LegalZoom.com, Inc. (LZ) Q2 2025 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the LegalZoom's Second Quarter 2025 Earnings 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, Tyler Drew, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's second 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. In addition, we will also discuss certain non-GAAP financial measures. 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, and thank you for joining our second quarter earnings conference call. We are very pleased with the accelerated progress that was made this quarter and believe it will benefit us going forward. As I complete my first full year as CEO, I want to take a brief moment to reflect on the accomplishments we have achieved at LegalZoom. When I stepped into this role, my objective day 1 was clear: to build a more consistent, predictable and profitable business. One that could support sustainable long-term growth resilient to changing economic cycles. Our second quarter results demonstrate the work we have done to achieve these objectives, notably ahead of plan. First, we've stabilized the business and reignited subscription revenue growth. Second, we're building a premium brand and new suite of products that cater to the diverse needs of high-quality small business owners and individuals. Third, we're delivering operating efficiencies and expanding margins, strengthening our financial profile. All of this rolls into our second quarter strong results. Total revenue reached $193 million, up 9% year-over-year, ahead of expectations. Subscription revenue grew 10%, marking our second straight quarter of sequential growth and early achievement of our double-digit growth target, 2 quarters ahead of schedule. It is worth noting that our subscription revenue growth was led by our compliance offerings, including our new Compliance Concierge product suite, which we will talk about later. Further, our compliance offering showed encouraging improvement in first year retention, indicating that customers are appreciating the incremental value that we are delivering. With respect to our new concierge solutions, we launched and saw strong adoption of products that have shifted upmarket by adding additional value, leveraging artificial and human intelligence to allow us to offer the highest service levels to customers. On profitability, similar to Q1, we continue to deliver strong margin performance. Our adjusted EBITDA margin reached 20%, a 400 basis point improvement year-over-year, reflecting strong operating discipline and strategic efficiency gains. We also continued to generate healthy free cash flow, reaching $32 million in the quarter, further strengthening our balance sheet. Given our strong performance and momentum, we are raising our full year revenue guidance from 5% growth to 8%, while maintaining our 23% adjusted EBITDA margin outlook. We attribute the achievement of these milestones to the work we have done to realign our organization to focus on subscription-based growth and improve operational efficiencies to create a more profitable business model. As part of this strategic realignment, we executed across the 3 key focus areas we outlined when I first joined as CEO: one, optimize our subscription business; two, reorient our go-to-market approach; three, leverage artificial and human intelligence to deliver expertise to our customers. We made solid progress across these 3 areas over the last year. In addition, we made a strategic acquisition, Formation Nation that was not only accretive and enabled us to bring in a world-class team of sales and service experts, but also sets us up to further advance our market position and realign our premium brand messaging. Let me now walk through updates across our 3 key focus areas. First, subscription model optimization. To put it bluntly, our subscription strategy is working. We drove a 22% increase in total subscriptions in Q2, powered by enhancements in packaging, pricing and personalization. We continue to bundle services that deliver incremental value like forms, eSignatures and bookkeeping into premium tiers, driving stronger early engagement and longer-term cross-sell opportunities. Last quarter, we launched our most comprehensive subscription suite of products to date, the Concierge Plan, a full-service white glove suite of solutions driven by artificial and human intelligence designed for the sophisticated small business owner that prefers a hands-on solution. The first product, Compliance Concierge, has been a strong success and includes a do-it-for-me solution to filings, permits and alerts alongside a dedicated adviser at a price that's still significantly lower than traditional legal services. We also soft launched 4 other concierge products that are currently being tested. Each affords customers the ability to offload their business' legal and compliance work to our team. Strong initial traction from our do-it-for-me products, including early adoption and customer response, validates demand and reinforces product direction as we scale through expanded offerings and long-term capabilities. Importantly, DIFM products garner significantly higher prices or ARPU, attract higher-quality customers and we believe create greater customer stickiness. This is central to our strategy of delivering intelligent, expert-led, proactive legal support at scale, which we believe will support renewal and retention trends over time. Second, evolving our go-to-market strategy. Our go-to-market strategy is focused on positioning LegalZoom as the trusted legal brand for small businesses to drive awareness and consideration. This spring, we launched a new brand campaign that frames LegalZoom as a legal companion for every step of customers' journey. Our message, technology when you want it, human support when you need it, reinforces the principle behind AI augmented expertise. Without increasing our overall ad budget, we delivered a multichannel, full funnel brand media campaign driving awareness, consideration