Giood day. Thank you for standing by. Welcome to LegalZoom's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your 1st speaker today, Madeleine Crain, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's third quarter 2024 earnings conference call. Joining me today is Jeff Stibel, Chairman and Chief Executive Officer; and Noel Watson, our Chied Operating Officer and 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 should not be relied upon as future 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 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. We use non-GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. These non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.

Good afternoon everyone and thank you for joining our call. Today, I'll be providing an overview of our third quarter results before diving into detail on the progress we've made in our three key focus areas. During the quarter, we focused on reimagining transactional products towards subscription and enhancing the value of our subscription products. We also began updating our customer education and pricing to better reflect the value we provide. Our efforts were guided by customer learnings and feedback, as we focus on delivering best-in-class expertise and improving the customer experience. If there is a single message we hope to get across during this call is that, we are focused on driving durable results, improving the predictability of our business by reaccelerating subscription revenue growth and leading the business toward increasing profitability. Let's jump in. We achieved third quarter revenue at the high end of our guidance of $169 million. Our subscription revenue grew 5% year-over-year from strength in our compliance related subscriptions. Our transaction revenue declined 7% year-over-year, largely due to softer business formations. Sensus EIN applications declined 9% year-over-year in Q3. And we saw a decline in our market share of business formations, which was expected as we conducted important testing with a goal of narrowing our focus to high value customers. Market share versus quality share will be a key topic I will be discussing today. Overall, we're pleased with our early progress against shifting our business towards recurring revenue to drive long-term durability. We also achieved strong bottom-line performance this quarter. third quarter adjusted EBITDA came in well above forecast at $47 million, which reflected a record 28% margin for us as a public company. While the outperformance included the benefit of certain one-time items, which Noel will discuss, it also reflects success in key…

Thanks, Jeff, and good afternoon, everyone. I'll now turn our focus to our third quarter financial performance. Please note all comparisons will be on a year-over-year basis unless otherwise stated. Total revenue was $169 million for the quarter or up 1%. Our results met the high end of our outlook with strength coming from subscription revenue. Looking at our revenue performance in more detail. Transaction revenue was $58 million down 7%. We recorded 255,000 transaction units in the quarter. The 8% increase was primarily due to an increase in non-formation, business related transaction products, such as our new BOIR offering, offset by lower volume of formation units. We've recorded 113,000 business formations in the quarter, an 18% decline year-over-year. The decrease was due to a softer business formations macro with Sensus EIN applications falling 9% year-over-year. In addition, we performed important testing related to our go-to-market strategy, which also pressured our formations as we focused on attracting high value customers. Average order value was $227 for the quarter, down 13% year-over-year due to a higher mix of lower price transactions including BOIR. We expect a similar trend for AOV in the fourth quarter and continue to expect a high single-digits decline in AOV for the full year 2024 versus 2023. Subscription revenue was $111 million up 5% year-over-year from stronger compliance related subscriptions and legal advisory subscription. This growth was partially offset by our tax product due to our decision to pause new customer acquisition as well as the exit of certain channel partners in Q3 of 2023. We ended the quarter with over 1.7 million subscription units, up 10% year-over-year as we saw an increase in forms and e-signature and bookkeeping subscriptions due to the bundling of these products into certain business formation offerings, as well as growth in…

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

Thanks so much for taking my questions. Jeff, I wanted to ask a little bit about the pricing test that you talked about in the quarter. Can you talk about where pricing could go going forward? And then, just related to the larger move across the industry of moving to free that we've seen over the last couple of years. And then, for my second question, can you talk about the broader opportunity with MyLZ and some of the components of selling subscription after the core formation? How do we think about conversion later in entrepreneurs' lifecycle as it relates to LegalZoom? Thanks so much.

Sure, Ben. Let me take the first question about pricing first and unpack that a bit. In terms of where we think pricing can go, again, it's not a function of higher or lower necessarily. It's a function of matching pricing to the value that we're offering, and the value and the promise that our brand derives. So we have done a series of price tests, higher and lower. This is not dissimilar to what you see with many different companies. I think that, there is a lot more opportunity for price on the high-end for certain products, particularly we're offering higher value-added services and where we're mapping both our product to the expertise that we deliver. And there are going to be some areas where pricing can be lower. And a good example of that is, with our free product, which we did not shut down. We just started repositioning so that our customers knew exactly what they were getting. With respect to the competitive landscape, just to be clear, some companies offer a free product, but I put quotes around that free product. But some offer a free product, which is really just a 12 month trial, and then you run into a subscription. Some offer a free product so long as you're a member and you have to subscribe to that membership. And then, others offer a free product alongside an attachment to other products and services. So it's a bit of a misnomer to think that the market is going towards free. And customers need to be aware that, you get what you pay for. With respect to free, that's an important thing to understand and we get what we pay for. We've seen some Secretary of States go to free only to find out that…

