LegalZoom.com, Inc. (LZ) Q1 2023 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to LegalZoom's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sarah Bland, Securities Counsel. Please go ahead.

Thank you, operator. Hello, and welcome to LegalZoom's First Quarter 2023 Earnings Conference Call. Joining me today is Dan Wernikoff, our Chief Executive Officer; and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, and similar expressions and 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 annual report on Form 10-K 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 results 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. I'm excited to share our strong performance as we kick off 2023. I'll start with a brief overview of Q1 results. Revenue came in at $166 million, up 7% year-over-year. Transaction revenue was down 5%, while subscription revenue was up 15%. LegalZoom business formations grew 32% year-over-year to 170,000 units. U.S. Census formation were up 4% to $1.5 million for the quarter. The resulting share gain was 27%, which is the largest gain we've seen since we began tracking it. Adjusted EBITDA was $22 million for the quarter or 13% margin. These results reflect the bulk of traffic going to a premium line of test over the full quarter, and then more specifically, all traffic being directed to the winning lineup at the beginning of March. We tested this lineup for some time, and there were no surprises in the results once deployed. In March, we were able to better understand the implications of free messaging on traffic, and it exceeded our expectations. Coupled with a stronger-than-anticipated formations macro, we saw strength across the board. This is a significant business model shift and inflection point, providing a step function improvement towards realizing our strategy. Our first strategic pillar is to scale the core formations business. And in this quarter, we saw record formations growth, while improving service levels and reducing cost of revenue per unit on the formations business. Our second strategic pillar is to create an ecosystem of subscription services. With this new lineup, we will further leverage the ecosystem by shifting the purchase mix more aggressively towards recurring revenue. And our third strategic pillar is to integrate experts. This new lineup includes a premium SKU that bundles a subscription with access to our network of independent attorneys. The freemium lineup is an accelerant to all of our strategic pillars. To be clear, it's still early innings. And while we're very happy with the initial launch, there are many opportunities to improve our performance across all investment areas. We're excited to build on this new foundation and we have a backlog of improvements that we've already begun to test. Stepping back, our focus is to remove any barrier that stands in the way of someone wanting to launch a business. With this new lineup, we've materially reduced the price of forming a business, which is especially important in today's economic environment. In fact, the formation lineup pricing we have today is lower than it was at our founding in 2001. This focus on making our formations products more accessible, while expanding the type of services we offer beyond just legal and compliance has led us to revisit our mission. Our heritage as a legal disruptor is something we remain both proud of and dedicated to, but we continue to identify additional ways to remove barriers to block entrepreneurs when they form a business. As an early and often the first adviser to small businesses, our customers are looking for us to do much more. Democratizing law is one of many opportunities we have to make expertise more accessible and affordable. As such, 20 years into this journey, we're updating our mission from Democratize law to unleash entrepreneurship. We've already made progress against this new broader mission, and we're excited to share additional product updates in support of it by the end of the year. With this new mission, our top priority is helping small businesses get off the ground. We mentioned last quarter that small businesses are resilient, determined, and their secular tailwinds point to a strong long-term macro. Many factors such as work from home, the emergence of gig economy platforms, lower capital requirements and increasingly sophisticated digital enablement tools make starting a small business easier and lower risk than it's ever been before. Just as we feel good about the long-term prospects of the macro, we also anticipate growth opportunities as we begin to leverage generative AI. The most exciting opportunity we see is eliminating inefficiencies in the contract drafting and review process. This was the key thesis of the Revv acquisition and the forms reinvestment we announced at the end of last year, where we see less opportunity, and therefore, we consider the product highly defensible is within our core filing solution. Let me go ahead and expand on both. There are 2 parts to our core formation process. The first is providing context and confidence around what's required to form. We believe generative AI is a meaningful evolution to current search solutions when providing content and context and we'll work to integrate those capabilities. Although it's worth noting that much of this content has been widely available for some time through traditional search and there is a high bar around confidence in the source as well as regulations that advice to be delivered through a credentialed expert. But once a customer has the necessary context, the formation process is a complex workflow. This requires data collection, mapping