LegalZoom.com, Inc. (LZ) Q3 2024 Earnings Report, Transcript and Summary

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 tests that we ran in support of our goals to acquire customers more efficiently and shift our business towards high margin subscription offerings. This reinforces our conviction that, we can drive durable margin expansion in 2025. This quarter, we spent considerable time listening to our customers and to our employees, who are closest to our customers, particularly in sales, fulfillment, and service. Two things became abundantly clear. First, our small business customers are meeting us early in the tenure of their company building. They come to LegalZoom because they don't have time to spend hours researching how to form and maintain a compliant business. Similarly, our estate planning customers often come to us before speaking with other experts and are eager to plan ahead for their future. They come to LegalZoom because without expensive attorney help, they don't know the steps they need to take to protect their loved ones. Our customers depend on us to guide them through the process. As I noted on our last call, the customer experience has been lacking education on the problems we solve and the long-term value we provide. We will weave this education into our technology and our service. Prioritizing education will cultivate trust, engagement and reinforce why customers need LegalZoom to be successful. Second, we created the online legal services sector back in 2001, and we continue to be viewed as a leader in this industry. These points roll up to a clear message that, our brand promises. LegalZoom is a trusted partner of needed legal and compliance services. It represents our core and in order to succeed, we need to embrace this fact. Our focus is to build the best core products we can, partner with others who offer best-of-breed ancillary products, and provide service that not only empowers, but wows our customers. That will require some changes and it will take some time, but we are confident that the outcome will drive long-term sustainable growth. Let's now turn to an update on the progress we made during the quarter. In Q3, we made important commercialization changes related to customer education and pricing for the value we provide. These will help to drive the key goals I laid out in August. First, demonstrate the value of our subscription offerings, which will build trust, add value to customers, and support retention. And second, improve the quality of our subscriber base towards high value customers, as we focus on growing lifetime value. We know that, higher value products attract customers, who build stronger businesses. This also drives a stronger survival rate for businesses and reduced churn for LegalZoom. We see this with our customers. Those who purchase, for example, between $500 to $750 worth of our services during their initial order have over a 10% higher retention rate than our customers who form, by way of example, for between $100 to $250. It is clear to us that higher intent customers are higher value customers and build more durable businesses. In September, we started the process of revamping our formation lineup to attract higher intent customers through education of the long-term SMB journey and the value of our subscription products. The results, while early, were shipped away from freemium purchases to more high intent products. We did so by first updating our $0 or basic formation SKU messaging to make it clear that, customers could be left without important tools they need to effectively run the business and remain compliant. We also expanded the offerings in our pro and premium SKUs and enhanced our messaging on the value these services provide. These SKUs now include a mix of compliance solutions, business management subscriptions, one-on-one legal advice and trials for some of our subscription offerings. We are still testing the right mix, but so far, we've seen a mix shift from our $0 basic formation SKU to our $249 Pro and $299 premium formation SKUs, which has yielded positive results. Next, we reverted to historical pricing on certain compliance solutions with promising outcomes. Despite being a market leader in formation and compliance, many of our prices have declined over the past several years, while operating in an inflationary economy. Pricing is a leading indicator of value, and in this case, we may have sent an inappropriate message to customers, who expect us to be the best in the industry. We are testing our way into these changes and the paradox is with these changes, we expect to see lower revenue churn over time. In 2023, we've reduced the price of a registered agent product by 20%. Just this September, we returned our registered agent subscription to its historic pricing level for new customers with strong initial success. Given the value of this product and the peace of mind it provides, our attach rates have remained relatively consistent. Our long-term goal is to have our pricing speak to the value we provide our customers. We are actively testing price points across our product portfolio, as we focus on attracting high value customers, who will grow with LegalZoom over the long-term. During Q3, we also focused on reimagining transactional products into subscription offerings. We ran successful tests to reorient two of our transactional offerings, the Beneficial Ownership Information Report or BOIR and business licenses for subscription services, by adding more value to these product offerings. Reorienting our products for subscriptions is a key driver of growing the lifetime value of our of our customers. It's also what our customers need from us to succeed. Staying current with legal and compliance business requirements is not transactional by nature. It's an ongoing obligation. Beginning with BOIR, there is a recurring nature to this report. But more importantly, customers see it as a compliance requirement. In August, we began testing an online promotion for our BOIR product was integrated with an annual subscription that included BOIR and our compliance subscription, alongside a standalone BOIR transaction at an equal price. To little surprise, we saw a meaningful increase in the attach of our compliance subscription, significantly improving the