and conversion under a single brand narrative. The campaign deployed across connected TV, digital and mobile with strong early results that we expect will build steadily over time. Of particular note, we saw sequential improvement in site traffic and engagement trends in June and July following the launch. We maintained a healthy return on ad spend, or ROAS, despite a longer brand payback curve and we maintained marketing discipline with low commitments to brand spend and return hurdles for performance channels. We plan to launch additional phases of the campaign across social and offline channels to build on that momentum. In addition, we will continue to deepen channel tests and diversification to optimize full funnel performance. Given the early success, we may consider incrementally adding to our marketing budget, but would do so within the confines of our overall expense schedule and margin profile. We are also expanding visibility through strategic partnerships and driving new customers through growth in our channel partner program. Most notably, we teamed up with 2 AI pioneers. First, with Perplexity. We launched a tailored legal support program for Perplexity Pro users, an innovative move that places LegalZoom at the intersection of legal expertise and emerging AI-led search behavior. More recently, we've announced a new relationship with OpenAI. OpenAI is launching Agentic capabilities inside ChatGPT, which they will be rolling out to 30 million users. Our collaboration enables ChatGPT agents to access LegalZoom's robust legal resources through advanced AI capabilities to ensure users are given high-quality legal information and insight. The system can intelligently navigate legal resources, run analysis and even deliver editable documents and spreadsheets. We believe collaborations such as these will be instrumental in boosting LegalZoom's brand presence and driving new customer acquisition. Finally, AI augmented innovation and service delivery. AI is becoming a fundamental differentiator for us, particularly as we build out our DIFM product suite that I spoke to earlier. We see a strategic opportunity to lead by combining proactive legal insights with automated execution, leveraging 20 years of robust data. Our AI tools will enable customers to address their needs faster, more efficiently and with greater personalization. With AI being utilized throughout many parts of the organization, we have enabled higher speed, satisfaction and scalability with shorter fulfillment times and improved resolution rates. With this foundation in place, we're turning our focus toward customer innovation, applying AI to create higher value, do-it-for-me offerings that improve compliance and efficiency. A recent example of that is automatic annual reporting within our compliance offerings. With this new launch, all compliance customers as well as concierge customers can have their annual reports filed automatically using intelligent software with little to no need to intervene. The net result of our push toward deeper engagement thus far has been significantly more annual reports filed and more businesses remaining compliant, which we believe has contributed to the improved retention previously discussed. We have a pipeline of DIFM and do-it-with-me products being launched as we accelerate our offerings with improved AI, automation and service levels. This is in keeping with our focus on quality share, finding the best customers and providing the best subscription offerings available. AI, to be clear, is not optional at LegalZoom, and we're just scratching the surface here, and I'm personally excited about the AI product road map. Lastly, I'd like to touch on our recent acquisition of Formation Nation. This strategic acquisition brings complementary brands and core capabilities that align seamlessly with LegalZoom's vision. We are extremely pleased with the transaction for several key reasons. First, integration efforts have been swift and successful. We've onboarded a sales team of more than 130 experienced professionals as of Q2, significantly strengthening our customer service capabilities and leveraging a brand strategy to differentiate between value and premium product offerings. We've also initiated cross-sell and upsell opportunities within our respective customer bases. Notably, we've repositioned one of the Formation Nation's sales centers, representing approximately 17% of the sales team and who are now focused on selling LegalZoom products, enhancing our ability to deliver higher-touch formation and compliance services, an important part of our strategy to attract and retain higher LTV customers and sell more DIFM products. Second, our strategic marketing investments are already yielding results, driving increased traffic and engagement to the Formation Nation platform while reaffirming LegalZoom's brand ethos. Finally, we acquired an amazing team. The leadership is bar none in sales and service and the broader team continues to teach us best practices. In short, this acquisition is already delivering meaningful value and we are comfortable stating that we are now one team with a singular mission and focus. In summary, we are ahead of schedule on our strategy and the business is on a stronger foundation than it was a year ago. Looking ahead, we remain confident in our growth trajectory. I would like to also take a moment here to thank our tremendous team, whom I personally owe a large debt of gratitude. This has been a difficult year with a lot of transition and change. It has also been a hugely successful year and I'm proud of that. The speed at which we've executed is a testament to the strength of the team here at LegalZoom. And this team, I firmly believe, is still being underutilized. They are that good. I deeply believe in all of this and that with this team, I'm convinced we can do even more together. With that, I'll now turn the call over to Noel, who will take you through the Q2 financials and updated guidance in more detail. Noel?