the data set to proprietary unstructured forms and the last mile connection to over 3,000 counties, 50 states and several federal agencies. These agencies do not have APIs. Instead our IP here is the combination of the scale workflow, numerous RPA bots to automate filing and last mile capabilities that sometimes require human intervention. In many ways, we act as an API on top of all government agencies and likely have an opportunity to be a plug-in through ChatGPT. We do, however, believe generative AI will revolutionize the legal document space and therefore is an untapped growth opportunity. You can already see large investments being made in national consulting and legal practices to build internal tools that serve enterprise clients. What isn't addressed by that investment is smaller, independent firms that can't afford to make similar investments. These are the firms that typically serve small businesses. According to the ABA roughly half of practicing lawyers are in firms of 1 to 10 attorneys. One of our strategic pillars is to integrate experts. As part of that strategy, we're building an expert platform that enables smaller firms within our ecosystem to compete by driving new business, managing administrative burdens, enabling efficiencies and leveraging new technologies. We've hinted multiple times that you should expect new product releases in the back half of this year that will provide clarity on our strategy with attorneys. And the foundation for this is a new contract and forms platform that will leverage AI. It's worth noting that while technology will continue to make attorneys more efficient due to regulations related to unauthorized practice of law, attorneys will still play a prominent role in the delivery of legal services and this is yet another area where we differentiate ourselves from most of our online competition with a large network of independent attorneys already operating in our ecosystem and ready to consume these services. Beyond generative AI, there are many growth opportunities across all our strategic pillars. With the new line of rolled out and parallel progress on tech investments to streamline fulfillment, we continue to improve efficiencies as we scale volume. We're about halfway through our automation investment and have opportunities to drive higher margin for multiple years. These investments will also serve to improve the customer experience by lowering the error rate and increasing our speed to file. In addition to efficiency gains, we're focused on improvements in how we commercialize our service through the formation of workflow. Right after we deployed our winning test, we were in market testing ongoing improvements to the new lineup. And in the coming months, we have additional tests queued up on our attached products and services. Similar to virtual mail, we moved quickly to integrate forms and e-signature through MyLZ. This is the third ecosystem subscription launched within the last 2 years. We aim to be the simplest and e-signature, provider offering a low-cost service tailored specifically to small businesses needs. We're currently working to reimagine the entire end-to-end experience starting with form and contract creation through the collaboration with an attorney and culminating with a process to get a digital signature and securely store your documents. In addition to deploying a lineup that included an attorney subscription bundle, we continue to make progress on our third strategic pillar, integrating experts. While tax season is extended this year with grace periods for filing in California, we're far enough along through the year to understand our performance and begin applying learnings towards next season. For the year, we expect to double the total number of returns filed compared to 2022, benefiting from the product investments we made before the tax season. We're still just a couple of years into creating this service and believe there are opportunities to drive stronger growth through a better return experience, which will then translate to better retention rates. In our first tax season, we were largely an off-line provider. That changed this year as we built onboarding, intake, document upload and accountant scheduling into MyLZ. In turn, those investments drove significant improvements. But with any new product experience, we continue to receive valuable feedback that will be incorporated into postseason releases. Outside of the filing experience, we are still constructively dissatisfied with active usage and retention rates. While we expected lower retention for those seeking pure advisory as their needs may be more episodic, especially right after they form and pre-revenue. We have not seen the level of ongoing active engagement expected for those entitled to a tax return. We have many insights in this area. And as was the case last year, we're building and we'll be testing improvements in anticipation of next tax season. On the whole, this was a big quarter at LegalZoom, and I want to thank the legal Zoom employees for all their hard work and dedication. We made considerable progress against our new mission of unleashing entrepreneurship, and as a result, we're raising both top and bottom line guidance for the year, which Noel will detail in a few moments. I'm very encouraged by the progress we've seen in the market, demonstrating significant share gains, while accelerating our shift to recurring subscription revenue. What gets me even more excited, though, is what I see in our product pipeline and the advances we continue to make in building out a new and novel SMB ecosystem. With that, I'll turn it over to Noel.

