LegalZoom.com, Inc. (LZ) Q1 2025 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the LegalZoom First Quarter 2025 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 first speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's First Quarter 2025 Earnings Conference Call. Joining me today is Jeff Stibel, our Chairman and Chief Executive Officer; and Noel Watson, our Chief 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 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 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. We delivered strong first quarter performance that exceeded our guidance, reflecting progress in our key focus areas. We are pleased with our execution in the first quarter and are reiterating our 2025 outlook, reflecting our continued confidence in our ability to manage our business despite an unpredictable environment. Let's jump in. First quarter revenue of $183 million increased 5% year-over-year. We drove strong results despite a weaker-than-expected macroeconomic environment, where Census EIN applications fell 5% year-over-year. Subscription revenue grew 8% year-over-year from strength in our compliance-related and virtual mail subscriptions. Our growth reflects pricing for the value we provide and shifting toward higher-end solutions. Importantly, Q1 marks the first time in the past year that our subscription revenue growth has accelerated on a sequential basis. We believe this change in trajectory is sustainable. On the bottom line, first quarter adjusted EBITDA of $37 million also exceeded our expectations. Adjusted EBITDA margin of 20% benefited from our strong revenue performance and ongoing cost efficiencies. Throughout the year, the broader macroeconomic environment has been shifting rapidly amid ongoing uncertainty surrounding potential tariffs and broader policy changes. Today, businesses of all sizes are operating with caution as they await greater clarity on the impacts to their operations. In response, we've adjusted our assumptions for Census EIN applications from flat year-over-year to down mid- to high single digits. Despite this, and because of the work we have done to decouple from formations, today, we are reiterating our full year revenue outlook of 5% year-over-year growth. This includes our expectation for double-digit subscription revenue growth by the fourth quarter. Our high degree of assurance is based on 2 key factors: First, as our Q1 performance showed, we can achieve solid results despite weaker-than-expected business formations by focusing on areas that we can control and driving leverage through the business. Second is our continued execution with respect to stabilizing our business fundamentals, including the success of our pricing initiatives, solid progress from our Formation Nation integration and early success from the introduction of higher-value subscriptions. To that end, we are also reaffirming our adjusted EBITDA margin outlook of 23%, reflecting double-digit growth in adjusted EBITDA dollars year-over-year. Importantly, our adjusted EBITDA guidance implies full year adjusted EBITDA of approximately $165 million, which we believe we can achieve irrespective of revenues. We have a resilient, dynamic business that gives us flexibility to execute, manage to the bottom line and drive cash flow generation. I'd like to remind everyone of the key differentiators of our business model that position us to navigate a challenging macro environment. First, LegalZoom is a leading platform for online small business formations. We dominate in-category brand awareness and are recognized as a leading authority for online legal services. During recessions and volatility, small businesses naturally gravitate towards safety. We are the dominant brand and safe choice for established small businesses. Next, since I joined as CEO last summer, we've been working to decouple ourselves from the business formations macro. We are focused on quality share, concentrating on our core competencies of legal and compliance services and emphasizing subscriptions. Today, our revenue mix is over 60% subscription base, which is durable as almost 90% of our recurring customers are on annual plans. This gives us strong visibility and predictability into future performance. Finally, as Noel will detail, we have significant expense leverage and flexibility. This enables us to quickly react to preserve our adjusted EBITDA if the environment deteriorates further. We have a strong cash position, 0 debt and healthy free cash flow. We'll continue to monitor the broader economic backdrop and focus on how LegalZoom can help ensure the success of small businesses, the cornerstone of the U.S. economy. These are challenging times, but challenges create opportunities. We are concentrating on the areas of our business we can control and remain dedicated to managing our company to drive long-term value for our shareholders. Turning now to our 3 key focus areas. First, we are focused on driving subscription adoption within our category. We are continuing to test and roll out pricing changes across our Legal and Compliance portfolio from top of funnel to renewals. As a reminder, we reverted our registered agent pricing from $199 back to our historic $249 pricing in September of 2024 and are continuing to see relatively stable attach rates. In Q1, we also began testing registered agent pricing changes and value increases for our existing customers, and results have been highly accretive given the inelasticity of this product. We've also been hard at work to add more value