LegalZoom.com, Inc. (LZ) Q4 2022 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. Welcome to LegalZoom Fourth Quarter Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Sarah Bland. You may begin.

Thank you, operator. Hello, and welcome to LegalZoom's Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me today is Dan Wernikoff, our Chief Executive Officer; and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, and similar expressions and are not and should not be relied upon as a guarantee of future performance or results. 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. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. In addition, we will also discuss certain non-GAAP financial measures. Our CEO and CFO, use these measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. 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. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now I'll turn the call over to Dan.

Thanks, Sarah, and good afternoon, everyone. Let me jump right in by sharing our Q4 performance. Revenue came in at $147 million, up 3% year-over-year. Transaction revenue was down 10% and subscription revenue was up 13%. LegalZoom business formations grew 12% year-over-year in Q4, while U.S. Census formations were slightly down in the period. This resulted in 12% growth in share, the largest increase over the last two years. Adjusted EBITDA was $26 million for the quarter at an 18% margin. These results are reflective of our freemium test ramping and are an early indication of the opportunity we have to drive meaningful share gains. As we make the product more accessible, we'll continue to see improvements in conversion, allowing us to reduce our marketing spend. In Q4, CAM spend was lowered by a third, contributing to a margin expansion for the period. We remain confident in the target provided on our Q2 2022 call of growing share by15%, while also expanding our adjusted EBITDA margin to 15% in 2023. As we've mentioned in previous earnings calls, our revenue growth is decelerating because, one, our business is roughly 40% transactional and has a correlation to the health of the formations macro, which has been declining; and two, we're experiencing consecutive years of a reduced formations macro, which negatively impacts compliance subscriptions revenue that's attached at the time of formation. As a result of those two factors, we expect revenue growth in 2023 to be 2%. As we make this business model transition, we expect to shift to a freemium lineup to be revenue neutral in this calendar year and accretive in subsequent years, given the shift to subscriptions. This is an unexpected positive results of our testing to-date. As we enter 2023, we're erring on the side of profitability as macro conditions remain unclear. As the year progresses, we'll reassess marketing spend levels, but in all scenarios, we anticipate an improvement in marketing spend ROI. As a result, we expect adjusted EBITDA in 2023 to be $100 million or a 16% margin. We want to provide additional clarity on the macro assumptions embedded in the guidance that I just shared. We expect U.S. formations, as measured by census data, to decline mid-single-digits for the year. We're also working off the assumption that the decline will accelerate in the back half of the year with an expected recession. At this point, we are not yet seeing that in our business nor is it observable in the census data. Philosophically, having experienced multiple down cycles, I very much believe you should plan for the worst case, managing capital conservatively. But also as the category leader, we need to be aggressive and consider it a time to accelerate customer growth through more accessible pricing and products, meeting customers where they are. With that philosophy embedded into our plan and with an accelerated decline in the macro due to an expected recession in Q3 and Q4, we still would expect revenue to begin to show improvements in the back half of 2023, driven primarily by a buildup of our subscription revenue with the new lineup. When I joined LegalZoom, I laid out three strategic goals: one, to scale the core formations business, two, to create an ecosystem of subscription services, and three, to introduce integrated experts. Since 2019, we’ve increased the number of formations from 295,000 to 474,000 or 61% growth. During the same period, the formations macro has grown 44%. Subscription revenue has grown from $206 million to $358 million or over 73% during the same period, which translates to a 20% CAGR. And since then, we've introduced new higher-value products that integrate experts, such as LZ Tax and attorney-assisted trademarks, both of which are meaningfully contributed to growth. While in the near term, we're seeing revenue growth slowdown alongside the macro, it's worth pausing to consider a longer, more normalized view, absent the peak or valley caused by COVID and the post-COVID slowdown. We are now moving from a period of marketing investment to one of product. Looking ahead, we are beginning to benefit