LegalZoom.com, Inc.

Thank you for standing by, and welcome to LegalZoom's second quarter 2021 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's call may be recorded. If you require additional assistance, please press star then zero to reach an operator. I would now like to hand the call over to Danny Vivier, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello, and welcome to LegalZoom's second quarter 2021 earnings conference call. Joining me today is Dan Wernickoff, our chief executive officer, and Noel Watson, our chief financial officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, confident, and similar expressions. and are not and should not be relied upon as a guarantee of future performance or results. Results could differ materially from those contemplated by our forward-looking statements. We caution you to review the risk factors section of our reports and filings with the Securities and Exchange Commission for a discussion of all the factors that could cause the results to differ materially. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the investor relations section of our website at investors.legalzoom.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now I'll turn the call over to Dan.

Thanks, Danny, and welcome, everyone. Thank you for joining us today for our first earnings call as a public company. Noel and I enjoyed meeting many of you in the weeks leading up to our IPO and appreciated all the support along the journey. Before we discuss our second quarter results and review our priorities for the duration of the year, I want to take a moment to reflect on our mission here at LegalZoom and to remind everyone of the significant opportunity ahead of us. A little over 20 years ago, LegalZoom started with a vision to disrupt legal services by leveraging technology. We believe then, as we do today, that legal services need to be democratized so everyone can access and afford them. We take our responsibility very seriously, knowing that as we empower small businesses with the tools they need to thrive, we are in turn powering the success of the U.S. economy, a purpose all the more inspiring as these small businesses continue to navigate a global pandemic. Our journey to democratize law brings with it a compelling economic opportunity. Despite the digital transformations we've seen across many other large and highly regulated end markets like tax prep, financial services, or healthcare, the $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation. In fact, last year, just 8% of legal services in the United States were provided online. The majority of legal services are still conducted through an offline attorney, many of whom do not have a functioning website, let alone software to automate routine tasks, enabling lower cost of service. In a system plagued by inefficiencies, small business owners are left holding the bag, forced to spend their limited resources on services that are difficult to navigate at a price they often cannot afford. Ultimately, most will choose to avoid accessing legal protection altogether. leaving small business owners and their families vulnerable to significant financial risk. LegalZoom is very well positioned to serve this huge need in the market. First, we are relentlessly focused on the customer experience and have built a differentiated product that makes business formation and legal compliance simple. The LegalZoom product distills complex government forms into easy-to-follow questionnaires that can be completed efficiently with little to no human involvement. Our product's ease of use and affordability has resulted in a net promoter score of 65, more than double that of traditional attorneys. Second, we have a clear brand advantage, with our unaided awareness nearly eight times higher than our closest competitor. The strength of our brand has been built over two decades of steady investment and cannot be quickly nor easily replicated. This gives us a meaningful head start. Third, We have a proven ability to navigate the complexity of the U.S. legal and compliance system across all 50 states and over 3,000 counties. We have a broad network of independent attorneys that are available to provide our customers with high-quality legal and compliance support when they need it. These attorneys have deep expertise in our SMB-specific matter and geography, which creates a superior experience for our customers reflected in our promoter scores three times higher than a typical offline attorney interaction. Fourth, we operate within an attractive market that is both resilient and poised for growth. The rise of the gig economy and proliferation of SMB enablement tools are making it easier to start a business than ever before. We believe we are well positioned to benefit from these macro tailwinds, which should lead to accelerated share gains as the leading digital formations provider. And finally, We've methodically built a best-in-class leadership team with an attractive mix of SMB domain expertise and experienced leading high-growth technology companies at scale. I'd like to now highlight our results for the second quarter of 2021. For the second consecutive quarter, revenue growth accelerated, ending the period at $150 million, up 36% year-over-year. Performance was driven by the transactional side of our business, with revenue up 45%, we saw a mixed shift towards business formations, which helped drive higher average order values in the period. This shift is a positive signal that our efforts to reposition the legals and brand are resonating with small businesses. The top line strength flowed through to our profitability metrics with adjusted EBITDA ending the period at approximately $22 million, or 15% of revenue. I'll let Noel unpack the quarterly results in more detail, but it is important to remember that quarterly growth rates in 2021 are and will continue to be impacted by the effect COVID-19 had on business formations in 2020. In summary, we're very pleased by our second quarter results and believe we're entering this new chapter as a public company with momentum on our side. It's important to remember that we're building LegalZoom into the next great category leader. The executive team is focused on making the right investments today to support durable top-line growth into the future. I'd like