to the LegalZoom platform. Q1 enhancements included the rollout of all new total compliance subscription features. These include a compliance status badge and more detailed monitoring, leveraging data obtained from state filing offices to keep customers informed of their businesses standing. Importantly, for customers with a negative compliance status, we are able to promote and upsell our compliance solutions to help them regain their good standing. Finally, we've been introducing new customers to our subscription ecosystem by bundling select entry-level products such as bookkeeping, forms and e-signatures into our premium formation packages. This strategy not only encourages customers to move up the lineup, but also familiarizes them with our broader platform from day 1. These placements contributed to the 20% increase in the number of subscriptions in Q1. While we expect lower ARPU and renewal rates from these products, this strategy is proving to be an effective way to drive early engagement and ultimately position customers for long-term growth by graduating them into higher-value subscriptions over time. These bundled products also represent future cross-sell opportunities within the Formation Nation customer base. Second, while diversifying our go-to-market strategy has been a recurring theme for us, it's now more critical than ever in light of shifting economic conditions. This spring, we are launching a new brand campaign that positions LegalZoom as the premier provider of online legal services. At the heart of this campaign is a refreshed brand message, technology when consumers want it and human support when they need it, reinforcing LegalZoom as a trusted guardian for our customers. As always, our mission remains to make legal services feel accessible, approachable and within reach. This new messaging will be delivered through a robust multichannel media plan, targeting high-intent audiences across all core product categories. It will all be done within our existing budget and complement our performance marketing by expanding into brand media to elevate awareness and perception. Additionally, we are accelerating investments in AI-driven search engine optimization, AI platform visibility and integrated partnerships. These efforts will further strengthen our leadership position in key channels and continue to diversify our marketing mix. Our go-to-market strategy remains focused on quality share acquisition, moving LegalZoom customers to higher value formation SKUs, including subscription services. This led to a continued shift in mix away from free formations at the LegalZoom brand level. We accelerated these efforts in anticipation of the acquisition of Formation Nation. In the first quarter, LegalZoom's LLC free formations were under 50% of total volume. We are now positioned to leverage the Inc Authority brand to capture those value customers. Following the transaction, we began to implement our marketing best practices to help support their customer acquisition efforts. While small in absolute dollars, we reallocated our marketing budget to increase Formation Nation's marketing spend by over 30% with positive net results. We are pleased with our early integration efforts with Formation Nation, which contributed approximately $8.6 million in revenues in the first quarter. We are applying the learnings from our early integration efforts across each of our respective businesses. One example is Formation Nation's Do-it-for-me services. Formation Nation's white glove business service is helping inform how we support our LegalZoom customers, accelerating our goals of providing higher-value expert services. These products lend themselves to high-intent customers who are willing to pay more than 3x our average order values. Today, we are testing areas of opportunity within do-it-for-me, compliance and dissolution services and look forward to providing more details in future quarters. These high-end offerings are informing how we will leverage artificial intelligence to augment human expertise and drive efficiency alongside better adoption of our highest value products. This is our third and final focus area. Ultimately, that adoption will be delivered by our technology progress. So I'm excited to welcome Pratik Savai, our new Chief Technology Officer. Pratik has a strong record of driving innovation, building businesses with recurring subscription revenues and scaling technology teams. We look forward to benefiting from his experience as he focuses on expanding our technology ecosystem, optimizing platform scalability and leveraging emerging technologies such as generative AI to simplify legal processes for individuals and businesses. Let me summarize by expressing my strong conviction in our ability to execute and meet our financial goals for 2025. We remain confident in our ability to navigate across a wide range of macro outcomes. To reiterate, we are the leading authority in online small business legal services. Over 60% of our business is subscription-based with approximately 90% paying annually. Our cost structure is roughly 70% variable. We are deeply committed to EBITDA growth, and we've been focused on further decoupling our business from the formation macro since I joined back in July of last year. In these respects, we are making solid progress. I am grateful for the hard work of our teams and look forward to delivering continued strong execution in the coming quarters. Let me now turn the call over to Noel to discuss our first quarter results and outlook in more detail. Noel?