from the significant infrastructure investments required to enable scale. Our focus is on building the product experiences that we believe can help businesses better succeed at the time of formation and beyond, especially during this economically challenging time. Given actions already taken in 2022, we expect overall non-CAM operating expenses to remain relatively flat year-over-year, while materially increasing our investment in technology and development. Within technology, our investment in infrastructure is declining, enabling our engineering organization to more than double the size of the team working on our product and product platform. You'll begin to see the fruits of that increased investment through more product announcements this year. Our product pipeline is robust. As we enter the year, we continue to make end-to-end progress around our growth priorities of scaling the formations business. We expect to be rolled out to 100% of traffic with the new lineup by the end of Q1. We’ll continue to test different components of the lineup for some time to come, but a free formation will be a consistent foundational element. We also continue to make progress in automating our fulfillment process; a precursor to deploying the premium lineup was driving more efficiencies in the cost to fulfill, ensuring we are meeting our customers' SLAs with much higher volume. With these investments, we've reduced the time to fulfill and the cost of revenue, excluding filing fees on a per unit basis for our formation transactions is also down. We continue to invest here and believe there are more opportunities to drive higher efficiencies along with a better customer experience for multiple years. Our second strategic goal, creating a robust ecosystem of subscription services is what allows us to reduce formation pricing. But more importantly, what we are building here simply doesn't exist anywhere else. Running a new business is challenging enough. In 2022, over 70% of the LLCs we formed were a business of one person and the majority of small businesses formed in recent years operate out of their home or somewhere other than a company office. The landscape of legal, regulatory, and compliance changes occurring at the federal state and county level is overwhelming. Our product development is focused on bringing order to it, especially for those businesses of one without a staff or the time to navigate this complexity. By mid-year, both e-signature and virtual mail will be completely integrated into the experience. Virtual Mail is already part of our formations process and the business performance continues to exceed our expectations. Additionally, in the quarter, we launched an embedded experience with Next Insurance, and we also launched a banking partnership with Chase. Both are critical services in formation and both are best-in-class providers. Moving to progress on our third strategic goal, integrating experts, we've been very busy leading up to tax season. Recall that last season, we launched quickly, considering an opportunity to learn fast. Since we are focusing narrowly on a group of businesses right at formation, we sought to understand their unique tax needs. Our product at the time was not well integrated and as a result, we erred on higher staffing to ensure a good experience at the cost of efficiencies. During the course of last season, we discovered some challenges in how we had commercialized the product and as a result, we experienced higher attrition than expected. But we did prove two things that have become the foundation of this season, we have a powerful channel; and given our focus on the needs of the new-to-the-world businesses, we have a novel account experience with the Net Promoter Score above 80. We're excited about this tax season. We have a new complexity based lineup. We brought all of the customer onboarding and tax intake online, integrated into MyLZ and we tuned our schedule and experience also adding a synchronous access to our experts. Our advisory sessions are trending materially higher than they were last year. NPS has held, and we are demonstrating improved efficiency per customer in return. We are now selling LZ Tax through MyLZ, expanding access to our whole base of subscribers. We are prepared for tax season this year and are already in the heart of it. Stepping back, while we acknowledge the external environment is putting near-term pressure on revenue, our new freemium lineup is providing an opportunity to go after customer growth and we're in a unique position to do that while expanding our profitability. We remain cautious on the overall formations market planning for the worst case, but we can't help but be optimistic that small businesses are resilient and some emerging trends such as side businesses for those working for home will persist. Our goal is to fuel that trend by building a world-class product that unlocks this entrepreneurial spirit, removing all the roadblocks so that our customers can build successful driving businesses. With that, I'll turn it over to Noel.