Thanks, Dan, and good afternoon, everyone. I'll begin by echoing Dan's excitement with regards to our start to the year. The combination of our new lineup, alongside refresh marketing messaging, drove impressive market share growth in business formation, a key focus of ours as we look to drive more customers into our subscription ecosystem. Importantly, this combination has also led to improved traffic trends and marketing efficiencies as we've been able to significantly reduce our marketing spend year-over-year, while driving the higher volumes. We continue to see increasing benefits from automation within our operations where improving productivity levels allowed us to fulfill orders faster than anticipated in the quarter. We also saw reductions in the number of customer care contacts per order and in the related cost per contact. We believe there is still a significant opportunity to improve the efficiency and effectiveness of our operations and are maintaining the investments needed to realize these gains. Cost discipline remains focus. As we look to balance our goals of reaccelerating revenue growth and improving margins. We remain confident in our ability to drive significant margin improvement year-over-year and see our Q1 results as an important indication of our progress. One of the key factors in our performance this quarter was the macro where its performance exceeded our forecast and was the first quarter of formation growth reported by the Census in over a year. As a result, we're increasing our formations macro expectation for the second quarter. Despite this strength and aligned with our focus on controlling expenses, at this time, we are not adjusting our macro assumptions for the back half of the year. We will continue to manage to the expectation of a recession with the one exception being the continued acceleration of our investment in product and technology. I'll now provide you with a review of our performance in the first quarter and end with our outlook for Q2 and the full year 2023. Total GAAP revenue in the period came in at $166 million, up 7% year-over-year and above the top end of our guidance range. Transaction revenue was down 5% year-over-year at $62 million. Average order value declined 18% year-over-year, while total transaction units were up 15% year-over-year. Reduction in average order value was driven by the full rollout of our new lineup. We completed 170,000 business formations in Q1, up 32% compared to the same period last year. Our formations growth well outperformed the market, which was up 4% during the period as measured by U.S. Census data, enabling us to grow our market share by 27% versus the same period last year. The successful share gain can largely be attributed to our new lineup, and we, therefore, expect the year-over-year growth in share gains to moderate in the second half of this year as we start to lap the initial testing and expanding rollout of our free products. Transaction units were 308,000 in Q1, up 15% year-over-year and increasing business formation transaction was offset by a decline in intellectual property and consumer transactions. Average order value came in at $202 in the first quarter, down sequentially from the fourth quarter and down 18% year-over-year, again, driven by the rollout of our new lower-priced lineup. As mentioned earlier, we did see increasing benefits from automation within our fulfillment operations and improving productivity levels allowed us to fulfill orders faster and recognize more revenue than anticipated in the quarter. Subscription revenue was $97 million in the quarter, up 15% year-over-year due to a 10% increase in the number of subscriptions and continued improvement in ARPU. We saw revenue growth in the quarter across our core compliance, LZ Tax and virtual mail subscription products. I remind you that Q1 is a stronger quarter for revenue recognition in LZ Tax, given the higher tax preparation volumes and unutilized tax preparation entitlements. ARPU came in at $259, up 6% year-over-year and flat sequentially from the fourth quarter. The increase was primarily due to the increased mix of higher-priced LZ Tax subscriptions within our total subscription base. We expect year-over-year ARPU growth to moderate through the remainder of the year. Partnership revenue was up 11% year-over-year in the first quarter at $6 million. Now turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Gross margin came in at approximately 66% of revenue in the first quarter, up from 65% in Q1 of last year. The improvement was driven by efficiency gains from cost reduction initiatives implemented in the second half of last year. We expect gross margin to slightly decline in 2023 as a result of higher filing fees as a percentage of revenue due to higher business formation volumes. Sales and marketing costs were $57 million in the quarter with 35% of revenue, down 11 points from Q1 of last year. Customer acquisition marketing came in at $41 million, down 24% year-over-year. In Q2, we continue to expect a significant year-over-year decline in customer acquisition marketing, although to a lesser extent than our Q1 results. Technology and development expenses were $14 million in Q1, up $1 million year-over-year as our primary hiring focus remains in product and engineering. General and administrative expenses were $15 million in Q1, up $1 million year-over-year. Adjusted EBITDA was above our guidance range at $22 million for the quarter compared to $2 million in the first quarter of 2022 and our base of deferred revenue increased $17 million in the period. In the first quarter, we continued to execute on our $150 million share repurchase authorization. We repurchased a total of 771,000 shares of our common stock at an average price of $8.78 per share for a total repurchase of $7 million. Since inception, we have completed $102 million in buyback with a total of 10 million shares repurchased. As of March 31, 2023, we had cash and cash equivalents of $204 million and no debt outstanding. I'll now provide guidance for the second quarter and full year 2023. For the second quarter of 2023, we expect total revenue of $166 million to $168 million, a 3% year-over-year growth at the midpoint. We expect adjusted EBITDA of $27 million to $29 million or 17% of revenue at the midpoint. For the full year of 2023, we are raising our total revenue to $630 million to $650 million or 3% year-over-year growth at the midpoint. As a result, we now expect adjusted EBITDA to increase to $105 million or 16% of revenue. And with that, let's please open the call for questions.