Thanks, Jeff, and good afternoon, everyone. We are very pleased with our second quarter results, which reflected continued progress in our key focus areas. As Jeff mentioned, our business has stabilized. We're seeing solid growth in our core and we've reached key financial targets ahead of schedule. I'll now turn to a review of our second quarter financial performance. Unless otherwise stated, all comparisons will be on a year-over- year basis. Total revenue was $193 million for the quarter, up 9% and ahead of our expectations. Looking at our revenue performance in more detail, we generated 10% subscription revenue growth, which resulted in roughly $120 million from subscription revenue in the quarter. Achieving double-digit growth in subscription revenue 2 quarters ahead of schedule is a strong indicator that our strategic shift is gaining traction and delivering results. Subscription revenue benefited from higher compliance-related subscriptions as well as the Formation Nation acquisition and our 1-800Accountant partnership. We will maintain our focus on our core strengths in legal and compliance services while also leveraging partnerships with top-tier providers to address the additional needs of our customers. We ended the quarter with approximately 2 million subscription units, a 22% increase. In addition to the inclusion of Formation Nation, the strong unit growth was driven primarily by higher forms, eSignature and bookkeeping subscriptions as we bundle these products into certain business formation packages. We continue to expect this growth to moderate as we have seen lower renewal rates with these initial cohorts. ARPU was $256 for the quarter, down 6% year-over-year and up 2% from the first quarter. The year-over-year decrease was primarily the result of the aforementioned mix shift of lower-priced subscription offerings related to the bundling of forms and eSignature and bookkeeping subscriptions into our higher-end formation SKUs. We expect to maintain similar ARPU dollar levels in the second half of the year. Turning to transaction revenue. We saw an increase of 6% to $73 million. The increase was due to an $8 million improvement in transaction revenue from our acquisition of Formation Nation, largely offset by a decline in BOIR revenue. We also saw a decrease in business formations in line with our shift in focus towards higher-quality customers. We expect similar transaction revenue growth rates in the back half of this year. We recorded a 5% decrease in transaction units to 278,000, primarily due to a decrease in BOIR filings, partially offset by Formation Nation transactions. We processed 131,000 business formations in the second quarter. The 2% year-over-year decrease in business formations, again, reflects our ongoing focus on targeting quality share, partially offset by the addition of Formation Nation. Average order value was $262 for the quarter, up 12% versus the same period last year. Finally, deferred revenue increased by $2.8 million from Q1, reflective of the typical seasonality in our business and the success of our subscription initiatives. Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Second quarter gross margin was 69%, up from 68% in prior year. Sales and marketing costs were $63 million or 33% of revenue, an increase of 9% from prior year. Customer acquisition marketing costs decreased $0.4 million or 1%. Non-CAM sales and marketing expenses increased $5.7 million or 56%, which is primarily a result of the addition of the Formation Nation sales team. Technology and development costs were $15 million, down $3 million or 15%. General and administrative expenses were $15 million, a decrease of $1 million or 6%. Both technology and development and G&A costs were primarily driven by efficiencies built into the business that started in the third quarter of last year. Our execution drove adjusted EBITDA of $39 million. This represents a 35% year-over-year increase as compared to adjusted EBITDA of $29 million for the same period last year. Adjusted EBITDA margin 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 $32 million in the quarter, up 82% compared to $17 million for the same period in 2024. Our free cash flow improvement was primarily due to the increase in adjusted EBITDA and increased subscriptions as well as lower cash taxes. While