expected lifetime value of these customers. We've also seen similar traction in our sales center with our sales associates now emphasizing the value of our compliance subscription bundle versus the standalone BOIR transaction when speaking with our customers. Another product that lends itself to a subscription offering is business licenses. On average, small businesses need over five licenses to operate legally. Remaining compliant is a time-consuming and error-prone process, and failure to comply can materially impact a business through fines or temporary closures. Our transactional business license offering launched in November of 2023 matched a small business profile with relevant licenses and permits using a proprietary database, but through a one-time transactional product. This September, we've repackaged our business licenses into a subscription offering by adding more value to our customers. The new subscription product includes license storage, license sharing, notification of due date renewals, and alerts regarding any changes, where a business may no longer be compliant due to changing regulations. This is a smaller product offering, but an important test case, where we believe the expected lifetime value of these customers will increase as a result of these changes. Looking ahead, we'll be rolling out new promotions, products, features and offerings more broadly across our customer base to enrich our subscription offerings. Turning to our consumer channel. Over the past few years, we've been singularly focused on our small business opportunity. This is a market we have largely neglected, as a result. And given our strong historical brand recognition and our market position, we feel reinvestment in consumer is warranted. Further, as I noted on our last call, every business has an owner behind it that needs estate planning products. In August, we launched a marketing campaign for National Make A Will Month, which included a limited time discount on estate plan products. We saw strong traction during the campaign, including an increase in estate plan sales to our existing small business customer base during the promotion period. We're continuing to invest in this area of our business, including a complete redesign of the user experience for estate plan offerings. This includes an improved customer experience via simplified customer intake questionnaires. We believe enhancements such as data validation tools will result in higher completion rates and instantaneous document generations, saving our customers time. This will also drive increased efficiency within our fulfillment and service centers. Our long-term goal is to better lean these products towards subscription offerings to help our customers over their lifetimes. This is a market where we believe, we can create an enduring subscription channel that can be used to offset periods of weakness in small business starts. Finally, I'd like to provide an update on our AI efforts. The first prong of our AI strategy is to build a foundation from which we can leverage our 20 plus years of legal documents and business formation experience. LegalZoom has robust data that we can utilize across nearly 4.3 million estate planning documents and over 4.5 million business formations. We are working to capitalize on this in an ethical way by first scrubbing personally identified data using privacy enhancing technology. The outcome will enable our artificial intelligence engines to leverage a vast number of legal documents that have worked for our customers over many, many years, alongside edits, changes, and the legal nuances that come only from having a rich historical record dating back to our founding in 2001. Our service and fulfillment teams will leverage these tools with a goal of providing faster, more efficient and personalized customer service. And over time, our goal is to use this intelligence and other AI tools to empower our own law firm, LegalZoom, Legal Services, as well as our network of over 1,000 independent attorneys who support our customers. This will require more time and care to ensure that we are empowering and not displacing the experts that drive our business forward. But once unlocked, we believe, these tools can drive significant efficiencies for our legal experts and faster, more cost-effective legal services for our customers. It is important to remember that, generative AI alone cannot replace attorney advice. LegalZoom stands apart from our competitors as a technology platform that sits alongside an established network of independent attorneys available to leverage the power of AI to unlock what we believe is a massive opportunity. Finally, we're working on launching more AI-powered tools to help our customers. We know that finding a valid and available business name is a clear point of friction. Last month, we introduced an AI-powered business name generator to help our customers with this important and often difficult first step. As this product rolls out and is perfected, we expect it to help increase close rates and become a natural path to cross selling other products, such as trademarks and website domains. In closing, I'm very pleased with the hard work we've accomplished during a very short period of time in just about a quarter. I am proud of our teams for embracing our new priorities and driving immediate tangible results. As a final word, I want to follow-up on our ongoing commitment to transparency and communication. Despite hitting the top end of our revenue guidance, our year-over-year revenue growth was still only 1% this quarter. I'm nevertheless proud of the team for delivering at the top end, but we still have a long way to go. We are early in our roadmap of execution against our new initiatives and laying the foundation for the future trajectory of our business. This includes changes in our execution to enable us to disconnect from our dependence on small business formations for growth and accelerate our subscription revenue, both of which will improve predictability of our business and drive continued margin expansion over time. We will continue to communicate with you openly and transparently on our progress driving durable results. With that, I'll hand the call over to Noel to discuss our third quarter results and outlook in more detail. Noel?