[Operator Instructions] And our first question comes from the line of Andrew Boone with JMP Securities.

Congrats on a strong set of share gains. Can you talk a little bit about how LOMs may change the competitive dynamic for business formation? What are the risks you see out there as people are more utilizing more generative AI models, what do you see there? And then can you talk a little bit about the cadence of the quarter? So understood for you really went live in March. Can you give us some more recent update in terms of what you guys saw on attach as well as maybe how March compared to January and February.

Thanks for the question, Andrew. Let me start up on the question with generative AI. I mean, maybe I'll just start by saying, this isn't all that new news for us. I mean if you go back and think through the pandemic when GPT-3 was released, we saw a pretty significant demonstration of some of the incredible capabilities that you get from LLM and from generative AI. If you think about some of them, it's legal text to plain English, summary briefs, just all of the distilling capabilities that it has and even more complex drafting. So when ChatGPT came out, that was just a little bit more about fine-tuning on a model of conversational UI. But those capabilities have been in place for a little time now. So if you step back, the generative piece of this it's going to change how people write almost like photos changed art, and bad writers will be somewhat overnight pretty good writers and we all know attorneys are amazing writers that effectively get paid by the word, which is a proxy of time. So there's going to be an impact on the industry. What I don't think everybody fully appreciates is that our whole purpose for the first 20 years of our existence has been to leverage tech to make legal services accessible. The issue isn't in my mind, disruption of the online players. This is all about getting to the problem of nonconsumption through broader digital reach. And just about every estimate we see by every expert says that the majority of the U.S. population leaves their legal needs unmet. And anything that can stimulate that demand is a good thing in my mind. So what do I mean by that? So on our business, less than 5% of our revenue comes from forms and contracts, including our state planning business as well. We announced our acquisition of Revv in Q4 last year, pre the ChatGPT release. Our intent there was twofold. We've talked about e-signatures and actually, we've deployed that already, but part of this was to reimagine our forms and our contract offerings. Because we hadn't invested them in that business in 10 years despite the fact that, that's where we got started, we really haven't had a significant investment there for some time. So in diligence, when we were out looking at potential acquisitions, Revv one of the things that attracted to us to them was the fact that they had some pretty novel features leveraging machine learning. And I've been through these shifts a couple of times before. What I'd say, typically, the pattern news is the most disruptive technologies start horizontally and then they get tuned vertically. And we're in a really unique position to not only leverage ChatGPT, but to also couple it with our attorney network to bridge its shortfalls. And there's a couple of those, such as technical issues like hallucinations but also regulatory issues like unauthorized practice of law. So I view ChatGPT as expanding our addressability. Of course, that means we have to be innovative in the space, but we are the market leader, so you should expect that. I certainly do. So we're excited about where we are, and we have a couple of things that we talked about as we get towards the end of the year, and we're in a pretty good spot for that. On the cadence in the quarter, I would say we didn't see any surprises in the launch. And part of that is a reflection of just how much we tested before we released the winning lineup. And so if anything, we saw the predictable conversion improvements, we saw the reduction in AOV. The one thing that we were able to get a new read on in March was marketing efficiency and just what the impact of free messaging would be. And I can say that, that exceeded our expectations a bit. And we're just getting started there, too. So there's a lot of tuning that has to happen on the line up itself. But the early indication is that the free messaging is resonating, you can see it in the share performance. I mean the 27% share gain is probably the best indication in general. On the attach side, we did not have any surprises there. It played out exactly how we saw it in our tests, where we're seeing slightly lower attach rates, but that's overcome by the fact that you have much more units. And so overall, it's going to be an acceleration in the subscription business, increasing mix and driving longer lifetime revenue. And all of that is in combination with lower CAM expenses and better CAM efficiencies. So it really was pretty clean exactly what we had expected.