we are in the process of fully evaluating the implications to our business from the recently passed One Big Beautiful Bill Act, our initial expectation is that we will see a positive impact on our cash flow for the year. This is primarily a result of the provision enabling accelerated tax deductions for research and development expenditures. We ended the quarter with cash and cash equivalents of $217 million. Our cash position increased by $7 million versus Q1 2025, benefiting from strong free cash flow generation, partially offset by share repurchases. Subsequent to quarter end, we renewed and amended our credit agreement, which, among other things, extends the maturity date to July 2030 and lowers this revolving credit facility to $100 million. The facility remains undrawn. As a reminder, last quarter, our Board of Directors approved a $100 million increase to our existing share repurchase program. During Q2, we repurchased approximately 2.2 million shares at an average price of $9.33 per share for a total of $20.4 million. We now have approximately $130 million remaining under our existing authorization. As we look ahead, we continue to believe our strong cash position and healthy free cash flow generation will enable us to continue to invest in our business as well as evaluate strategic M&A opportunities. Before turning to our outlook, I want to take a moment to discuss how we think about the macro environment. Over the past year, we've made a deliberate effort to decouple our business performance from the unpredictability of the broader industry trends. While business formation trends continue to be volatile and difficult to forecast, we've taken proactive steps to build greater resilience into our model. Our strategy centers on doubling down on our core strengths, legal and compliance subscription services tailored to high-quality customers with long-term value potential. Through this focus, we aim to reduce our exposure to short-term macro fluctuations and instead build a more stable recurring revenue base. We believe that the company is executing well against this strategy and it can be seen in our stable results during an otherwise volatile macroeconomic period. Looking ahead, as we shift away from one-off free formation transactions toward durable premium solution-based subscription services, we also anticipate a stabilization in market share trends. Ultimately, our goal is to deliver durable results through the strength of our offerings, the loyalty of our customers and the operational flexibility we built into the business regardless of macro trends. Now turning to our outlook. We are pleased to have outperformed our second quarter expectations and with the clear progress we are making across our key focus areas. As such, we are raising our full year revenue guidance. For the full year 2025, we now expect revenue to grow by approximately 8%. We continue to expect an adjusted EBITDA margin of 23%. For the third quarter, we expect revenue between $182 million and $184 million, representing growth of approximately 9% at the midpoint of the range with similar growth rates to the second quarter across both subscription and transaction revenues. For the same period, we expect to achieve adjusted EBITDA in the range of $44 million to $46 million, which reflects a 25% margin at the midpoint. In closing, despite the uncertain economic environment, we're demonstrating clear progress against our key focus areas, including achieving double-digit subscription revenue growth ahead of expectations. With strong execution and a focused strategy, we're well positioned to continue delivering results through the remainder of the year regardless of macro conditions. Long term, we remain confident in our ability to deliver sustainable, profitable growth for several reasons. We are the market leader in online legal services with unmatched brand recognition. Over 60% of our revenue is subscription-based, providing predictability and resilience. We are just beginning to tap the potential of AI and data to deliver smarter, more personalized legal solutions. And we have a flexible operating model and a strong balance sheet, giving us the ability to invest while staying nimble. As always, we'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 the line of Brent Thill of Jefferies.