Thanks, Jeff, and good afternoon, everyone. Our first quarter results reflect solid progress in our key focus areas. As we move forward, we will lean into our differentiated market position to advance our initiatives while remaining nimble in response to the macro uncertainty. I'll now turn our focus to our first quarter financial performance. Unless otherwise stated, all comparisons will be on a year-over-year basis and all 2025 financial information and key business metrics for the first quarter ended March 31, 2025, include the acquisition of Formation Nation, which was completed on February 10th of this year. Total revenue was $183 million for the quarter, up 5%. Looking at our revenue performance in more detail. Transaction revenue increased 1% to $67 million. The increase was due to a $6 million improvement in transaction revenue from our acquisition of Formation Nation and, to a lesser extent, an increase in revenue from greater-than-expected Beneficial Ownership Information Report, or BOIR, filings at a higher price point than the year ago period. We do not expect BOIR to contribute to transaction revenues going forward following a FinCEN ruling on March 21 that eliminated this filing requirement for U.S. companies. We recorded a 1% increase in transaction units to 341,000, primarily due to an increase in annual report filings from our compliance subscriber base. We recorded 131,000 business formations in the first quarter. We are attributing roughly 6% of business formations to Formation Nation. The 6% year-over-year decrease in business formation reflects our ongoing focus on quality share acquisition as well as a softer business formations macro with Census CIN applications falling 5% year-over-year. Average order value was $196 for the quarter, down 1% versus the same period last year. Turning to subscription revenue. We generated 8% growth to $116 million. Our growth reflects strong execution in our efforts to optimize our subscription business and reorient our go-to-market strategy. Subscription revenue benefited from our compliance pricing initiatives, increases in our virtual mail subscriptions from higher customer engagement and our new 1-800Accountant partnership. As a reminder, we are investing in our partner ecosystem. This enables us to better reallocate our resources toward our core offerings while benefiting from partnerships with best-in-class providers that serve the ancillary needs of our customers. These results give us conviction in our ability to achieve double-digit subscription revenue growth in the fourth quarter. We ended the quarter with approximately 1.9 million subscription units. The 20% increase was mainly driven by higher forms and e-signature and bookkeeping subscriptions as we bundle these products into certain business formation packages. As Jeff noted, we expect this growth to moderate as we experience lower renewal rates from the initial cohorts. ARPU was $252 for the quarter, down 7%. This was primarily driven by a mix shift towards a higher quantity of lower-priced subscription offerings, including the forms and e-signature and bookkeeping subscriptions mentioned earlier as well as a decrease in our higher-priced tax subscription offering, partially offset by higher prices in our compliance category. Finally, deferred revenue increased by $36 million from Q4, reflecting the benefits of our subscription pricing initiatives, the inclusion of Formation Nation deferred revenue and the typical seasonality of our business. Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. First quarter gross margin was 67% compared to 64% in Q1 2024. The 300 basis point improvement was primarily driven by lower filing fees as a percentage of revenue from lower formation volumes. Margins were also supported by our decision to transition from an in-house tax solution to a partnership model as well as automation and process improvements in our service delivery operations. Sales and marketing costs were $56 million or 31% of revenue, an increase of 9% from the prior year. Customer acquisition marketing costs increased $4 million or 9%, primarily due to timing. Last year, we deferred certain marketing expenses into the second quarter to align with the NBA playoff season in connection with our former NBA brand partnership. We expect CAM to be down year-over-year in the second quarter. Non-CAM sales and marketing expenses increased $0.9 million or 8%, which includes the addition of the Formation Nations sales team. Technology and development costs were $15 million, down $2 million or 10%. General and administrative expenses were also $15 million, a decrease of $1 million or 6%. Both technology and development and G&A cost savings were primarily driven by the reduction in force that occurred in the third quarter of last year. Our execution drove adjusted EBITDA of $37 million. This represents a 33% year-over-year increase as compared to adjusted EBITDA of $28 million for the same period last year. Adjusted EBITDA margins of 20% increased 400 basis points year-over-year. As a reminder, our adjusted EBITDA margins are generally lower in the first half of the year due to higher CAM spend levels that align with our business' seasonality. Free cash flow was $41 million, up 67% compared to $25 million for the same period in 2024. Our free cash flow performance exceeded our expectations, primarily due to the improvement in adjusted EBITDA and increased subscriptions. We ended the quarter with cash and cash equivalents of $210 million. We remain debt-free with no outstanding borrowings under our $150 million revolving credit facility. Our cash position increased by $68 million versus year-end 2024, benefiting from strong free cash flow generation, the sale of our Austin office building for approximately $38 million and proceeds of $44 million, principally driven by option exercises from prior executives. This was partially offset by the use of $48 million of cash on hand related to the acquisition of Formation Nation. We believe our strong cash position and healthy free cash flow generation will enable us to invest for the long-term health of our business. In this environment, we will also look to capitalize on synergistic M&A opportunities that can accelerate our strategic growth plans and bolster our market leadership. We did not repurchase any shares in the first quarter. This week, our Board of Directors approved a $100 million increase to our share repurchase program. We now have $150 million remaining under our authorization. Moving forward, we will maintain a flexible cash position to support our capital allocation priorities while protecting our balance sheet against an uncertain economic backdrop. Turning to our outlook. We are very pleased to have exceeded our first quarter results with outperformance in revenue largely dropping to the bottom line. While our actions across our key focus areas continue to gain traction, we recognize that we are operating in a dynamic environment. This year has been characterized by a rapidly evolving macroeconomic and geopolitical climate, which persisted in April and through the beginning of May. These dynamics have driven softer traffic and formation volume in comparison to normal seasonal trends. To account for external factors, we are now modeling an expectation for the formation macro to be down mid- to high single digits year-over-year in 2025. Since last year, however, we have been focused on the areas of our business we can control, and that has positioned us well for these changes. This, along with the current underlying performance of the business, gives us assurance in our ability to maintain our full year expectations of year-over-year revenue growth of approximately 5% and EBITDA margin of 23%. This reflects our confidence in our execution, including our expectation to achieve double-digit subscription revenue growth in the fourth quarter. Our full year revenue outlook includes a revised formation macro estimate of mid- to high single-digit decline year-over-year and the elimination of BOIR filing requirements for U.S. companies as well as our decision to discontinue new customer acquisition for our own tax product. We estimate the combination of the tax and BOIR filing assumptions represent approximately 4 points of headwind to our revenue growth in 2025. For the second quarter, we expect revenue in the range of $181 million to $185 million or 3% year-over-year growth at the midpoint. Turning to expenses and profitability. For the full year, we continue to expect an adjusted EBITDA margin of 23%. This translates to approximately $165 million in adjusted EBITDA, which we are committed to generating irrespective of revenue. For the second quarter, we expect to achieve adjusted EBITDA in the range of $37 million to $41 million, which reflects a 21% margin at the midpoint. I'd like to reiterate our high degree of assurance in achieving our adjusted EBITDA dollar target. We have a strong grasp on our expense structure and are able to quickly react to changing market trends. Our cost of goods sold are highly variable with the majority directly associated with new formations and our staffing model remains highly flexible through our third-party partners. Cost of goods sold and marketing expenses represent approximately 70% of our total cost structure. For CAM, most of our spend is guardrail-driven, automatically fluctuating with demand, and we have no upfront commitments. Beyond this, we will continue to focus on automation and managing fixed costs prudently. While we are navigating a changing landscape, our business is well-positioned. We have conviction in our ability to execute on the initiatives within our control and have levers within our business to preserve our margins and profitability in a challenging operational environment. In closing, I'd like to thank the entire LegalZoom team for their efforts this quarter. And with that, let's now open up the call for questions.

