performing versus expectations? And then second, could you elaborate on how the partner strategy may be shifting the go-to-market top of funnel in the corpidness?
Speaker Change: You, rather than LegalZoom, just preferring customers to solutions? Are you starting to see new customers kind of referred in?
Bye.
Great questions, especially in second one.
Speaker Change: which is a core priority for us. On 1-800 qualitatively it is performing better than expected on our end and on our partners end. So both sides see it as performing...
Better than expected.
Speaker Change: You know, we moved into market quickly to take advantage of the existing tax season. The results outperformed our plan. It is offsetting some of the decline that, you know, that we're continuing to go through as we lap our own tax product. And we expect that to accelerate over time. So we feel very good about that, about that partnership and, you know, we're leaning in pretty heavily and believe in what they're doing generally. And specifically, what they're doing with artificial intelligence.
Speaker Change: On your second point, which I cannot emphasize more, that is a key priority for us. I can't say that it was historically, but again to reiterate, we had leveraged.
partners.
Speaker Change: Take our customer base and help monetize those customers with other answering services. We are now focused intently.
Speaker Change: on trying to bring partners in who can drive customers to us.
Speaker Change: So that we are not so dependent on, you know, on our own marketing.
Speaker Change: And, you know, I suspect in the short term, you will see more from us in that respect as we start leaning on partners to drive customers to us as opposed to leveraging our consumers to increase our margins.
Okay, thank you. You're back. Thank you.
Thank you.
Steven Ju: Our next question comes from Stephen Zhu, from UBS. Please go ahead.
Speaker Change: Right. Great. Thank you. Hi, Jeff. Noel. I'm just building on your earlier comments.
Speaker Change: You know, it sounds like formation nations, customer lifetime value is realized basically on the first transaction, so you're what and done.
Speaker Change: But there seems to be this open opportunity to upsell cross-sell. So is there a way to characterize what the incremental customer LTV unlock or uplift could be over time? I get that you guys have gone this after for three months, but any type of color would be interesting and
Speaker Change: And I guess there's other sort of different considerations because the user base for formation is probably different versus the LegalZoom user. So any type of help there in terms of how much.
So I guess LTV, you can unlock going forward then. [inaudible]
Speaker Change: I guess, and as you refine the process for formation nation in terms of the upsell, cross sell, should we be looking for you to be getting a little bit more aggressive on the customer acquisition spend. So theoretically you should be in a better position to outbid your competitors in the paid media channels. Thanks.
Decreak.
Speaker Change: Great questions, and you raise an interesting point, and you know, and this speaks to why we're calling this a quick integration because so much of the integration efforts is literally just us deprioritizing free. What I think formation nation does so well is their onboarding process with lower intent customers and what they've realized rightfully so is those lower intent customers need a bit more handholding.
Speaker Change: And they drive more value. You need to drive more value upfront.
Speaker Change: So that you're pulling them in early and they have lower-
Speaker Change: Lifetime. So, you know, so that life cycle is quite quick.
Speaker Change: The reason that's important to understand is we effectively had a one-size-fits-all model. We were assuming all customers were alike and that these were very high intent, very long-term life cycles.
Speaker Change: And that works well for high-intent paying customers. It works less well for these free users. So the first point is even if we do nothing on that side, speaking to your core question.
Speaker Change: We still win here just by bifurcating between these two customer sets.
And you know, in shifting...
Speaker Change: The best customers that fit the profile for Inc Authority and the best customers that the profile for LegalZoom over to LegalZoom.
Speaker Change: So, that is our first priority, and that's something we can do very quickly, almost through osmosis, because we can do it independently, even though it becomes a synergy, just because of how we market. A second to that.
Speaker Change: Inc Authority drive value up their value chain and drive greater lifetime value is the same way that we're leveraging them to help us as well with some of the core things that we can do better. And we're looking at the differences and saying it will be somewhere in between. Their transaction volume looks like our subscription volume. [inaudible]
Speaker Change: And our subscription volume looks like their transaction volume. So the opportunity set is somewhere in between there.
They're being...
Speaker Change: Significantly transaction-oriented to us being significantly subscription-oriented. I suspect we will see that grow probably not to that rate.
Speaker Change: It's hard to tell this early how much we can do on the subscription side because the one thing we don't want to do is break their model. It works really, really well and is effective. And worst case, it accretes subscribers to us.
Speaker Change: Generally, through our model, being more effective at the customers that we're going to pull from them over to us, which we will, as the premium...
Brand.
Speaker Change: I don't know if you have anything to add on it. I would just say on your question on marketing spend we noted in our prepared remarks that we've started to increase spend there so we do think that there's an opportunity right up front just to start spending into some different channels.
Speaker Change: And I think there's more we can actually do in their existing channels. And obviously, I think it's too early to quantify anything around the LTV opportunity, but certainly as we start to realize some of that opportunity, we for sure.
Speaker Change: It expands what we can do from a spend standpoint. And having the multiple brands also helps as well. And we have the potential for the Amazon effect where we have a lot of traffic.
Speaker Change: We can have effectively a quasi marketplace where we're going to be happy to send certain customers directly to Incathority, not indirectly. In the same way that Amazon will promote Audible, which is owned and operated, but most customers see it as independent in a different offering than in some of the other both book and audio book products that Amazon offers under their brand. [inaudible]
Thank you.
You bet.
Speaker Change: I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.