Just to build on that Andrew, one example where we've seen the benefit of MyLZ in terms of helping us monetize customers post formation is with, the beneficial Ownership Information Reports or BOIR where we primarily monetize it through the MyLZ experience. So to Jeff's point, it is still early innings. There's more that we can do there, but we are seeing examples where it's creating a benefit, in addition to the benefits that it creates around helping customers through our process. Where they can get status updates, there's other benefits that they see beyond just monetization that helps with the overall customer experience.

Thank you. Our next question comes from the line of Ron Josey with Citi. Your line is now open.

Great. Thanks for taking the question. Jeff, I wanted to talk a little bit more, understand your comments on market share versus quality share and just understand just how we're going to market overall, how the business is shifting to subscriptions and maybe how this might impact market share going forward in that metric in particular? And then, Noel, on sales and marketing, we heard on the call both you and Jeff talked about more efficiently acquiring customers, executing more tests to get there. Any insights on what's going -- what you're doing here to be more efficiently acquire customers would be helpful. Thank you, guys.

You bet. Thank you. I'll take that first part, which is an important question, because this concept of market share and how we define it is very narrow. It's limited to our share of formations that come in through the United States. The reality is, there is a certain amount of formations that aren't going to generate high value for a group like LegalZoom. In the end, we are providing legal and business services to customers. So if you have someone who's forming an LLC for no other reason than to try to protect an asset, it is unlikely that that will turn into a recurring revenue customer or a customer who is buying anything more. There is also more fraud when you focus purely on free. And then, you end up with a lot more transients as well, which tends to clog your systems even if it is a customer, who might be intending to start a business by way of example, but doesn't actually form that business or doesn't engage deeply in that business. So we are deeply focused on quality share. And it's one of the things that I learned in my first 90 days and perhaps one of the most important things, which is once you understand our customers, they are looking on to us for quality. In return, we should be looking for those quality customers, customers who will stay with us and endure with us and will grow with us. So we are again early in this journey and lifecycle, but we've already seen pretty strong green shoots of shifting positively to focusing on quality by education, by pricing, by packaging and by launching some new products that would in nerve particularly to customers, who are high intent.

Yes. And then Ron, on the sales and marketing side, starting with marketing, I think primarily, just retesting spend levels within -- even at a campaign level to understand and regularly recheck incrementality, so that we're constantly optimizing those campaigns. And then also looking at spending into newer channels to us and testing different formats there, so things like radio and direct mail and spending more on social and in different formats there. So I think the combination of those two things alongside doing some reinvesting in our brand, as well and testing different messages around our brand. And then, also on the sales side, implementing various tests to help us optimize there, I think we're still -- there's still a lot of training that we're investing in there, testing different comp structures, expanding our upsell capabilities. So those are all things that we're regularly advancing and looking to generate more effectiveness and efficiency from.

And, Ron, to add to what Noel was saying, from any good marketers perspective, all marketing is performance marketing if it's done well. So we're looking at ways to complement the marketing we're already doing and then really testing the assumptions on the pure performance marketing in terms of the last dollars. So what you would see from the outside in is, us doing some pretty deep testing on Pulse advertising, Pulse marketing, how we deliver customers to the website and to our sales force, and making sure that we are bringing in the right customers who are going to be able to be up sold and cross sell them to subscriptions over the long-term.

Thank you. Our next question comes from the line of Josh Beck with Raymond James. Your line is now open.

Hi there. This is Kish Patel on for Josh Beck. As you look across SMB, how would you characterize the competitive environment with some others like Zen Business, and then maybe also who's more relevant on the consumer side? And in addition, can you discuss the macro environment as it relates to current customer spending patterns as well as new business formations and maybe how we should think about a rebound in 2025?

