LegalZoom.com, Inc.

Good day, and thank you for standing by. Welcome to the LegalZoom's fourth quarter and full year 2021 earnings conference call. At this time, all participants 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Danny Vivier, Head of Investor Relations. Please go ahead.

Thank you, Operator. Hello, and welcome to LegalZoom's fourth quarter and full year 2021 earnings conference call. Joining me today is Dan Wernickoff, our Chief Executive Officer, and Noelle 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, and similar expressions and are not and should not be relied upon as a guarantee of future performance or results. Results could differ 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 factors that could cause our 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 non-GAAP financial measures. Our CEO and CFO use these measures in making decisions regularly regarding our business, and we believe these measures provide helpful information to investors. 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 Danny.

Thanks, Danny, and good afternoon, everyone. I joined LegalZoom at the end of 2019 with one goal, to make it the digital destination for starting a small business. Our mission is to democratize law, simplifying the legal and compliance complexities small businesses face the moment they want to turn their dream into a reality. Whether it's registering their business with government agencies, that incredibly important first step to protecting themselves and their assets, or if it's reaching important milestones like signing a lease, starting a first client project, making a first customer sale, or hiring their first employee. We're there every step of the way with them, helping them to create that LLC, keeping them compliant in an incredibly complex and ever-changing regulatory environment, and connecting them to tech-enabled experts that create or review legal docs and tax filings. These businesses rarely have VC funding, corporate attorneys, or fancy accounting firms when they start, They just have innovative ideas and an incredible drive to succeed on their own, and we want nothing more than to help them be successful. Now, let me start by highlighting some of our Q4 results. Revenue in the quarter came in at $142.1 million, up 16% year-over-year. Excluding partner revenue, where we have exited a couple of non-strategic relationships, our revenue growth would have been 20% for the quarter. Our subscription business continues to outperform, with subscription revenue accelerating to 29% growth in fourth quarter, up from 24% in Q3. We continue to lap strong prior year comparisons on the transactional side, with transaction revenue up 8% in the period. Given anomalous volumes in prior periods, a more normalized view is to look at the two-year CAGR, which remains strong at 26%. Business formations were up 10% year-over-year, and again, if looked at as a two-year CAGR, the growth is strong at 22%. Lastly, adjusted EBITDA was $7 million in the fourth quarter, or 5% of revenue, reflecting investments in marketing and in our LZ tax offering, both of which we believe will help to drive long-term growth. For the full year of 2021, we grew revenue 22% to $575 million. We helped 447,000 businesses form. That's almost one every minute. This is up from 292,000 in 2019, a two-year CAGR of 24%. And in particular, subscription revenue growth more than doubled to 26% for the year. We continue to be profitable, albeit at a lower margin. For the year, adjusted EBITDA was $48 million, or an 8% adjusted EBITDA margin. And given many of our services are annual subscriptions collected up front, our base of deferred revenue grew by $18 million, driving unlevered free cash flow of 10% of revenue. Importantly, we've also been prioritizing long-term growth through investments in three critical areas. First, our brand, with a particular focus on establishing knowledge of our SMB products. Second, critical product infrastructure and a move to the cloud to enable scale and increased speed of development. And finally, by launching LZ Tax and acquiring Earth Class Mail, both new subscription businesses that leverage the formations channel. In regard to our philosophy of balancing near-term profitability relative to long-term growth opportunities, we believe we are in the early endings of disrupting an industry and will err on the side of capturing growth even when it impacts near-term profitability. For example, if we were focused solely on period-over-period margins, we would never launch LZ Tax or acquire Earth Class Mail. As we invest to scale both, they invariably hinder our near-term profitability, but we have confidence both will be businesses that will reach our long-term goal of 30% adjusted EBITDA margin, and they will positively impact our share of wallet through our existing channel as measured by ARPU gains that you will continue to see quarterly. These important longer-term investments continue to show measurable progress. Our brand investment has yielded the 39% unaided awareness up from 25% just a year ago in Q4 2020, an over 50% improvement. We're attracting top-tier product and engineering talent with a cleaner, more modern tech stack, and they are increasing our velocity of product innovation. And LD Tax is already an important contributor to our growth and had an early transactional net promoter score of 83% in Q4. Out of the gate, it has the strongest net promoter score of any service we offer. As we continue to turn our attention towards 2022, it's worth reiterating what we outlined during the IPO process nine months ago. There are three important areas of focus for driving long-term durable growth. The first growth vector is scaling our core formations offering. Up to now, this has been primarily done through increased marketing efforts. But in 2022, we expect to see this begin transitioning to a more balanced approach of marketing and core product improvements that will lead to better long-term growth efficiencies. Since pivoting our marketing strategy in early 2020, we've increased our CAM spend from $67 million in 2019 to $195 million in 2021. With that large increase in marketing spend, we've seen efficiencies decrease as you'd expect them to, but we have always maintained and stayed within a guardrail of first-year bookings payback. However, as we look out to 2022 and consider a more normalized macro, we're projecting our CAM spend to remain roughly flat year over year. As growth and marketing spend begins to moderate, we will also be spending a bit differently. In 2022, we expect to benefit from our investment in media mix modeling and will accelerate our growth in new channels that have had low historical investment that have higher projected return than our current primary channels. We're also developing a new creative platform with the continued objective of