to spend the remainder of my time providing an overview of our three key growth vectors with an emphasis on areas of focus for the latter half of the year. The first vector is scaling our core formations offerings through marketing and core product experience. As the clear digital leader in a massive vertical with very little tech adoption, we believe now is the time to accelerate our growth and take share from offline competitions. We first started ramping our marketing investment in 2020 with customer acquisition spend up 77% annually. We were able to grow spend significantly while maintaining a tight 90-day payback period with most of our acquisition costs covered by the upfront transaction revenue alone. We are confident that there is room to continue scaling our media spend, particularly as we add new cohorts at higher LTVs driven by additional monetization opportunities and improved customer retention. We are also entering new channels, such as digital video and paid social, leveraging media mix modeling to optimize spend allocation and improve overall returns. In addition to our performance marketing efforts, we are also focused on making the right SEO and brand investments to drive a larger share of organic traffic. Today, despite our brand leadership, the minority of our traffic comes from earned channels. This is both a problem and an opportunity. In the near term, we'll continue to add depth to our in-house team and we'll equip them with the tools they need to build a best-in-class SEO function. The other lever to drive core share gains is product. When I first arrived at LegalZoom in late 2019, our technology stack severely constrained our testing capacity. We quickly set in motion a plan to modernize our platform, making the critical investments we needed to scale. Today, the company has a product-centric mindset, and we are rapidly A-B testing our product to drive improvements to conversion, subscription cross-sells, and customer satisfaction. In the near term, we'll be focused on improving the formation process by refining our questionnaires, streamlining the purchase experience, and optimizing our lineup of subscription bundles. Our second key growth factor is building out an ecosystem of SMB subscription services. We know that in 2020, approximately two-thirds of our customers had not begun operating when they formed their businesses through LegalZone, giving us a unique position very early in the SMB lifecycle. At Formation, we have an opportunity to earn our customers' trust by introducing them to the right set of products and services they'll need to operate their business. Certain of these services we will deliver ourselves. LZ Tax, which launched in October of last year, is a good example of how we want to build in-house expertise within compliance. The most frequent support questions we receive at the time of formation relate to tax implications, and over 70% of small businesses do not have an existing accountant relationship at the time of forming their business. LZ Tax offers an accountant and bookkeeping bundle in a monthly subscription and an access to CPA that can provide tax advice and complete their annual business tax filings. It's early days here, and while we do not expect LZ Tax to be a material revenue driver near term, we remain very bullish on the long-term opportunity and are investing aggressively to accelerate its growth. In the second half of this year, we expect to roll out a tax solution across 100% of LLC formation traffic. With more traffic, we'll be able to accelerate product testing to help fine-tune our commercialization strategy. In parallel, we will work to build out our operational infrastructure and scale our CPAs to meet anticipated future demand. We also plan to expand the services we bring to our customers by partnering with best-in-class third-party solutions to offer business checking accounts, payments, website hosting, and other relevant adjacencies. In 2020, we made a significant change in our strategic approach. We're actively transitioning our existing one-way partnerships with bounty payment structures in favor of two-way strategic and well-integrated partnerships built on recurring revenue share models. We expect this transition to weigh on our partner revenue line in the near term, but we are confident that this change in approach will lead to a better customer retention and drive higher ARPU over time. Our third and final key growth vector is integrating attorneys into our products so that small businesses can feel confident expert support is just a click away. Delivering this integrated service can help us in three ways. First, we believe it will increase our share of TAM by attracting new customers that never would have considered the digital category without knowing an attorney is available if needed. Second, when we bundle independent attorneys into our core offering, it will increase our AOV as a premium price digital solution, but will still be at a cost lower than existing offline alternatives. And third, We expect it will drive higher conversion rates and provide opportunities to cross-sell subscription services at the time of formation. Earlier this year, we introduced our first attorney-assisted solution as part of our trademark product. Users can now choose to file a trademark themselves for $249 or file with the help of an attorney for $599. Since launch, we've seen a significant percent of our customers select the attorney-led option, driving a meaningful uplift in AOB. Late this year, we'll begin testing new ways to integrate attorneys into our customer journey with a focus on our most popular on-ramp, LLC formation. Similar to our LZ Tax Initiative, integrating attorneys is a long-term play, and we fully anticipate our go-to-market strategy to evolve as we test and learn. Let me end by saying we are incredibly excited for the journey ahead as a public company and I'm very proud of the team for delivering such a strong quarter while also meeting the many demands of an IPO process as well. We believe that the LegalZoom story is just beginning and that this company has an incredible growth potential for years to come. We have high conviction that the investments we are making will allow us to achieve that full potential. With that, I'll hand it over to our Chief Financial Officer, Noel Watson.