This is John Jin on for Brent Thill. So a lot of positive comments there. I wanted to see if you could maybe dig in a little bit more on the confidence in raising the growth for the full year by 3 points. Obviously, the trends are good, but the macro is still somewhat volatile. And so I don't know if you could dig into a little bit in terms of the drivers behind your confidence.

Sure. And thank you for that, John. Why don't I start at the high level and then turn it over to Noel to dig in on the details. But we're now running a more predictable subscription-driven business that isn't fully beholden to small business starts. And you're seeing that with some of the trends that are developing within the business. And that gave us confidence at the beginning of the year. It gave us confidence that the Q1 trends would continue and persist. It allows us to maintain margins and accelerate growth. I won't say irrespective of the formation macro, but with a much wider range so that we're not so limited. We are range bound now such that we can operate our business within our control in a way that we couldn't previously.

Yes. And I would say, importantly, the increasing guide is driven by performance that's sort of multifaceted if you look underneath the covers. We saw strength -- as we mentioned in our remarks, we saw strength in our core compliance subscriptions, which is really important and that's partly due to pricing the value, but also we're starting to see some positive signs on retention here as we look at year 1 renewals, and that's tied to a lot of the work that the team has been doing to improve engagement with our compliance hubs. We've seen strength in our virtual mail offering, specifically with renewals outperforming our expectations. We continue to be very happy with our 1-800 partnership and that's driving growth. We have some added benefit for Formation Nation, and that still continues to represent a near-term opportunity as we look to shift a largely transactional business to subscription. So importantly, it's coming from a bunch of different areas. Some, to be frank, of the raise is built into performance that we've already delivered year-to-date, but we're seeing consistent, visible and predictable improvement in the initiatives that are underlying the guide increase.

Great. That's very helpful. And maybe a quick follow-on. On your announcements with Perplexity and OpenAI, I don't know if you're able to discuss any of the financial aspects or benefits that could be given there without getting into the details that you can't disclose.

Yes. Great question. Without getting into the details, I mean, what you're seeing here is a signal that AI is incredibly critical to what we're going to be doing going forward. And if you look from those companies' perspectives, they're choosing the market leader, which is us. And with 20 years plus of data, robust history, strong brand and this ability to move upmarket, it's a natural fit for us to start working with the best in this field, OpenAI, Perplexity, there are others that we're going to try to continue to work with. Probably more importantly, as we look to the future, it's a strategy that lends itself to what we're doing with do-it-for-me, DIFM. And this concierge model of being able to leverage AI not to replace, but to augment our expertise is something that we believe is unique to LegalZoom and something that only we can deliver. And then the last thing that I will say is that it speaks to a last mile problem, which most technology has. We believe AI does as well, which is something we've been talking about for a number of quarters. AI has the ability to do a lot of things in our space and in legal tech generally. But when it comes to that last mile, the just before a contract is signed, that's when you need to introduce some level of service and some level of product that is very tailored to the individual customer. We're uniquely positioned to drive that forward. And some of the pivot that we have made over the last year and most of what we're doing go forward is designed to actually align with that because we think that as the market evolves, that's where we're going to be able to sit and create real differentiation for LegalZoom.

Our next question comes from the line of Patrick Mcllwee of William Blair.

Nice results this quarter. So my first question, I may have missed this, but I didn't catch you mentioned your retention rates this quarter. So first, if you wouldn't mind sharing those, that would be great. And then second, can you provide an update on how the retention or attrition rates you've seen in some of those initial bundled cohorts has progressed now that I believe you're kind of lapping some of the changes you made to those SKUs last year?

Yes. Pat, this is Noel. Thanks for the question. So our aggregated retention rate for the quarter was 59%. That's down from prior quarter of 60%. So we've signaled this, I think, on prior calls, and we've mentioned a few times that it really relates to the fact that we started bundling these lower-priced, lower retention subscriptions in our pro and premium SKUs, specifically forms, eSignature and bookkeeping. So we've lapped forms and eSignature rollout, which is really in the first and second quarter of last year and we'll be lapping the bookkeeping rollout, which was more kind of end of third, early fourth quarter of prior year. And that we'll start to see absent further changes in commercialization, retention rates stabilize thereafter. I will say when you look at -- it's largely -- the change in retention is largely this mix in product. And when you look individually at our respective products, we're actually happy with the retention rates that we're seeing. And as we mentioned in our prepared remarks, we're seeing some positive signals within our core compliance subscriptions, which are the products that matter most to us.