Thanks, Dan, and good afternoon, everyone. I'll start today with a review of our performance in the fourth quarter and end with our outlook for Q1 and the full year 2023. Total GAAP revenue in the period came in at $147 million, up 3% year-over-year and at the top end of our guidance range. Transaction revenue was down 10% year-over-year at $51 million due to a 10% reduction in average order revenue, while total transaction units were flat year-over-year. The expected reduction in average order value was driven by acceleration of our new line of testing in addition to strong growth from our wholesale price partner integration channel. We completed 115,000 business formations in Q4, up 12% compared to the same period last year. Our formation growth outperformed the market, which declined 1% during the period, as measured by U.S. Census data revealing new applications for EIN, enabling us to grow our market share by 12% versus the same period last year. Transaction units were 211,000 in Q4, flat year-over-year as the increase in business formation transactions was offset by a reduction in intellectual property transactions due to the discontinuation of our DIY trademark product and a continued decline in our estate planning and other consumer transactions. Average order value came in at $241 in the fourth quarter, down sequentially from the third quarter and down 10% year-over-year, again driven by accelerated testing of our new lower-priced lineup and growth in our partner channel where we provide wholesale rates. We expect lower AOVs in 2023, particularly in the first half of the year as we fully roll out our premium lineup in our other lower-priced SKUs and before we start to lap our lineup testing in the back half of 2022. Subscription revenue was $91 million in the quarter, up 13% year-over-year due to an 8% increase in the number of subscriptions as well as improving ARPU. While our newly introduced subscriptions show healthy unit growth, we've seen a slowdown in our core compliance subscriptions, given the muted or negative formation volumes experienced for several quarters. ARPU came in at $258, up 9% year-over-year. The increase was primarily due to growth in LZ Tax and Earth Class Mail which we acquired in Q4 of 2021. We expect year-over-year ARPU growth to moderate throughout 2023, primarily due to the rollout of overall lower pricing and LZ Tax. Partnership revenue was flat year-over-year in the fourth quarter of $5 million. Early in 2023, we exited partnership in the uncontested divorce space, which has an approximate 1 point impact on our expected revenue growth for 2023. In Q1, inclusive of the impact of this partner exit, we expect partner revenue to be flat to this past quarter. Now turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Gross margin came in at approximately 70% of revenue in the fourth quarter, up from 68% in Q4 of last year. A slight improvement in margin was largely due to efficiency gains from cost reduction initiatives implemented in Q3, partially offset by higher fulfillment costs driven by continued growth of LZ Tax and ECM. We expect a slight decline in gross margin in 2023 as we experienced higher filing fees as a percentage of revenue due tote increase in business formation volume as a result of the rollout of our freemium lineup. Sales and marketing costs were $46 million in the fourth quarter or 31% of revenue, down 14 points from Q4of last year. Customer acquisition marketing came in at $32 million, down 33% year-over-year. As planned, we continue to reduce our lower converting brand media spend in the quarter. We are also benefiting from higher conversion rates within our existing traffic. This combination is serving to drive higher efficiencies across our overall spend, and we are excited to amplify this result with improved marketing messaging centered around free as we fully roll out our new lineup. Technology and development expenses were $14 million in Q4, up $2 million year-over-year as our primary focus remains in product and engineering. We are now also fully reflecting the added headcount costs related to our recent acquisition of REV. In 2023, we expect to continue to grow our technology team as we begin to rely more on development of our products versus marketing spend to drive growth. General and administrative expenses were $16 million in Q4, up $3 million year-over-year, primarily due to higher professional fees and consulting costs. Adjusted EBITDA was above our guidance range at $26 million for the quarter compared to $7 million in the fourth quarter of 2021 and our base deferred revenue decreased $4 million in the period. We are pleased to see the improvement in adjusted EBITDA as it reflects the multiyear infrastructure investment that has helped to generate efficiency improvements across multiple facets of our business and gives us greater visibility and confidence in our ability to deliver in 2023. In the fourth quarter, we continued to execute on our $150 million share repurchase authorization. We repurchased a total of 3.6 million shares of our common stock at an average price per share of $8.66 for a total repurchase of $31 million. Through the fourth quarter, we have completed $95 million in buybacks with a total of 9.2 million shares repurchased, which represents a reduction of approximately 5% of our prior year-end fully diluted share count. As of December 31, 2022, we had cash and cash equivalents of $189 million and no debt outstanding. I'll now provide guidance for the first quarter and full year 2023. For the first quarter of '23, we expect total revenue of $153 million to $157 million or flat year-over-year growth at the midpoint. We expect adjusted EBITDA of $17 million or 11% of revenue at the midpoint. For the full year of 2023, we expect total revenue of $620 million to $640 million, or 2% year-over-year growth at the midpoint. As Dan mentioned, we expect adjusted EBITDA of $100 million or 16% of revenue at the midpoint. And with that, let's please open the call for questions.