driving legal and product knowledge as an SMB formation solution versus the historical perception of being a consumer estate planning provider. Over the last few years, we've invested heavily in our LLC product experience, and as a result, it converts at approximately two times the level of our other SMB workloads and has higher attach rates into our subscription ecosystem. Non-profit DBAs and corporations are collectively about a third of the volume of LLCs, but as of yet have not been migrated over to this new technology and experience. In 2022, we will move these workflows over, modernize the experience, and enable similar cross-sell targeting, which should in turn enable better performance, most specifically in mobile. Finally, and maybe most importantly, we've been focused on automating the annual processes required to fulfill orders. The cost and time to process a formation order has historically made it prohibitive to explore lower-cost business model innovation. In 2022, we will continue to deploy these changes throughout the year, and you will see us be more aggressive in going after share by creating a segmented lineup that supports cost-sensitive businesses all the way up to those looking for expertise and willing to pay a premium for it. Our second growth vector is building an ecosystem of SMB formation-related subscription services. This is an area where we've already made significant progress. First, I'll talk a bit about LZTax. As you recall, we launched LZTax on January 2021. We've been happy with the attach rate, and that rate continued to increase as we entered the new year and get closer to tax season. As I mentioned, the most important metric in any new service is NPS, and our accountant advice sessions have the highest score of all the subscription services in its very first year. We're now over 100 accountants strong and currently focused on executing the tax season. In 2022, we will remove the throttling we have in place and market it to the whole base of formations customers. moving beyond just LLC as well as more seasonally to our existing subscriber base through cross-sell within our product experience as well as through email marketing. We also expect to learn a lot from this tax season, which will inform investments in efficiency in this service. After one year in market, our LZ tax practice is one of the largest accounting distribution partners of QuickBooks Online. Now let me talk a little bit about the acquisition of Earth Class Mail. To refresh, we bought Herb Class Mail because of the channel, product, and technology synergy it has with our registered agent service. SMDs are required to declare a business address, and increasingly they are home-based operations that want to look professional and separate their business and personal lives. We are hard at work at beginning to integrate it into our product channel and will begin testing different approaches to commercialize it. We'll also begin to understand LegalZoom customer usage patterns and capacity needs and tailor the product to them as we tune the offering to get to product market fit for our segment of newly formed businesses. In parallel, we're working to scale up the operational side of Earth Class Mail to meet the significant organic demand that we anticipate relative to the existing operations. Our final key growth vector is integrating attorneys into our products and services. We know that many people are afraid to do legal transactions on their own, and they feel they are forced to seek advice from excessively priced offline attorneys. By integrating attorneys, we lower the barrier to entering the LegalZoom ecosystem for many people looking for legal services. We've made a significant amount of progress in integrating attorneys into how customers interact with us. We've tested and deployed our first attorney-assisted solution for trademarks in 2019, and since that launch, we're now doing more than half of our trademarks with the help of an attorney, and the mix continues to grow. Customers are also showing greater satisfaction in the attorney-led model with assisted net promoter scores exceeding the do-it-yourself option. We've already tested an attorney-assisted solution to aid in the formation of an LLC, which showed a lot of promise. It also helped us understand the infrastructure required to fulfill it. Since then, we've been diligently working to build out an attorney platform and some of the key collaboration capabilities to enable this first-of-a-kind innovation in the legal space. In the next quarter, you'll begin to see us testing a new lineup that includes this offering in the wild. I'm excited to launch this capability, as we know from experience that our attorney network has three times the Net Promoter Score of an offline attorney, and we offer access to them at a material discount in cost. Our attorneys specialize and do high volume of the matters that our SMBs seek out. We're confident in our ability to provide superior expertise at a lower cost. Stepping back in 2021, we saw record formations, specifically in the first half of the year, driven by COVID-related government stimulus. As a result of that peak last year, we are forecasting U.S. formations to decline modestly this year. Still, we have seen and expect to continue to see strong growth in our highest margin subscription revenue. The addition of new high ARPU services like LZTax and Earth Class Mail, in addition to improved retention among our age cohorts, is expanding customer lifetime value. These new product offerings will continue to add predictable, high-margin income streams into the business, independent of the health of the macro. And considering both the platform investments we made to date and the strength we've seen in the subscription side, we believe now is the time to innovate on our commercial lineup. We'll be running a series of tests throughout 2022 to identify the ideal mix of do-it-yourself and attorney-assisted formation experiences that cater to every customer demographic. We'll be disciplined in our approach with success measured by the growth in year one bookings. As we turn the page on 2021, I'd like to share one final reflection. When I joined LegalZoom a little over two years ago, it was because of its position as the leading digital brand in a market that remains largely analog. Our thesis has been that only innovation by the leader in the space can create the market. That's our job as LegalZoom. Over the past couple of years, we've been working to enable growth by attracting the right talent, making foundational investments in data and infrastructure, investing in our platform, and creating an ecosystem of services needed at Formation. The last step is to reimagine the core product itself. 2022 will be the year we do that. Now I'll turn it to Noel to go over a more detailed review of our financial results.