Yes. And specific to those compliance products, which are the majority of our revenues in subscription, we're seeing positive trends, both in retention and in engagement. So it gives us a proof point on retention, which speaks to what we've done in the past, but that engagement number speaks to our ability to drive retention higher, churn lower over time in those core products, which are the products that we want some of these bundles to graduate into anyways because what we're trying to do is actually cross-sell and upsell them ultimately into those compliance products.

Right. Okay. And then my second question, Noel, I think you mentioned that Formation Nation contributed $8 million in revenue this quarter, if I caught that correctly. But I believe there's a decent amount of seasonality in that business. So I just wanted to ask if you could frame expectations for that in the second half, just so we can kind of back into a more organic growth rate.

Yes. So Formation Nation delivered $8 million in the transaction revenue side of the business for the quarter. In total, it was a little over $12 million that they contributed. And you're right, because it's more heavily transaction oriented, there's more seasonality in the business than LegalZoom. We're not breaking out the guide, but you would expect that seasonally, the first half of the year is stronger than the second half of the year generally in our category. So we would expect the contribution to be somewhat similar to slightly lower than what you saw in Q2.

And I'll just caution you on a couple of things because we've been doing deep integrations with Formation Nation. So number one, we've been accelerating our marketing efforts towards Formation Nation. And that complicates that decoupling if you're trying to do that. Number two, we have been rebranding LegalZoom and then Formation Nation's lead brand, Inc Authority, with LegalZoom being premium, Inc Authority being discount and free. And then number three, we've now taken a sales center and -- from Formation Nation and redeployed them on LegalZoom's higher- end products. So it is not a clean look when you're trying to do an apples-to-apples.

Our next question comes from the line of Elizabeth Porter of Morgan Stanley.

Jeff, I wanted to follow up on your comment about moving some of those sales heads over at Formation Nation. I wanted to touch on just the success you may be seeing thus far around attaching subscriptions to Formation Nation's higher-value customers. So I know it might be early, but what are the signs of success you're seeing so far? And what products do you think may have the highest attach rates to this type of customer base?

Sure. Good question, something we are deeply focused on. Let me unpack it a little bit. What we've done is deployed a sales center focused on LegalZoom selling model, which is disproportionately more subscription than what Formation Nation's was historically and even is today. That, by default, by pulling those customers through our funnel will immediately move people into a subscription base more quickly than with Formation Nation. In terms of where we think we can take these Formation Nation customers over time, I think it is very similar to what we have done historically with LegalZoom. So first and foremost, it's our core product offerings, those compliance offerings. Some of which Formation Nation had but didn't lean on because they were more focused on being cash generative day 1 because they were run with being cash constrained. Number two, some of the products that they didn't have. So some of the things that we're creating around DIFM, some of the compliance calendaring, some of the automatic filings that we're doing now and then some of the product lines like virtual mail that they weren't able to offer prior. So I think that there are a lot of areas where we will be upselling and cross-selling both the existing base and porting over new customers. But I'll reiterate, we're very, very early in that process. We're going after low-hanging fruit right now because it's there, it's available and that integration is already proving very successful. But over time, I think that there's a lot of opportunity and it points to our ability to do that with potentially other M&A opportunities and within our core base as we grow as well.

Great. And then maybe a follow-up for Noel. Great to see the revenue upside. I was wondering if there are incremental areas that you're pushing the lever of investment on that just may be mitigating some of the upside to margins that we have for the full year outlook.

Yes. I think Jeff hit on one of the areas that we're pretty excited about, which is in the, call it, concierge or do-it-for-me offering, which is much more of a hands-on white glove service that we're providing and this is part of our march towards focusing on higher- value subscriptions toward higher-quality customers. We're having really good early success there. And as you start to scale new products like that, it generally takes a larger investment. And so that's the mode that we're in right now and you're seeing that in the results, but we're expecting it to continue to scale quickly. And so we'll invest behind it. And as we build the tools and automation to create efficiencies in supporting it, we'll see leverage from a margin standpoint as we move forward. So that's a particular area of focus for us right now in terms of investment.