[Operator Instructions] Our first question comes from Ella Smith from JPMorgan Chase.

So Noel and Jeff, first, I was hoping to ask about the strong subscription unit growth. Could you speak to again what the puts and takes are that contributed to the strong subscription unit growth numbers?

Sure. Happy to. And we're incredibly proud not just of the strong numbers that we put out in Q1 on subscription growth, but also the change in trajectory. So just as a reminder, we were seeing negative subscription growth. So that turn, which happened quite recently, was a function of a couple of things. At the highest level, it was moving towards quality share, finding better customers. What that meant was we had to reorient our products, our packaging and our pricing to make sure that we were going after more of these better companies. In effect, what we're doing is we're creating a barbell strategy on subscriptions, which is best practices. We're trying to bring people in first with transactions because that's how our core model was working, but eventually with lower-priced subscriptions and then move them up the value chain and over the value chain, so upsell and cross-sell. So we've leveraged some of this through changing our existing products. We've talked about this with registered agent and the pricing changes that we've done there. We've leveraged it with registered agent and some of the product changes the features that we've done. We've introduced some concierge level do-it-for-me products as well that are higher priced and our expectations is they will also be lower churn products as well. And then finally, we have started to bundle more and more of our lower-end subscriptions. These subscriptions will inevitably have higher churn, both because they are part of a bundle and because they are lower priced, but the idea is to wet people's appetites who are in at the lower end through our formation channel and then ultimately migrate the ones who are most successful as businesses up that value chain.

Yes. And just to build on that, Ella, in terms of the subscription unit growth specifically, that Jeff was alluding to the bundling of our forms and e-signature subscriptions as well as our bookkeeping subscriptions and our pro-premium SKU, which we started to roll out last year added greatly to the subscription count. Because they are lower-priced subscriptions, we've seen sort of corresponding pressure on ARPU. And as we start to lap the bundling into those premium SKUs throughout this year, we'll start to see that growth subside.

And Ella, I'll reiterate what Noel said, it's a really important point is it's a twofold strategy. One is to drive subscriber, the other is to drive subscription revenue. You drive subscription count by tackling your transactional business and trying to convert them to subscriptions. And those tend to be slightly more fleeting customers at a lower end. And then you cross-sell and upsell and value price a subset of those to be your highest price, highest value customers and that often drives your revenues forward. So I think we have done a good amount of work to start orchestrating that strategy. And over the next few quarters and upcoming years, you're going to see more of that. And it's what ultimately gives us confidence that we can drive towards that double-digit number.

That makes a lot of sense. And as a quick follow-up, I want to ask about Formation Nation. Can you speak to the process of integrating that business and your vision to drive that business forward?

Sure. And it is very similar in terms of what we were talking about with subscription with that twofold model. What we had in this case with our brand was the leader in the brand going after value pricing and value products. And we actually created a race to the bottom at LegalZoom. So what we've done is we bought the leader in value-priced products. This is Formation Nations Inc. authority. They actually created the first reformation product offering that we knew of. So what we are trying to do with this integration is we're trying to decouple what we had done historically at LegalZoom from offering both free products to high-value products. And now our hope and expectation is that we will be able to push the lower-end customers, the customers who aren't quite ready to deeply engage in their business over Formation Nation, where there's more handholding and a better ability to move people up the value chain over time while starting with a free offer. And in doing so, and this is one of the reasons why we discourage anyone from looking at Formation Nation as a segment of our business, separate from Legal Zoom. As we do that, we're going to want to remove and reduce the revenues that were coming through our free formation site. So we're equally proud of the work that we have done on our end, we're calling that part of the integration to deprioritize our free business. And as you saw, the 2 stats that are really, really important and valuable here above and beyond the fact that we're moving up the value chain is that as a percentage of total formations, we now have our free formations below 50% and that we were able to increase Formation Nations marketing cost effectively to drive at least some subset of those customers over to now our associated sister brand, Inc Authority, so that we can normalize that and not fully cannibalize as we move up the value chain.