[Operator Instructions] Our first question comes from the line of Andrew Boone with JMP Securities. Your line is open.

Thanks much for taking my questions. Dan, I think you said in the prepared remarks that the transition to freemium is expected to be revenue neutral in 2023. Can you just break that down a little bit more? Can you talk about the assumptions here across attach rate and then conversion? And then, Noel, in your commentary, I think you said you'd amplify the marketing message around the free lineup. In our Google searches, we're starting to see some free wording in search results. Can you just talk about the improvement that's expected in marketing there, or any uptick that you would expect in efficiency as you guys roll out that messaging? Thanks so much.

Yes. Thanks for the question, Andrew. I think the first question is really around a little bit more of a breakdown of the freemium task and what we’re seeing. And I did in the prepared remarks, to share that we were a little bit surprised that it's revenue neutral in year one. We were sort of assuming that because we get a different mix of subscribers relative to transactions, that it may defer some revenue to year two. The reality is, it covers that revenue in year 1, while still seeing a mix shift. So year two remains pretty positive on the revenue side. And what I should just – stepping back here, just reiterate, this is very specific to testing in LLC only, which is about 3/4 of our formation transactions. We're seeing very clear conversion improvements and you can see the partial results of that conversion improvements in Q4 with the share gains that we recognized. And it's probably going to mean that we're changing a bit around what we're doing from a marketing standpoint, which probably leads into the second part of the question. But I just want to reiterate something here that our free strategy really only works because of two things that we've been focused on. One is driving efficiencies through our infrastructure, so we're reducing the cost of process, which allows us to scale it and still deliver on the SLA. But probably more importantly is over the last couple of years, we've been investing very heavily in owning a subscription ecosystem of services required right at the time of formation. So we've always had a strong presence in compliance subscriptions. But obviously, we've added REV, which does e-signatures. We’re adding virtual mail. We have LZ Tax, which is new. We have some partnerships that are being added. And what’s really interesting about it is we're bringing it all together into a single experience, which really just does not exist in the category. So there is a lot of exciting stuff there. And I think freemium is a bit of the tip of the spear. But there's a lot that’s happening in our ecosystem.

And Andrew, this is Noel, just to hit at your second question. So we've been very limited in what we've been able to test around free messaging in the market. And so as we fully roll out our lineup, we'll be doing lots of A/B testing there, as you can imagine. We'll look to broadcast it across all channels. So think SEM as well as the contextual marketing around SEO, display ads on our social channels. So really being able to roll it out everywhere. And so we're expecting that not only to have an impact on overall traffic that we drive to the site, but also on conversion rate within our experience as well. Just as you hit them early on with that message free likely has an impact on conversion in the product flow as well. So there is a lot we need to learn, so we don't have any answer on the – necessarily expected efficiency that it drives, but we'll be iterating on that throughout the year.

But clearly, I mean, when you think about the conversion improvements we're seeing, it's clearly allowing us to dial down the CAM spend in the aggregate. And then we haven't yet tested to Noel's point because of the ability to test on top of a test the marketing efficiencies, we would expect that there'll be some pretty material efficiencies.

Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.

Great. Thank you very much. I first wanted to dig in on the improvement for subscription revenue in the back half of the year. Just given many new customers are tied to that business formation, which has been soft and expected to get a little bit softer, it sounds like. What drives the improvement in subscription revenue? And what are you seeing in terms of attaching subscriptions to more of the existing customers? Thank you.