Sure. Why don't I take the first part. I think the most important thing to focus on is what is that competitive set. When you look at our addressable market or TAM, it is inclusive of companies like a Zen Business as you mentioned. But the majority of share is actually going to lawyers. These are small law firms and small individual attorneys, who are picking up most of Main Street and the consumer market. That's the real focus. It was historically, it always should be. So rather than us fighting on price, looking at, you know, someone who is an online competitor, I would much rather be inclined towards going after that larger TAM with the higher value-added products and services, where we can build enduring relationships with customers at a much lower price, than what they would get by going down the street and into a individual attorney. And, in many cases, our business is uniquely set up to tackle that addressable market, because we have rich and robust technology that makes us sufficient. But, we also have a law firm and a legal network of attorneys that can provide the expert advice, which I think is a combination that no one else can offer or afford. So as you see what we are doing to reposition our business and our company, it really is focused and based on the customer learnings that we've gathered to actually address their problems, as opposed to just selling them a product. You want to take the macro question, Noel?

Sure. Ass it relates to the macro, obviously the macro is very difficult to predict and project. There's been lots of change and even this morning news of new change and unclear as to exactly how it will impact it. Overall, the macro thus far this year is softer than last year, right? It started off, I think it was down 2% in Q1 and then 6% in Q2 and now 9% in Q3. We're in a generally soft environment relative to prior year, but structurally materially higher than pre-pandemic levels. And so, as we look forward, there are certain tailwinds that are driving, I think, that structural increase, including remote work, the fact that, it's never been easier to get a business operational with very low cost of capital and with enterprise like capabilities. And then at the same time, there's the fact that, the growth rate that we've experienced in formations overall in the last four years has been higher than the historical CAGR. So there's the potential for it to regress towards that mean. All-in-all, to say, it's very hard to project and we're kind of taking a middle of the road view on it right now and wait and see until we have some more data points.

Thank you. Our next question comes from the line of Patrick McIlwee with William Blair. Your line is now open.

Hi, team. Thanks for taking my questions. So further to the changes on pricing for your compliance products, just understanding that, those are a sizable portion of your subscription revenue, how should we think about the timing and potential eventual impact of those changes to your overall subscription revenue?

Sure, Pat. We're still in the process of unpacking this now both with the new pricing out on the website, the pricing that we're testing with the sales force and then potential pricing changes to the existing base. In all cases, we think it will be a net positive to revenue and EBITDA. But this is relatively new. So, we have to make sure that, we're doing it in a way that is accretive to the business and to our customers. So, we're making sure that, we're adding both pricing changes and value changes and that we're accreting again to what we were saying earlier, which is quality share versus market share. And that's a lot to unpack, knowing that, we really just launched this about 45 days ago. So I suspect we'll have more to say, at the next earnings call on this one. And you shouldn't think of this as limited specifically to compliance, because we're looking across our entire base of customers and product offerings to make sure that, we're matching pricing to value and matching our brand and reputation to everything that we're doing.

Okay. Understand that it's early, so that's helpful. Thanks, Jeff. And then, just on rebuilding the consumer channel, the strategy makes total sense given what you've all talked through today. But just in contrast to what we saw this quarter, I mean, should we expect a re-ramp in the CAM spend as you pursue that initiative, or how should we think about the implications of that push?

I don't think the implications are going to be spending money on marketing. To the extent that we do, again, that that marketing budget is largely fungible, because when you're spending on consumer, you're effectively spending on brand and it should in there to the SMB side as well. And as we've said repeatedly and believe deeply, it's a fact, of course, we believe it deeply. All small businesses have an owner behind them and those owners need wills and trusts and very small percentage of consumers actually have a will or trust. So, I think we have everything that we need to go to market from a marketing perspective. However, what we do need to do is refresh the products that we offer in two respects. Number one, they need to be best-in-class. And then number two, they need to be recurring in nature and are not just specifically speaking to the business model. I mean, we can't leave customers stranded. And a will cannot be done in a vacuum and then left alone. That's the real focus. And the way in which that we're going to drive that home is, with, what we were saying on the call, which is through real expertise. That's the clear focus and the number one thing that was lacking before. We were over automating to a fault. And, we, in some cases, will need to slow down the process so that our consumers can get a better understanding and knowledge and education of what it is they need to be buying. And then once they buy, what it is they need to do to ultimately be successful with these products.

Thank you. [Operator Instructions] Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.

Thanks. This is Katie Kuser for Elizabeth tonight. I wanted to double click on the customer education piece. What are some of the initiatives that have been most impactful to broadening out the scope of the portfolio to the broader customer base? Is there a specific point in the formations flow where education has been most successful? And kind of looking ahead, when customers are more engaged and have been practiced, what's that first tangible step in moving from discovery to monetization? Thanks a lot.