And as a reminder, the Formation Nation business is largely a transactional business in nature. So it affords us the opportunity to look to bring some of the subscription prowess and strategy that we've been enabling on our side to shift towards subscription to that -- to those offerings as well.

And I know we wouldn't have done what we did on the LegalZoom side, at least as quickly as we did. And I don't know if we would have ultimately been successful without having that Inc Authority brand.

Our next question comes from Pat Mcllwee from William Blair.

My first question, you talked about launching a new brand campaign from SEO and also stepping up the marketing spend in Formation Nation this year. So my question really is, should we expect to see overall marketing spend elevated going forward? Or are there any offsets we should thinking about there?

I will start by saying no, and Noel can elaborate on that in terms of the financial profile. What we're really talking about is a shift in marketing spend more than an increase in marketing spend. We're trying to be more efficient in a number of different areas. And where we're leveraging brand, we're leveraging that to help drive authority into our business. We're at a pretty unique period of time as we enter into minimally this economic uncertainty, maximally potentially a recession. And typically, when you see these periods, the strongest brands tend to thrive in those periods. So what we're trying to do is reorient ourselves as the guardian for our customers. We are the company that you go to because we are the safe choice such that if you're a strong going concern, you're going to want to switch to us for compliance. You're going to want to switch to us for registered agent services or for virtual mail. And if you're thinking about starting a business, either because you lost your job or now feels like the right time, where else to go than the best. We are still orders of magnitude cheaper than a law firm, but a premium provider relative to other online technology firms. And to do that and do it well, we need to shift the way that we think about and spend on our marketing. And then finally, so that we don't lose some of those customers that we are willing to give up on the LegalZoom side because they were not margin accretive to our core business and they were deleterious to our brand, we wanted to shift sufficient spend over to Formation Nation so that they could capture those customers.

Yes. And Jeff's right, I think we're expecting a similar level of CAM spend this year. There'll be some puts and takes on the quarters just relative to how we rolled out some of our brand spend last year. The good news is our spend is largely performance-oriented. So it adjusts quickly given the commentary on an uncertain macro. Our performance marketing will adjust to changes in demand. And from a brand spend standpoint, we've steered clear of upfront commitments. So we have flexibility to adjust to in different environments as well.

And it's an important question, Pat. So I'm glad you raised it. More generally, we're being incredibly cost-conscious and sensitive to the fact that we know that the economic situation can change. So we're, I think, being appropriately prudent in general.

Got it. Very clear. And then the second is just more quantitative. You shared in the press release that Formation Nation contributed right about $8.5 million in revenue this quarter. Given the mid-quarter close to that, is that fair to kind of assume that type of run rate contribution going forward? Or should we expect that to grow? And then also kind of the mix between transactional and subscription changing going forward?

So good question. Let me unpack that qualitatively first, and then Noel can take the quantitative bit. Because qualitatively, this is really important to understand. We are not running this business in a segmented way. It is highly integrated. And the more revenues we can push to Formation Nation, particularly if they're able to grow with healthier margins, we are going to do and we're going to continue to do. So those numbers are convoluted to some extent, regardless. And the example we gave in terms of increasing that marketing spend we are happy to do that and spend to grow their business if they're growing efficiently and profitably. We're also happy to pull from their business if it accretes to LegalZoom as a whole because we can manage it more effectively. And we're looking at areas where we can do that as well. There's also a lot of cross-learning where we're able to cross-sell and upsell products. The last thing I'm going to think about is where it should be placed within one versus the other so that we have to force something down a different billing system or a different accounting system just so we can manage to one number or another. I say that because we are execution driven, and that's what we're focused on mostly, predominantly. And we don't want to put the kind of accounting cart before the operating horse. And we've got a lot of ground to cover here. So I would say you can use those numbers directionally, but they're not a good indicator of how one business or the other is doing. The indicator there is the combined business. Second to that, as you know, there's a lot of seasonality in our business. That's true with Formation Nation as well. Q1 is a seasonal high period. So it would be significantly lower if you try to extrapolate that half of a quarter into Q2.

Yes, that's right. Because it's much more transaction-oriented, it has a heavier seasonality than LegalZoom. So I wouldn't do a pure extrapolation. And to Jeff's other point, as we look for opportunities to give and take between the businesses and do some transition to subscription, that could have some impact on near-term revenue expectations for the medium- to long-term benefit.

And again, within one of those segments. But as a whole, we're managing the growth across both.

Our next question comes from Brent Thill from Jefferies.

This is Sang-Jin Byun on for Brent Thill. Two questions for me. On the macro, I mean, other than business formation, just wondering what you're seeing in behavior, maybe across some of the other products or some of the KPIs you see as you went through the quarter, January, February, March as well as through April, May? And then I have a follow-up.