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 virtual mail subscriptions. This growth was partially offset by the impact from the exit of legacy partner relationships, which have now largely transitioned from our platform. ARPU came in at $264 for the quarter, down 1%. Looking at our subscription performance on a sequential basis, subscription revenue increased 2%, primarily due to a 7% increase in units from the bundling of forms, e-signature and bookkeeping subscriptions into certain business formation offerings as well as higher compliance related subscriptions. Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Third quarter gross margin was 71% compared to 67% in Q3 2023. The year-over-year improvement was primarily driven by lower filing fees as a percentage of revenue due to the lower information volumes. Margins were also supported by lower headcount expenses associated with our tax product as well as automation and process improvements in our service delivery operations. Sales and marketing costs were $43 million or 26% of revenue, a decline of 10% from last year. Customer acquisition marketing costs declined 4%. During the quarter, we executed several performance marketing spend tests to better understand incremental efficiencies. This helped us to further optimize our marketing spend levels and allows us to reallocate certain investments to longer-term brand initiatives. Non-TAM sales and marketing expense was down $3 million or 25%, due to the impact from our sales reorganization in Q4 of last year. Technology and development costs were $15 million down $1 million or 5%. General and administrative expenses were $14 million a decrease of $1,000,000 or 4%. Our performance drove adjusted EBITDA of $47 million or 28% margin. This represents a 40% year-over-year increase as compared to adjusted EBITDA of $34 million for the same period last year. As a reminder, our adjusted EBITDA margins are seasonally higher in the back half of the year due to lower volume of business formation. Adjusted EBITDA was supported by our revenue performance, which came in at the higher end of our expectations. Additionally, we saw a 300 basis point increase in our subscription revenue mix, which supports our performance given the higher margin nature of these products. These results were also driven by certain one-time factors, including lower TAM spend from the aforementioned testing and better-than-expected savings from our reduction in force last quarter. Excluding these factors, adjusted EBITDA would still have exceeded the high-end of our outlook due to the solid revenue performance, and as we drive ongoing efficiencies in our business. Deferred revenue decreased by $3 million in the quarter, which was in line with our expectations and the typical seasonality of our business. Free cash flow was $22 million, compared to $19 million for the same period in 2023. We ended the quarter with cash and equivalents of $112 million. We remain debt free with no outstanding borrowings under our $150 million revolving credit facility. During the third quarter, we repurchased 3.8 million shares of our common stock for a total of $25 million. This reduced our share count by approximately 2%. Since our first share repurchase program beginning in the first quarter of 2022, we have returned approximately $313 million to shareholders in the form of share repurchases, reducing our share count prior to the program by approximately 17%. Subsequent to the end of the quarter, our Board of Directors approved a $40 million increase in our share repurchase program authorization, bringing the total amount authorized to $215 million. Following the increase, we had approximately $50 million available under the share repurchase authorization as of today. We are continuing to balance our share repurchase program alongside maintaining a flexible cash position to support our capital allocation priorities. Finally, turning to our outlook. We are updating all components of our outlook today to reflect three quarters of actual financial results and our latest expectations regarding macro trends and business initiatives in the fourth quarter. For the fourth quarter, we expect revenue in the range of $158 million to $162 million or 1% year-over-year growth at the midpoint. On a sequential basis, we expect fourth quarter revenue performance to reflect a sequential improvement in transaction revenue growth, driven by an anticipated increase of BOIR filing in advance of the December 31st deadline as well as fulfillment timing, and a sequential deceleration in subscription revenue growth due to headwinds in our tax product, following our decision to pause new customer acquisition. For the full year, we expect revenue in the range of $678 million to $682 million or 3% year-over-year growth at the midpoint. Our revenue outlook continues to reflect the impact from a mid to high single-digits decline in the Sensus EIN information macro for the full year 2024. Turning to adjusted EBITDA, we expect to achieve adjusted EBITDA in the range of $40 million to $44 million in the fourth quarter, which reflects a 26% margin at the midpoint. For the full year, we've raised our adjusted EBITDA expectation to be in the range of $144 million to $148 million or a margin of 21% at the midpoint. Finally, we expect free cash flow to be in the range of $80 million to $85 million. In closing, I'd like to thank the entire LegalZoom team for their hard work this quarter. We are beginning to see evidence of the positive trends our key execution priorities are having in our business, and I look forward to updating you on our continued progress in the coming quarters. With that, let's please open the call for questions.

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 they're ending up with a lot of fraud and bad actors and then stopping that. So we're hypersensitive to how we're looking at pricing and making sure that, it matches to what we're trying to deliver strategically. With respect to the second question and MyLZ. I mean, MyLZ for us is a platform. Customers will buy a LegalZoom product or service and we will want to meet those customers, where they do business. In some cases that means, we're pushing to them. In some cases that means we will be on the phone with them, if that's what they feel is best. But where we can, we want to deliver those services on our platform. That's what MyLZ was designed for. We are leveraging lifecycle marketing and management to bring more and more customers over time to MyLZ. And our strong belief is, that will in part help us to deliver greater up sells and cross sells post formation. And while we're in the early innings of that because it wasn't a core focus, we expect to be able to deliver more post-formation and post-initial purchase because of that the MyLZ platform, because of future investments and other things like mobile and our sales force and other areas, where we can offer more value-added services to our customers who are clamoring for these over time.

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.