Yeah, thanks. This is really what I was just referencing in the freemium test is that we've been building out an ecosystem for some time, and we're starting to integrate all of those new subscriptions more tightly into the formation experience and also even post-formation experience. So if you think of something like LZ Tax last season, it was integrated into formation, but it wasn't part of MyLZ and we weren't doing life cycle marketing back to the full base. We've started to do that really in Q4. If you think about Virtual Mail, that was actually fully integrated in Q4, and it's – other than a couple of states, which have different regulations around the postal service, it's essentially launched out to the full LLC base. We haven't yet done it, but you'll see us integrating REV and the e-signature capabilities, which will be another opportunity as we get into 2023. But pretty much across the board, we're starting to do a better job of integrating these both in formations and post formation with MyLZ, which will continue to drive that subscription growth over time.

Got it. And then, just a follow-up on tax season. I know we're approaching that soon. What's the benefit, particularly for blended ARPU that we can see from just a new kind of better product rollout heading into this season? And how are you seeing demand trends for just the high-end versus the low-end product?

Yeah. Thanks for the question, Elizabeth, the follow-up piece The tax piece is interesting in that what we've done this season is we've introduced an advisory product, which is actually a lower priced subscription. So that will have the effect of decreasing ARPU. But we do feel like we'll be attaching more customers because it's more relevant to a larger number of our pre-revenue or very simple businesses that aren't yet thinking about filing. We're not going to share the mix on this. But I would say still the majority are people who are looking for a filing relationship. And one of the really, really interesting pieces of tax and the advisory part of the business is, as we start to establish that relationship, you would think that we have pole position on actually serving that customer when they're ready to do a filing as well. So we can consider that almost like a pipeline into our filing business. So the tax season actually has started. So I should say we're not getting ready, we're fully in season at this point. And that commercialization change was super important. But I'd say equally important is what we did in the product. Last season, a lot of what we were dealing with customers was off-line or somewhat disjointed from an experience standpoint because we had a lot of experts but we didn't have the right infrastructure. This season, we've taken all of the onboarding process and put in the product. We've taken all of the intake, which is essentially building tax software into MyLZ. And we now are able to track cohorts of customers. We're able to reach out and understand where people are actually failing in the process or where they may get confused and need to reach out to an expert. And so it’s just feeding back into a loop that helps us get smarter and smarter as we get through tax season in building out the offering. So it's pretty exciting. I feel really good about where we are with tax season. We're going to continue to learn this year, but it's scaling nicely.

And just to build on that, Elizabeth. Not only has Dan mentioned, do advisory SKU help us with upsell kind of meeting the customer where they're at, at the time and then being able to upscale -- upsell them in the future. We also think this can have an impact on overall retention in our tax subscription business as well. And with all of the infrastructure and process improvements that Dan was just alluding to, we're seeing earlier uptake in terms of tax preparation and we're expecting to therefore, prepare a lot more returns this year, which will also help to drive retention in the product.

Understood. Thank you so much.

Thank you.

Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Ron Josey with Citi. Your line is open.

Hey, This is [Indiscernible] on for Ron. So my first question was on the channel partnerships. I was wondering if you could share more about the percentage of those transaction units that come through the channel partnerships and maybe how you think about the opportunity to expand distribution with those partners? And then, just the second question was just on the automation of processes and if you could share more just about how that's improving the efficiency in the business. Thanks.