Yes. It's a good question. We're perseverating on this point as is any good operating team. There's a lot of uncertainty. And what we're doing, which we think is the right approach is we're running a variety of scenarios, whether things could stabilize, get worse, get better, how the different macros, remember, we're subject to many of them, interplay with one another. How macros that don't necessarily directly affect us, like tariffs could indirectly affect us as well. And I think we're taking the appropriate steps both to model our business and to manage our business under a far wider range or band than we would otherwise. And that's where we come to that mid-to-high single-digit range that we're managing into so that we know that we can hit our numbers irrespective of a change. But to answer the question directly, we saw some negative pressure into Q1, and that has continued to date. And that pressure is compounded by uncertainty because you're seeing policy changes happen at record volume.

Yes. And that pressure, as Jeff mentioned, is in the range of assumptions that we laid out in the script as well as incorporated into our financial guidance for the year.

Great. And that's helpful. And then I know you're starting to integrate Formation Nation together. It's going to be harder to separate them. But in Q1, if you exclude the $8.6 million, I guess, the organic business was about flat in revenue. And I guess some of that is LVTech, some of it is BIR. But anything else to read in terms of dynamics if you look at the business, excluding Formation Nation in Q1?

Look, from an operating perspective, I would argue it's the wrong way to look at it or read it. As you saw, we were able to drive some margin efficiency. A lot of the revenues that came out of LegalZoom in Q1, just as in Q4 as we started to do this, were empty calorie revenues. A free formation in and of itself loses money for LegalZoom. When you look at it on the other side, on the Formation Nation side, because they have such a strong onboarding process, and veteran representatives, service reps, who call on every free formation customer, they're able to make money with those customers. So all you're seeing is us accelerating that transformation at LegalZoom to higher-value customers. So I think that, that would be the wrong way to look at what we're doing as we iterate this business. Instead, what we're trying to do is accelerate the repositioning of LegalZoom as the higher value, in fact, highest value in category brand. And then the second thing, which is probably as important, we were able to lean in more on subscribers instead of transactions. And you saw a big shift this quarter that probably wouldn't have been possible, at least not to that extent, without us knowing that we were going to be able to get this Formation Nation acquisition done. And Formation Nation is largely transactional. So at some point, we'll be able to turn to that business and look for ways to accrete subscribers over on that side as well. So I really would discourage you from trying to look at the business piecemeal because this was a strategic initiative. We looked at doing it organically. We hesitated to do it because we thought that it would look disingenuous to customers to build our own discount brand. So we acquired and moved quickly. In fact, I should say, we moved in advance of acquiring because we knew we were going to be able to get this deal done. So I think that that's the better way to look at it. And it certainly is the way that we are, and we're pleased with how it's gone to date.

Our next question comes from Ron Josey from Citi.

This is Jake on for Ron. So intra-quarter, we saw that you expanded virtual mail to consumers previously being only offered on the B2B side. I wanted to just hear like if you could double-click on the key priorities on the consumer side of the business and how you're viewing those efforts as part and parcel to your overall approach given examples like this with virtual mail.

You bet. And great question, Jake. The way that we're looking at the business generally is from the customer lens. And what does the customer expect of us as a large legal services provider. And consumer, particularly estate planning, is a legal service that people demand. And as we looked out and asked others how they saw us as a trusted provider, as a protector, as a guardian and what else they would like to see from us, we kept hearing over and over again that virtual mail was something that was very interesting to the consumer side. You hear this a lot from business owners who, of course, are also consumers. And I'll speak personally since I have a virtual mail product on the business side, it is something I would have liked on the consumer side. It was a relatively easy lift for us to build. And in fact, the company that we acquired had a product that appealed to consumers, and we knew that there was demand for it. And virtual mail is fully subscription and it is largely subscription anyways. And it is one of our bright spots in terms of subscription growth. So we launched it in quarter, and we've got high hopes for that helping to drive consumer. What I will say is, apart from that, it's those strategic pillars that we've outlined previously that matter from the standpoint of consumer. Can we leverage consumer to diversify our go-to-market? The answer is clearly yes. We will do that. Can we leverage consumer to drive increasing subscriptions and subscribers into our business? The answer is yes, and you will see more of that here as well. And then can we leverage expertise and artificial intelligence to offer a better service at scale? And we think the answer is yes to that as well. So it feels like that is a competency that we need to offer next to that core competency of small business services.

Our next question comes from Andrew Boone from Citizens.

Jeff, I want to go to subscription guidance and talk about the double-digit subscription growth rate as we think about exiting 2025. Can you talk about the key inputs there to ensure that you guys hit that target? And then going back to some of the conversation around Formation Nation and business formations, Jeff, you came on board in July of '24. And as we think about exiting '25, how do we think about continued share loss? Should we expect you guys to kind of be in line with the market as we set up the end of '25 and into '26? How should we think about your guys' progress in terms of getting rid of kind of the empty calorie business formations that are on the platform?