You bet. Thank you, Katie. I'll give you three high level pieces, and then Noel, if you want to jump in more specifically, especially from a historical perspective. But the three areas where we've had the most success is, first, during the initial sign up. So in the formation process that's in our questionnaire. And we introduce other products and services through education in that flow. The probably archetype case studies would be compliance, which is in our first questionnaire and we introduced that as part of something that is necessary, when you form a company. The second is registered is a registered agent service, and we put that in the second questionnaire at least for now. And, that is required whether you are doing it or whether we do it on your behalf as well. So we educate about what that is and why you need it and what the value is, and we'll continue to do more. The second is through something we talked about earlier, which is MyLZ or our platform/platforms. Once we have someone onboarded while they are using our products, when we see what they are doing and how they are doing it, we will offer other value-added products and services to them. And then, the final piece where I think that there is a lot of opportunity and we're in the early innings again in, but have historically been very strong is with regards to our sales, service and legal expert teams. And each one of these individual groups provides a level of expertise. So whether someone is calling in with a customer service need, whether, they're calling in because they need a new product or service or they're calling to talk to a lawyer or an accountant, in each of these cases, we have the opportunity to educate and then upsell and cross sell. That is an area of deep focus right now, because we think that has huge opportunity to not just drive cross sell and up sell, but to bring our customers up the value chain.

Yes. The only thing I'd build on there is to add personalization, which is an area we're investing in and doing some testing around now to early kind of success, which is, between identifying by industry or by the questions that are answered, by the entrepreneur on the site, we then provide them more specific copy related to, educating them in areas that are meaningful, and/or showing them products that are more appropriate, for them that we think they would need to remain compliant. So really getting specific throughout that questionnaire flow, depending on what the customer is telling us and being smart about what we're showing them from an education standpoint in terms of the material and from a product standpoint.

And that's a great case study and example, Noel, because this is something new that we have recently introduced and you can see it if you go through our formation flow right now. There are certain categories where we have them highly targeted and highly personalized so that, they're actually getting a different set of questions, a different set of educational tools. And that's yielding success again early innings in testing, but success with upsell, cross sell and conversion.

Thank you. Our next question comes from the line of Ella Smith with JPMC. Your line is now open.

Good evening. Thank you for taking my question. Jeff, first for you. You continue to see strength in your compliance subscription, but of course, the overall business formation environment right now is challenged. I would think the compliance subscriptions are generally cross attached to formation. Can you please help me unpack the strength and compliance subscriptions in the current environment?

Sure. I think it's really just a function of the calculus of our business. You have a very large addressable market that we have not captured fully. We don't dominate this market, no one does, which means, even when you have an environment of falling TAM, in this case, falling formations, you can still increase your business and you can do it one of two ways. You go after market share or you can go after quality share. In this case, that was a leading question. I appreciate it, Ella. In this case, what we have done is, we have pivoted from trying to bring in free customers just to increase share at the expense of other things to trying to educate customers right out of the gate and saying, if you're coming to us, our expectations of you as a customer is that, you're trying to, again, in this case, build a viable going concern in business. And if you do, you need to be compliant and that is difficult and challenging, so that if you don't have your own general counsel, if you don't have an outside law firm, you should leverage our products and services because they are going to be far more cost effective than ending up being fined down the road or worse being shut down temporarily or permanently. We've had early success in that respect, pivoting some of these customers both to our higher value formation products and upselling and moving them into compliance at higher prices.

Yes. Just to build on that, one of the ways that we've done that is leveraging BOIR for example. So BOIR is an example of how remaining compliance for a business owner is becoming increasingly complex. And so, the fact that they're paying attention to this new requirement that's come up has allowed us to also provide additional education on the other compliance-related products that we offer and be able to shift some of those customers into those subscriptions.

That's really helpful. Thank you so much, Noelle and Jeff. And, as a quick follow-up, I know you talked about testing higher price points with a few products, one of which was registered agent service. Are there any other products and services that you call out that you think, there might be some pricing power in?

All of that. If I can be blunt, it's not just about the elasticity curve in this business, it's about the value that we're driving and the way we want our business to be considered by our customers. It's what our customers are telling us as well. What we deliver is peace of mind. There is huge value in going with the industry leader to get that peace of mind. We are way cheaper, and probably always will be than going to a law firm. We have been in a race to the bottom for far too long and we don't think it's doing our company a service. It is cheapening our brand. I think we are looking at this in almost all cases. That doesn't mean that, there aren't going to be certain areas where we want lower pricing, whether that's from a marketing perspective or because we think that, that's the right value to price equation. But for the most part, we're more inclined to be the value priced provider, not the low cost provider.

There are no further questions at this time. So I'd like to thank everyone for your participation in today's conference. Since the program is concluded, you may now disconnect. Thank you.