Yes. Thanks for the question, Jay. On your first question on partnership channel, I'd say that's still emerging for us. We don't break it out, but it is growing at this point. I'd say many of the partners that we have today leverage our brand. There is some where they do it within their brand. We've built a pretty unique platform here where it can be customizable and it can be integrated directly into any solution, through APIs. You can almost think of us as the stripe of small business formations in that we enable other people to distribute them. We do have some newer partnerships where they're starting to contribute. But the one thing I'd say is we also have some legacy partnerships where we're actually terminating some relationships. We have a history at times of actually partnering with competitors in the industry and so we've decided that, that's something that we don't want to do going forward. Some of those are a bit material in terms of, for instance, active subscribers. And so that might be a little bit of a headwind from a unit perspective, but they're very low ARPU units. And so we think they're not that material when you start to look at it from a standpoint of subscription revenue. So there's lots of puts and takes there. We're not really breaking out any specific components of it or how much of it is of our total mix, but it's not a significant amount at this point. On the automation side, I mean, that has been a significant focus from the moment I got here. There is a --when you think about fulfilling an order, oftentimes an order goes to the Secretary of State, it comes back. It needs to be fulfilled sometimes with – also with an EIN. You have things like submitting operating agreements in the annual reports. And so when I joined, it was a somewhat manual process. We've been on a steady journey here, and we’ve been reducing the cost associated with fulfilling, primarily our LLC transactions because that's where the bulk of our volume is. We're starting to move into other areas as well. So there's still room to have continued efficiencies there. But that's what's enabled the freemium launch. And we'd expect that, that helps us from a cost of revenue perspective for some time to come. The one thing I'll just call out though, as we do launch freemium, we have a higher mix of filing fees as well that are associated with the actual transaction, which somewhat mutes the benefit from some of the automation. So there is, again, a couple of puts and takes there, but we feel really good about where we are.

Yes. And one thing to add on just overall, as Dan talks about those operational efficiencies through automation and infrastructure investments, I mean that's what's helping to drive the outperformance that we saw from an adjusted EBITDA dollars and margin standpoint in Q4, and what gives us confidence and visibility into our target EBITDA – adjusted EBITDA and EBITDA margin for 2023.

Thanks.

Thank you. Please standby for our next question. Our next question comes from the line of Mario Lu with Barclays. Your line is open.

Hey there. This is Jack on for Mario. Thanks for taking my question. On the topic of generative AI technology, I am just curious as to maybe how you guys view this. If it's something you could leverage with your own services or alternatively, if it's maybe more a potential threat in terms of competition moving forward and how this might impact your strategy? Thanks.

Yeah, thanks for the question, Jack. While I always think of these things more from a standpoint of the opportunity, I have a product background and have lived through multiple platform shifts and technology shifts, even going back to desktop to web and web to mobile and so, I think this is no exception. I think we could leverage ChatGPT as a way to enable our experts to be more productive. I mean if you think about – if you consider a law firm in the role of a paralegal, in a lot of ways what we try to do as an expert platform is be a paralegal for our attorneys. And the function of getting and summarizing data is sort of tailor-made for that and helps the expert be much more efficient. So that's a good example of how we might leverage it. What's interesting too from a competitive standpoint or from an impact to our business standpoint, it's a regulated business when you're talking about legal services and unauthorized practice of law is a real issue. And so we don't see something like ChatGPT impacting how we provide expertise through our attorneys. And I also feel like from an SEO standpoint, I've certainly played with it a lot. It's interesting because we have a lot of authority, we actually come back in a lot of the responses around how to form a business. So it looks like another flavor in a way of SEO. And if you had to ask me, I'd say, ultimately, ChatGPT will probably be more side-by-side with search and there'll be different use cases for each. And most likely, I'm assuming on the consumer side, they'll probably evolve into some sort of advertising model associated with it. So maybe a different form of the same type of a function of search. But if you step back from all of that, I think if anything, it just reemphasizes that the biggest brands are going to win, and that you really need to establish direct traffic. And when you think about us relative to our competitors, and we've talked about this before, our awareness level is 4 or 5x the next closest competitor and so we have a pretty substantial lead there as well. So net-net, I feel like it's good for us. It probably isn't good for an off-line attorney. Or I don't believe the government will adopt as quickly as we can. And so the Secretary of State sites probably won't get as much innovation out of ChatGPT. So net-net, I think it's a tailwind

Great. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Matthew Pfau with William Blair. Your line is open.

Hey, great. Thanks. First wanted to ask on the guidance – revenue guidance for 2023. Noel, could you help maybe give us some idea of how we should think about the split between subscription revenue and transactional revenue for the year at least directionally?