And Andrew, just one thing that builds on the trajectory of the quarter. We did see some strength in March as we fully rolled out. I mean, we were largely rolled out throughout the quarter. So it was a slight improvement. We also saw a stronger macro in March. That's kind of normalized in April. And so while we've increased our assumptions and forecast for the macro in Q2, our projections are not as strong as what we actualized in Q1. And then per our commentary, we also noted that in the back half of the year, we continue to take a really conservative approach to the macro. So as you think about Q2 from a business formation standpoint, what we saw in Q1 should be a fair expectation for our performance in Q2 from a year-over-year growth standpoint, and still staying conservative on the macro in the back half of the year.

And the next question comes from the line of Matthew Pfau with William Blair.

Wanted to ask on LZ Tax. Just sort of to clarify, how did that perform in its second year relative to your expectations? And you're thinking about areas of improvement, maybe what would some of those look like? Where do you think there's additional opportunities with that product?

Yes. Thanks for the question, Matt. Yes. Just to refresh, I mean, our tax business is pretty unique because we serve a segment of customers that a lot of people don't yet serve, which is someone who's even pre-formation and free operations. So people have questions about what type of entity they should have. And then even if they've created an entity sometimes it means that they're not yet in operation and we give them a lot of tax advice. So it's a pretty unique business through a unique channel because, again, we have -- we can identify them, whereas other people would have to do performance marketing or brand marketing to acquire these customers. The progress here has been pretty amazing. I mean one thing I reflect on is it's a practice that's less than 2 years old, and so we just finished our second tax season and the scaling that we're doing plus service improvements is phenomenal. But that said, I wouldn't say I'm disappointed, but I'm very satisfied in that we still see retention rates that we believe we should be doing better. We -- part of that is issues that we've identified ourselves just in the process of filing and some of the capabilities that we want to have on an ongoing basis as a tax service beyond filing itself. And we basically keep learning these things as we get out to market. And if you think what our philosophy is here is we're trying to balance speed of growth and scale and then also kind of listening to our customers and evolving the service itself. So it continues to be a strong performing service, and yet I feel like there's a lot of upside here as we continue to refine the end-to-end experience for our customers.

Got it. And then in terms of the share gains you're seeing, I mean, my guess would be, a lot of that is coming from more of the price-sensitive consumer. What are you doing then to address the large portion of the market that's still paying a much higher fee to go to a bricks-and-mortar attorney to do a business formation?

Yes, that's one of the really fun parts of the lineup that we deployed is it both solves for the price sensitive at the low end with a free offering, but our premium SKU actually comes bundled with access to an attorney. And so the benefit there is we're introducing a lot of people to the idea of you can get access to an attorney through technology to handle some of the early questions that you have as you're forming and then you can decide from there whether or not you're going to renew the service. And so that really is an entree into starting to disrupt the higher end of the market. Super early innings here. And actually, the volume that we're seeing coming in from this lineup is, again, what we're going to learn from and keep evolving the service, but the early read is quite positive. And that was the lineup that won overall in terms of both thinking about conversion as well as lifetime value.