Yes. And I'll give another one as well, which is less clear from a financial perspective, but I can give something very tangible, engagement because we know engagement will reduce churn. And if you think about what we do on the compliance side, if you have everyone trying to do it yourself, it's like herding a bunch of [indiscernible] and cats. I mean it just doesn't happen. So what we have done is we've started to build a bunch of technology-oriented automation that allows us to do this deep engagement in our compliance products. And we're already seeing proof points that, that is reducing churn. And the example, I think that we mentioned in the prepared remarks, was what we're doing for annual reports. And we've seen a dramatic uptick in annual reports. Ironically, that falls in our compliance line, the dollars because there are filing fees associated with it sits over on the transaction side. But what it does is we deliver those transactions in an automated way and they reoccur naturally, it ends up reducing churn in our subscription products.

Yes. I think one other important piece...

And -- sorry, that is an investment that is lower margin because of the filing fees.

Yes. One ongoing investment that we've been making and we continue to see bear fruit is just around our operations, the tools, the automation, some of it leveraging AI to help our team deliver our services to customers. It's just driven a lot of efficiency in how we deliver and improvements in customer experience. And so that is an offset to any investment that we're making as we're driving more efficiencies there.

Yes. And that's also an important point just to put a pin on this because we're leveraging the economies of scale. So we're still working on margin improvement. We're not talking about deterioration here, which is why we reiterated our margin target.

Our next question comes from Michael McGovern of BofA.

When we think about your AI partnerships and even agents creating documents for users that aren't necessarily in your ecosystem yet, can you just discuss what the playbook looks like for creating a longer-term customer there or monetization of that use case? And then second question, with that last mile delivery piece from your prior answer, does that lend itself to adding more AI partners in the future if you're really focused on that last mile?

Yes. Great question. And I mean, this is a real opportunity to expand our addressable market. I mean AI can be a very big TAM expander if you have something differentiated. And in this case, what we see is many people have legal questions and legal problems that they don't know are legal in nature. So by leveraging these partnerships, they will lend itself to prompts that the customer themselves might not think is legal. And that can pivot them to you need to get legal help for this. And that's where LegalZoom comes in and that really is our differentiator. So the short response to your question is, yes, we expect more of these. Part of the reason why we did press releases for these is we want to signal that we are open for business. We see the opportunity and the value of doing this. And what we give away to the extent that we give away anything is an opportunity to expand TAM because that's a marginalized part of what we do. It is not core to our business. What is core to our business is solving that last mile problem that we don't think anyone but LegalZoom can solve. And what that ends up meaning is we open our aperture for -- from the addressable market standpoint. And then we start going after the old line lawyers and law firm market that we weren't addressing prior because we were focused on top-of-funnel formations. So we think this is a really exciting new opportunity for us. We've even seen this in some of our marketing efforts to date.

Our next question comes from the line of Matt Condon of Citizens.

My first one is just on -- Jeff, you talked about engagement multiple times on this call. Can you just talk about maybe how the improvements in engagement with your products is informing your future product road maps and how you can cross-sell into that base of users? And then just a follow-up also on cross-sell. Can you just talk about how you're optimizing the purchase flow to just increase attach rate and what's really working there?

You bet. And good insight here in terms of how our customers more than anyone are driving our product experience and where we're headed. I mean this concierge suite of products was an out [ drop ] of what we were hearing from customers and what they needed. What we realized was a surprisingly high percentage of small businesses are out of compliance. And unfortunately, that includes customers who have our compliance products. And the reason is because this isn't easy. This isn't fun. This isn't anyone's expertise as a small business owner. Instead, we're giving them the tools to do something that they don't have the time, wherewithal or inclination to do. So they just fall out of compliance until fees build up and say, now I have to do something. So what we have realized is if we make it simple and seamless for real functioning businesses to remain compliant, they're willing to pay more for that because they see value in getting back their time. And as we begin to tease this out, we're going to learn more and more about what it is that customers need. And we've got a very good model for testing very cost effectively, the next do-it-for-me product, determine whether it works, then build automation and AI to make sure that it's streamlined and margin accretive and then relaunch it as a fully-fledged product. So I think you will see much more here in that respect and DIFM will be a larger and larger percentage of total revenues over time.

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