Yeah, so we're not providing any specific guidance across those lines. But directionally, I think with the roll out of freemium, as Dan kind of talked about earlier, there is naturally an impact on the transaction side of the business where we're seeing higher conversion, but that's being offset by AOV. And the natural increase in business formation volumes as a result of freemium is driving more subscriptions. So, while we expect a slowdown in subscription revenue growth year-over-year, we're expecting – we're still expecting subscription revenue growth. Whereas in the transaction side due to the macro, which we talked about, our expectations there and lower CAM spend and the impact of freemium, we actually would expect it to be down year-over-year.

Got it. And then, with the release, sort of, anticipated release of these new products this year and the products that you've integrated over the past year, how do you go to market with those products to customers without ramping up marketing spend? Is it bundling or are there other options that you're looking at to go to market with these products?

Yeah, I mean, that's the nice thing about our ecosystem. It really is a perfect adjacency to the formation transaction and it's also a great adjacency for post formation, first 30 to 60 days. So we already do a substantial amount of attaching as you go through to form your business. A good example would be you have to provide a business address. I talked about how many of our businesses are like a single member business and are working from home or in their car. They may not want to provide their address, and so that's a perfect area to cross-sell virtual mail. And so that's a good example of how we approach it. But separately, once you form the initial thing that you do post formation is you're looking at the status of your entity. And so we take you to MyLZ. When you're in MyLZ, we introduce you to different tasks that you should be thinking about as being a brand-new small business. The perfect example would be you've just established an entity to protect your personal assets, but you probably haven't yet protected your business assets and business insurance is a really important component of that. So we'll start to lay out these different types of ecosystem solutions for you directly in that experience when you're starting to think through all those formation services. So it's a pretty unique channel in that it's a pretty captured channel. They're part of our experience already. They’re part of the formations workflow. So we don't need real marketing costs. The costs associated with some of these subscriptions is more inbound sales, where if you have a complex service like LZ Tax, you may want to talk to a salesperson understand what's included where you would fall with package you should actually be purchasing. But it doesn't require any external CAM or anything like that because it's directly within our ecosystem.

Got it. Thanks for taking my questions.

Sure. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Brent Thill with Jefferies. Your line is open.

Hi, thank you. This is John Byun on behalf of Brent Thill. Two questions. Obviously, the business formation, you took a lot of share at 12% versus minus 1. I mean wondering why you're taking so much share? Is it the freemium lineup or other reasons? Is it just a cumulative effect of all the improvements you've made? And then second, on the freemium offering, when we look at some of the KPIs and results, I mean, where will we see that show up the most? Is it in the AOV? Just high formation? I mean where should we observe that? Thank you.

Yeah, thanks for the questions, John. Yeah, so freemium was a big component of the share gains. Partner channel also was a contributor to the market share gains, so I think those were really the two biggest pieces. I'd also just note that we weren't fully deployed in Q4. So obviously, our intention is to do better on share going forward. And then in terms of KPIs will be most impacted on the freemium line up. The way to think about freemium is there’s a certain number of our customers that are attaching free SKU, and that free SKU is really just a formation transaction that's now free, which used to be at the low end of it was charged $79. So you see an impact on AOV based off of that reduction. But we also see attach of some transactions, like an operating agreement or an EIN or a business license. And so that offsets a portion of it. But overall, the AOV will go down. And then you see slightly lower attach rates, but the number of formations to attach to on the subscriptions line will go up. And so you end up seeing in the aggregate a better subscription revenue over time. And that obviously will start to build, because we're talking about most of those being – or all of those being ratable and they'll start to build up over time. So that's the main way that it will show up in the line. I don't know if I missed anything, Noel?

I think you captured it.

Okay.

Great. Thanks very much.

Thanks, John.

Thank you. Please standby for our next question. Our next question comes from the line of Jackson Ader with MoffettNathanson. Your line is open.

Great. Thanks for taking our questions guys. The first one is on the CAM spend and maybe its impact on future -- future revenue growth, right? I know it’s too early to start talking about 2024. But like what should we be thinking about in terms of CAM spend being down so much, and what that might mean for kind of steady-state revenue growth either on the transaction side or on the subscription side as we move forward?