The other thing I'd add just in the value that we bring is the fact that it's a full suite of solutions and services that we provide either directly or through partners, which is a better customer experience. We're also improving our overall customer experience. We also mentioned this in our remarks around the automation wins that we've had in terms of the delivery of our services. And so we've been able to deliver a faster and better experience to our customers, which makes us better choice overall.

[Operator Instructions] And our next question comes from the line of Mario Lu with Barclays.

This is Jack Butler on for Mario. My first question was surrounding the partnership side of things. When should we expect to see a meaningful uplift from these new partnerships such as Chase, is there any time line you may be able to put behind that?

So there's 2 forms of partnerships on our side just to back it up and provide some context. On one hand, we have partners where we're marketing their service through our formation workflow. And then on the other hand, we have the partnership channel, where some of the partners that we have are actually marketing our formation service as well. And so I think your question was more on the services that we're marketing through our platform. And I'd say that that's actually a lot of moving parts. We've talked about we exited another partnership on the uncontested divorce side last quarter. So that's a bit of a headwind, while at the same time, we're really ramping up our partnership with Wix. We added Chase as a banking partner and I'd say NEXT insurance is another meaningful partner for us. Those are all growing very healthy. And I'd expect that, that starts to -- that continues to accelerate. But again, it's just lapping some other things that we're exiting. And we've -- if you think about it, if you can go back further a couple of years. That has been a consistent theme of ours as we're trying to build out an ecosystem that has an integrated experience for customers. At times, that means something we feel like is directly in the compliance space. We should have more ownership over that experience and we brought some of those things in-house because as you guys remember, tax used to be a partnership, and now it's what we're offering our customers as well. On the partnership channel, it's kind of similar. We have some partners where we feel like it's a very symbiotic relationship, where we're marketing their service and then in turn, they're marketing our service. And then in some cases, we have a legacy of almost acting as a vendor -- as a very low-cost vendor to alternative providers. And so in the case of the bilateral side, we love it. We want to have partnerships where we feel like it's symbiotic, and we're both helping each other. On the vendor side, we feel like that's probably not what we want to be doing longer term. And we think those economics don't fit aligned with what we're trying to do from a lifetime value perspective. So there's going to be places where there's puts and takes where we're exiting partnerships from a channel perspective.

Great. That's helpful. And then in terms of customer acquisition marketing, I know you indicated earlier on the call that you would expect to see a decline in that in 2Q on a year-over-year basis. Is that largely as a result of your shifting towards product and maybe weaning off after season with heightened marketing on LZ Tax or is there some other factor at play maybe you could call out?

Yes, there's a couple of different factors here. I mean we've really scaled down our brand spend. And that's a reflection of thinking relatively to our competition, our awareness is just extremely high, and we have a strong lead. And in this environment, we didn't feel like that's a place to commit and have long-term investments. So we backed off on the brand side a bit. But it's also just gotten more efficient when you start to think about the performance side given the free messaging that we're using, some of the channel shifts that we're doing within performance marketing. And then even beyond that, sales and marketing, so thinking about the OpEx side, we adjusted as well. And sales, for instance, has come down as an expense. So it's -- when you think about the headcount side, that's down 8% for the quarter. So came down 24%, the sales and marketing headcount expense down 8% with the program dollar in there as well. It's sort of across the board a reduction as we become more and more efficient to align with our new strategy, which is a lower AOV product.

Our next question comes from the line of Ron Josey with Citi.

Dan, I wanted to follow up on a question or a comment you had earlier. The most disruptive tech, I think you said gets announced horizontally and then tuned vertically. Talk to us about how that might impact LegalZoom or how you're thinking about LegalZoom from a verticalized LLM support perspective. And then I know we talked about freemium on the call here, and forgive me this has already been answered, but asked -- but I know we got insights on how the quarter progressed. But talk to just about less to learn here in terms of demand and more importantly, I really want to focus on the upsell process and driving awareness of everything else that LegalZoom has to offer.

