LegalZoom.com, Inc.

Good day and thank you for standing by. Welcome to the LegalZoom first quarter 2022 earnings call. At this time, all participants are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then 1 on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star then 0. I'd now like to hand the conference over to your host today, Danny Vivier, Head of Investor Relations.

Thank you, Operator. Hello, and welcome to LegalZoom's first quarter 2022 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 to make decisions 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. It's been a quick turnaround since our last earnings call, so I'll keep my comments brief today. Q1 was a strong start to the year for LegalZoom, continuing the momentum we experienced in 2021 In the first quarter of 2022, we generated $154 million of revenue ahead of the top end of our guidance range and up 15% year-over-year, despite a challenging prior year comparison. Subscription growth continued to outperform in the period, with revenues coming in at $84 million, up 29% year-over-year. The subscription strength, driven in part by LZ tax revenue, continues to dislocate our performance from the broader market for new business formations. with consensus EIN non-seasonal applications down 8% year-over-year in the period. The census decline in the first quarter was within our expectations. We outperformed the macro in Q1 with LegalZoom business formations down just 2% versus prior year. We reported adjusted EBITDA of $1.3 million in the first quarter, ahead of our guidance of breakeven. As a reminder, there's a seasonal component to the recognition of our transaction revenue that weighs on margins in the first quarter of the year. Noel will further unpack our guidance later in the call, but we continue to feel confident in our ability to deliver our adjusted EBITDA target for the full year of 2022. Given the current state of affairs with geopolitical concerns, inflation, and other macroeconomic factors causing significant uncertainty, it's important to consider the advantages our cost structure has in responding to external factors beyond our control. First, we've reduced margins in the near term to accelerate revenue growth over the long term. We are investing across all areas of the business, but most significantly within sales and marketing, which grew from 27% of revenue in 2019 to 45% of revenue in 2021. Excluding sales and marketing, we actually saw operating leverage over that two-year period, with non-S&M expenses declining from 50% of revenue in 2019 to 47% in 2021. I make this comment because it points to the inherent flexibility in our operating model. Less than a third of our operating spend is fixed. The vast majority is variable and can be flexed up or down dynamically, as market conditions warrant. We are an asset-light business with capital expenditures running at just 2% of revenue in 2021. And despite the rampant CAM spend, we continue to generate positive cash flow and have just under $250 million of cash and no debt on the balance sheet. We feel we are in a very strong financial position to weather a potential economic contraction and while still maintaining a healthy level of investment to drive durable long-term top-line growth. I'll now transition to an update on LZTax, where we successfully navigated our first peak tax season. We saw a notable step up in the number of LLC formations attaching a tax subscription in the first quarter of 2022. With taxes top of mind, it's not surprising customers were more open to the cross-sell. However, we were surprised to see a portion of these new customers had already completed their 2021 returns, and we're instead looking for a tax planning and bookkeeping solution for the 2022 tax year. This learning reinforces the power of our platform. Entrepreneurs are starting new businesses all year round, and since we're often the very first third-party entrepreneurs visit when starting their business, we have the unique opportunity to grow awareness and drive product adoption off-cycle, a significant advantage to our competition, which primarily relies on new customer acquisition during peak tax season. We're also seeing a significant opportunity to improve utilization of our tax platform. To date, our efforts have focused on cross-selling tax at the time of business formation. However, many of these new businesses are pre-revenue and are therefore less likely to require tax filing services. These insights reinforce the importance of engaging our existing base of 1.4 million active legal subscriptions, many of whom are generating income and scaling operations. We've seen the power of our channel to acquire new customers and grow awareness. Our focus now is providing these customers with the right service level at the right time in their journey, which is often months after they've formed. And finally, though it's a bit too early to interpret retention data, we continue to see that customers who engage with our tax platform and experts are really happy with the service. In our Q4 earnings call in March, I introduced our plans to conduct a series of lineup tests within our core formation experience throughout 2022. We spent the better part of two years driving efficiencies in our fulfillment processes, improving our attorney platform, and expanding our subscription ecosystem to make this testing possible. Our thesis here is that by expanding our formations lineup both up and down market, we widen the aperture of customer segments we serve, unlocking new opportunities to grow share and expand customer lifetime value. I'm pleased to report that the first segmented line of tests was launched in late April to a subset of LLC traffic in a few smaller states. The initial test includes a mix of do-it-yourself and attorney-assisted formation experiences with prices ranging from free standalone LLC registration to $1,149 for customers seeking a high-touch experience with an attorney. At the high end, customers will have on-demand access to our independent attorney network for the first three months post-formation as well as an attorney-assisted trademark filing with an attorney staffed in our ABS law firm. Services include everything from reviewing a lease, contract, or new employee agreement up to applying for a trademark registration. This one-of-a-kind solution emulates the experience of working with a traditional law firm, but at a fraction of the price. I'm proud of our team for standing up this new experience in short order. We've taken an agile approach to these tests, with the priority being to learn, quickly iterate, and expand, We're carefully monitoring user behavior in combination with business metrics, such as conversion rates, AOV, and subscription attach rates. I'd also like to talk about our progress on the partner front. Just a couple weeks ago, you likely saw the announcement of a new multi-year partnership with Wix. When integrated, entrepreneurs will soon be able to have a unified experience to legally form their business in the U.S. and build their online presence together in one place. This partnership is truly bilateral. Whether you start with LegalZoom and add a website or start by building a website and then decide to formalize your business or protect your IP, we work side-by-side to provide an integrated experience. The relationship is also built on recurring revenue model where both parties share in the economics through the life of the customer. The Wix announcement adds yet another major brand to our growing ecosystem of best-in-class SMB enablement solutions. Other partners include Intuit, Amazon, Square, and Toast. The success we've seen in attracting best-in-class SMB partners enhances our strategic mode. Few online providers come close to rivaling the scale of our third-party ecosystem. And with each successive new signed partner, we expand our competitive advantage by forging new relationships that offer integrations with more business applications and exposure to more potential customers. We anticipate an initial launch of the integrated experience in the second half of this year. but do not expect material revenue from the partnership in 2022. It'll take time to commercialize these partnerships to their full potential, but my conviction in the long-term opportunity could not be stronger. In closing, I'm very encouraged by our results in the first quarter and the energy I've seen across our teams to start the year. Despite a dynamic and in some ways challenged economic backdrop, I remain optimistic about the future of small businesses, our industry, and LegalZoom's position within it. We have a clear vision and plan and continue to execute against it. A solid first quarter positions us well for a strong 2022, and the foundation is continuing to be laid to enable us to continue penetrating the $50 billion legal service industry in the years beyond. And with that, I'll hand the call over to Noel.