Yeah, on the CAM side, we saw a bit of a steeper decline in Q4 as we were lapping some more material spend that was nonseasonal. Typically, we don't a lot of brand spending in Q4 but in 2021, we did to test it. We didn't like the yield on it. And so we wouldn't plan on doing it again, but we've also just sort of declined the full brand spend bucket. So I don't think you'd see going forward the identical reduction, you'll see a more muted reduction. But the bigger point would be that as soon as we deploy the freemium lineup, that's when we'll probably start to buildup our marketing spend again and optimize it around a completely different positioning in the lineup. And it also opens up some new channels. And we don't want to go into all the details of what our plans are to do on the marketing side because, obviously, our competitors listen and they've been emulating some of our strategies. But we do think that there’s going to be some opportunities to spend a bit more over time. What I'd say, though, is with – again, what's really going to be the longer-term driver of growth in our business is going to be the subscription ecosystem. And it's hard to sort of step back and just think about this, but we're now seeing multiple years of – or multiple periods of decline in the macro. And we still are showing pretty strong growth in our subscription side of our business. What we'd expect is, at some point, and we're not going to try and predict when that is, that the macro goes back to its historical level of growth, which is 5%. And it's going to amplify the model. It's going to – you’re going to start to see the leverage built out on not just the mix going to subscription, but the number of subscriptions that we offer. And that really is where our business model will kick in. It's very difficult to see that in the throes of declining macro volume, but it won't be when we see that turnaround.

Jackson, sorry, this is Noel. I'll just add to that. One of the – obviously, the macro is a factor on our level of CAM spend as well, and we talked about our expectations for the macro for the full year. We've taken a pretty conservative approach into how we're thinking about what will happen in the macro. We have a sort of accelerating decline through the back half of the year. Early in the year, thus far, the macro has been pretty healthy overall relative to our planned assumptions. And so, if that continues, then that would obviously impact the level of spend we have around CAM for the year as well. So we haven't seen kind of the signals of the macro continuing to deteriorate, but we do have those assumptions in our plan today.

Yes, it's a good point. I mean, even as we think about January and normally, I don't speculate forward. But even as we look at February, it's – the macro has been a bit healthier than we would have expected. And I actually wouldn't be surprised if you see growth in the macro in February. So that's one area where -- again, we're leading with conservatism because we know we can move very fast on the CAM side and respond and react if we need to.

Okay, that makes a ton of sense. If we switch to the LZ Tax side, small business tax, you've got a brand new competitor this year with Intuit. Curious if you're seeing any – some early learnings, whether some of the moves that some other competitors have made that surprised you, how you are reacting to them since it’s early goings for both of you, and it's kind of you're swimming in parallel.

Yeah, no, it's a fair question. I'd say, if I step back, and I'm obviously familiar with that competitor, and I’m familiar with the offering because you sort of led that as we were building it. I'd say we're doing something a little bit different here. If you think about most small business returns, they really are coming from independent accountants. There are some players that I almost consider mass market and, starting from a consumer standpoint, that are sort of amending their consumer offering and creating a seasonal tax product for small businesses. That's very different than what we're doing. It's almost like if you were building an SUV and you started out with the chassis of the sedan and you retrying to sort of bend it to do different things, in our case like we are starting with a customer oftentimes before they have revenue or have a return. And so that's a different channel and a different market to go after and we're starting more from an advisory standpoint that crescendos in a filing. And so that – when you think about how you design that and you think about the product that you need to deliver against that, it's much more of a year-round service. And you also have to be able to identify these types of prospects through a pretty unique channel. So we haven't really bumped up against anybody that I feel like is taking customers from our existing channel or base in a more material way this season. Like we like our attach rates. We think the volume of customers that we have coming is good. We never discount any competitor at all, and there's a lot of great competitors out there, but we really feel like we redoing something different. Like we are going after much smaller businesses. We're going out to them in a very early portion of their life cycle and we're focused heavily on advisory.

Got it. All right. Great. Thank you very much.

Thank you. Thanks.

Thank you. I am showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.