Yes. Thank you for the question, Ron. Yes. So LLM and verticalization, I mean, it's just -- it's almost like another form of saying fine-tuning, where if you think about LLMs and you think about ChatGPT, it does a little of everything, and it doesn't do anything perfect. And if you think about that, some of it can be related to the data sources, where those models might not have access to things that are analogous to the segments of customers that we're serving. So I'll give you an example. You may be able to go and scrap terms of service from every site that exists on the web and immediately be knowledgeable in drafting terms of services and really calling out anomalies in services. But do you have access to small business vendor contracts? Or do you have access to some geographically based terms tied to a lease. And that's where volume players will have a little bit of an advantage. And that's when you start to think beyond API-driven platforms on the LLM side and to more open source and where you have the ability to fine-tune with your own data set. So it's such early innings. We get really excited here, though, because we also have lots of data and we have a way to accumulate data that other people don't. That's also why having your own expert platform becomes really important because that is the step that you train the models on. And so you'll see more and more investment from there over the coming quarters. On the second question, lessons learned on the lineup and how we drive demand. I mean I think here, we get so much testing going into deployment of the lineup that we really understood all the commercialization challenges. But to your point, the thing that we hadn't yet fully understood was what was going to be an impact on the marketing side and how we drive demand. There are some sub channels. There's new channels that we've identified that we haven't really participated in, and I don't want to get into the details of that. But that's one big learning that I think we pulled out. The other thing here is we're just really getting a sense of how you apply free messaging and where you specifically apply it. In some ways, it has the effect of bringing down AOV, the more you amplify the free message, which we knew it was going to do. So you have to find that right balance of how do you make sure it's there for the customers who are price sensitive. But at the same time that you're not over-indexing on all the free messaging as well. And I'd say this is a place where we are just getting started. I think there's a lot of opportunity for improvement as we go throughout the year because we really didn't have a chance to test it. And so that's all happening in market right now.

And our next question will come from the line of Brent Thill with Jefferies.

This is Sang for Brent Thill. Two questions. One on the freemium. Wondering if you could talk about the pace, once they kind of come in through that door, how quickly do they end up buying a paid product and typically which products get attached? And then second, on your decision to keep your recession or macro outlook the same for the second half. Just wondering what you're seeing? I mean, it looks like last quarter, you mentioned January, February are pretty good and obviously, Q1 turned on very well, but just wanted to see your thinking behind that thought process of the guidance around the macro assumption.

Yes. Thanks for the question. So on attach rates on this new cohort of customers, it's actually been relatively predictable, again, through testing. We saw what customers were attaching. And there are a set of standard solutions that we offer, one we call a pack of essential docs, which is things like an operating agreement, EINs, helping them with business licenses. And then separately, the compliance subscriptions like registered agents, and we have a compliance subscription that does all your annual filings as well. Those are pretty standard and they attach very well because when you get down to it, they're sort of required still. And so that not only -- they're not only kind of value add from a perspective of thinking through like what is relevant as you form, they're actually required. So they still attach pretty strong. What I'd say is we haven't really commercialized these products in any way to adjust to the new segments that are coming in. So when you think about a very price-sensitive customer, they may not be looking for as much as broad a feature set or as rich of a product and they might be looking for something that's a little bit more simple, which gives us the opportunity to consider commercializing it slightly different to drive those attach rates up. But again, like the really interesting thing here, and I'm just going to keep saying it, we were extremely happy with the launch of freemium. There were zero surprises. And what I'd say coming out of it is we have a somewhat under-optimized lineup now where we haven't tested a bunch of the add-on subscriptions or add-on products and transactional products. And so there's opportunities that we're going to start identifying. We have a whole queue of tests that are kind of sitting there waiting to be run that have been sitting behind this freemium line for quite some time.

And on your question with regards to the macro, we feel like we're being appropriately conservative there. We're obviously still in the midst of an uncertain macro environment, kind of high inflation, increasing interest rate environment. So there's a general expectation that the economy will slow. We also, from a historical CAGR standpoint, look at the historical growth rates in macro formation and do some triangulation there and what the new slope could look like over an extended period given that we think the slope has shifted more favorably given all the tailwinds as it relates to forming and getting a business operational. So we factor in a lot of different things, but overall, believe that it's appropriate to stay conservative as we look out farther and we'll start to -- we'll normalize our forecast to whatever we're seeing for the upcoming quarter based on what we're seeing. But for now, as you look out at extended quarters, we're going to continue to stay conservative.