You bet. Both great and important questions, Andrew. On the subscription growth, I know that we put that double-digit number out last quarter, I suspect it felt premature to people outside of the company. It did not to us because we were looking at the roll forward and where we were towards the end of the year and what we were launching in Q1. I think what you're seeing now with this 8% print in Q1 shows you the path to us getting there. And the bigger question is whether it will be sustainable, and that's on us to make sure that we deliver that. So I have every degree of confidence that we will get to that double-digit subscription growth number that we've been talking about. And the reason for it is because of how we've reoriented the business. And part of that gets to your second question around market share. We were so focused on market share at all cost we failed to realize that we were bringing in, on the one hand, empty calories, unprofitable formations. Second, and this is probably the opposite counter, customers who had no intention of being upsold cross-sell or wanted to be subscribers. And then when you put those 2 together, what it meant was we were building a business that wasn't long-term sustainable. And that's what we've been really focused on over the past, call it, 9 months and probably throughout my first year, making sure that the customers we bring in are really, really well educated for what we expect of them and what we will deliver to them to help them succeed in return. And we're looking for customers who are going to grow, who believe in their business, who have a viable going concern. Yes, they're entrepreneurs, they're taking a chance. We will take that risk with them. But we want to grow alongside them. We don't want to bring in stagnant businesses, looking loose, people who are doing it because it's cheap or free or building a wrapper around their vacation home. So we've seeded that market, and I think we're happy to do that. So what that means over the medium term is we're going to ring that out of our business. It means market share deterioration from the standpoint of formations. But we actually think that if you look at the quality formations, we are increasing share. I think we are starting to prove that because when we look at our core subscription products, we're seeing ARPU rise. When we look at our ancillary subscription products, these are the ones that we're bringing people into at first, we're seeing large adoption. And then when you look at the mix shift that we're having of our basic free SKU and then our premium and Pro SKU, the higher-priced SKUs, we're seeing more customers migrate not just to that middle SKU, but to the highest SKU. And I think that's something that is proof positive that this strategy will work in the long run. But as you hear from a lot of counterparts in the SMB space, everyone is moving to quality share now because that's what you do when you're under macro pressure and when you're under uncertainty. We've been doing it for the last year, and I think we've been doing it quite successfully. So eventually, this will start to normalize out. And then the macro will be a decent enough proxy for our market share because we won't be looking to necessarily grow that market share at the cost of bringing in bad customers. Does that make sense?

Makes sense.

Andrew, the one thing I'd add to that is just in regards to free cash flow. If you look at our free cash flow for the quarter, it was really strong. $42 million, up from $25 million last year. We're coming off of a really strong free cash flow quarter in Q4. And one of the important drivers of the strength in free cash flow was the improvement in deferred revenue. So that ties to what Jeff's talking about in terms of the predictability or visibility that we have into our subscription revenue as we move throughout the year.

And just as a reminder for people because it's easily lost when you're looking at multiple companies. Our free product has a cost to it to customers. They still have to pay the filing fees. We pass 100% of that on to the Secretary of State which means we're taking on revenues with exactly 0 margin. And then we're fulfilling it, which means there's actual real cost to it. No matter how little that cost is, it is putting margin pressure on our business. So if we can't convert those customers, we don't want them. And this speaks to why that Formation Nation acquisition was so important is we were able to quickly accelerate the adoption of those free customers from LegalZoom over to Inc Authority. And that is accreting positively to our business as a whole. But in particular, you see that on the free cash flow.

[Operator Instructions] Our next question comes from Elizabeth Porter from Morgan Stanley.

I wanted to follow up on some of the pricing changes where you noted some better-than-expected retention in elastic demand, which is really encouraging to see. So just given some of the positive reaction to pricing, does this increase your confidence to expand pricing changes to other parts of the portfolio? And just how should we think about it as a lever going forward?

It's a great question, and it's something strategically that we are looking at right now. I think the right answer is it is clearly a lever. There is clear inelasticity in a number of our products with a number of our customers. We're still in the early innings. We did the first pricing changes to new customers towards the end of last year. And then we are still in the process of testing, in particular, registered agent renewal pricing. But because of that success, it does give us greater confidence. And I think that there are other areas where we see higher value in those products where we can drive higher pricing. I think the caveat and the hesitation in what I'm saying right now is I am reluctant personally, and I think the team shares this view to increase price without increasing value. I think we owe that to our customers. So we have to make sure that we govern what we're doing on pricing alongside what we're doing with product development. So with registered agent, we had a couple of very clear things that we could do to drive increasing value to our customers. That was relatively quick and effective. So we were able to do that as a first test. We now have to look to other products like virtual mail, compliance, our legal plans on the consumer side and on the business side. But I think you will likely see more of this over time because I do think that this is sustainable. I think it's scalable. And I think it's a lever that we can use into the future. And it's one that we should because the hidden benefit. The one that I am probably even more excited about is it sends a message to our customers and to the market that we are not cheap. You get what you pay for. And that is probably most true in legal services and the medical profession. And we want people to know that we are the best solution if you're not going direct to a law firm on Main Street. And I don't think that we have delivered that message effectively in the past.