Yes. In April, as an example, because the census publishes weekly data, you can see it, it stayed pretty healthy as well. And -- but yes, to Noel's point, we really want to control the things that we can, and we feel like the discipline of assuming a negative macro is healthy to how we manage the headcount. It's healthy to how we think about how we're spending and we want to be as conservative as possible in this environment.

And our next question comes from the line of Jackson Ader with SVB MoffetNathanson.

Actually, just one from our side. The -- is there like a different contemplation for the lifetime value of a customer that kind of matches the willingness to accept the lower upfront price. Maybe that might impact either the long-term model or the long-term margin profile?

Yes, I want to make sure I understand your question. Are you asking whether or not we should expect a different LTV for the customers coming in through this lineup?

Yes. Because I'm just thinking like if we think back to the IPO a couple of years ago, your long-term model probably just contemplated like certainly a different upfront price for most of the transaction units and then also a different price for the subscription units that would be attached. And so I'm just wondering like this new -- the new product offering, how that interacts with your long-term margin profile that, I think, mostly unchanged since you guys came out.

Yes. Well, it's somewhat unknowable as you start to get to the out years, what the LTV impact will be of this customer base, but I think what we're -- the way we're looking at this is on a relative basis to what the CAM spend is. And when we look at the AOV reduction, for instance, if we look at the total cart value reduction that is happening due to this new lineup, we actually see the CAM cost per customer going down at a faster rate than the actual cart value. So that should lead to a bit of an expansion, but it also just depends a little bit on what we're talking about in year 2 behavior, year 3 behavior. Of course, we're shifting more to subscription, so it stand a reason that the margin profile improves. But it really depends on some retention rates. And that data is just unknowable right now.

And our next question comes from the line of Elizabeth Porter with Morgan Stanley.

I wanted to touch on the share gains in business formations. The 27% is very impressive in Q1 and while you expect that to moderate in the year, how should we think about the trend versus your original target to achieve about a 12% improvement this year? And has that target changed at all just given the strong Q1 performance?

Actually, when we talk about moderating, that's moderation of the growth rate, which is really just starting to lap the testing that would happen in the back half of the year. So that -- what we're really trying to drive is increased share throughout the year. And I talked about this a little bit earlier. There might be things that we decide that we think are not -- it's share that we don't want because it's not the right value associated with that share. And there's places where we know today there's incremental investments that we can make that can drive more share. So an example there is we still only optimize the LLC portion of formations, but that's 3/4 of the formations transactions roughly, but there's still a quarter of them that we're still traditionally priced. So this is -- it was a very strong results, and we're super happy with it. We feel like it sets us up to now optimize more and start to build off of it as we go throughout the year.

And one thing I'll just add there Elizabeth. We had stated that our goal was to grow market share by 15% this year. And we're still highly confident that we are going to drive at least 15% growth.

Got it. And then I believe you noted about half the work so far has been done on the automation of filings. So when could we see that other half completed? Is this a driver that is more likely to come kind of beyond 2023 or something that's more of a near-term dynamic?

Yes. So the way automation works is, we really prioritize based off of the number of transactions that are occurring. And as you can imagine, because we do a lot of different types of transaction types. You get to a place of diminishing return eventually, and it becomes a little bit more of a like a long tail of smaller improvements. What I would say is we expect some significant improvements by the end of this year that should drive incremental efficiencies. And then at that point, we start to move to transaction types that have a little less impact thereafter. But there are parts of our products, for instance, that I mentioned before that we really haven't touched in many years. Even like when you think about consumer business, that still has a lot of manual processes underneath it. And most of what we've talked about on the automation side has really been on the small business side. So still opportunities. A lot of larger improvements should happen over the next 6 months and then it starts to moderate.

I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.