Great. And then just as my follow-up, I wanted to get an update on just the progress of 1-800Accountant. I know that initially, it was an expectation that, that could partially offset some of the headwind from taking your own product out of the lineup. So just one, how is that performing versus expectations? And then second, could you elaborate on how the partner strategy may be shifting the go-to-market top of funnel in the core business rather than LegalZoom just referring customers to solutions? Are you starting to see new customers kind of referred in?

Great questions, especially the second one, which is a core priority for us. On 1-800, qualitatively, it is performing better than expected on our end and on our partners' end. So both sides see it as performing better than expected. We moved into market quickly to take advantage of the existing tax season. The results outperformed our plan. It is offsetting some of the decline that we're continuing to go through as we lap our own tax product, and we expect that to accelerate over time. So we feel very good about that partnership, and we're leaning in pretty heavily and believe in what they're doing generally and specifically what they're doing with artificial intelligence. They had a Wall Street Journal article come out, I think it was last week speaking about some of the things that they're doing, and we have been leveraging that to ours and our customers' advantage as a result. On your second point, which I cannot emphasize more, that is a key priority for us. I can't say that it was historically. But again, to reiterate, we had leveraged partners principally to increase our margins and to take our customer base and help monetize those customers with other ancillary services. We are now focused intently on trying to bring partners in who can drive customers to us so that we are not so dependent on our own marketing. And I suspect in the short term, you will see more from us in that respect as we start leaning on partners to drive customers to us as opposed to leveraging our consumers to increase our margins.

Our next question comes from Stephen Ju from UBS.

Just building on your earlier comments, it sounds like Formation Nations customer lifetime value is realized basically on the first transaction, so you're one and done. But there seems to be this open opportunity to upsell, cross-sell. So is there a way to characterize what the incremental customer LTV unlock or uplift could be over time? I get that you guys have owned this asset for 3 months, but any type of color would be interesting. And I guess there's other sort of different considerations because the user base for Formation Nation is probably different versus the LegalZoom user. So any type of help there in terms of how much sort of, I guess, LTV you can unlock going forward? And I guess -- and as you refine the process for Formation Nation in terms of the upsell, cross-sell, should we be looking for you to be getting a little bit more aggressive on the customer acquisition spend? So theoretically, you should be in a better position to outbid your competitors in the paid media channels.

Great questions. And you raised an interesting point. And this speaks to why we're calling this a quick integration because so much of the integration efforts is literally just us deprioritizing free. What I think Formation Nation does so well is their onboarding process with lower intent customers. And what they've realized rightfully so, is those lower intent customers need a bit more handholding and they drive more value, you need to drive more value upfront so that you're pulling them in early and they have lower lifetime. So that life cycle is quite quick. The reason that's important to understand is we effectively had a one-size-fits-all model. We were assuming all customers were alike and that these were very high intent, very long-term life cycles. And that works well for high-intent paying customers. It works less well for these free users. So the first point is even if we do nothing on that side, speaking to your core question, we still win here just by bifurcating between these 2 customer sets and shifting the best customers that fit the profile for Inc Authority over to Inc Authority and the best customers that fit the profile over to LegalZoom. So that is our first priority, and that's something we can do very quickly, almost through osmosis because we can do it independently, even though it becomes a synergy just because of how we market. Second to that, the way that we're framing the opportunity for helping Inc Authority drive value up their value chain and drive greater lifetime value is the same way that we're leveraging them to help us as well with some of the core things that we can do better. And we're looking at the differences and saying it will be somewhere in between. Their transaction volume looks like our subscription volume and our subscription volume looks like their transaction volume. So the opportunity set is somewhere in between there being significantly transaction-oriented to us being significantly subscription-oriented. I suspect we will see that grow probably not to that rate. It's hard to tell this early how much we can do on the subscription side because the one thing we don't want to do is break their model. It works really, really well and it is effective. And worst case, it accretes subscribers to us generally through our model being more effective at the customers that we're going to pull from them over to us, which we will as the premium brand. I don't know, Noel, if you have anything to add on that?

I would just say on your question on marketing spend, we noted in our prepared remarks that we've started to increase spend there. So we do think that there's an opportunity right upfront just to start spending into some different channels. And I think there's more we can actually do in their existing channels. And obviously, I think it's too early to quantify anything around the LTV opportunity. But certainly, as we start to realize some of that opportunity, for sure, expands what we can do from a spend standpoint.

And having the multiple brands also helps as well. And we have the potential for the Amazon effect, where we have a lot of traffic that we're not monetizing appropriately. So at some point, we can have effectively a quasi-marketplace where we're going to be happy to send certain customers directly to Inc Authority, not indirectly in the same way that Amazon will promote Audible, which is owned and operated, but most customers see it as independent in a different offering than some of the other both book and audio book products that Amazon offers under their brand.

I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.