LegalZoom.com, Inc.

Hello, and thank you for standing by. Welcome to LegalZoom's fourth quarter four-year 2022 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 the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising hand is raised. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker for today, Sarah Bland. You may begin.

Thank you, operator. Hello, and welcome to LegalZoom's fourth quarter and full year 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. 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 factor 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. Our CEO and CFO use these measures in making 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.legaldoom.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, Sarah, and good afternoon, everyone. Let me jump right in by sharing our Q4 performance. Revenue came in at $147 million, up 3% year-over-year. Transaction revenue was down 10%, and subscription revenue was up 13%. Legal Zoom business formations grew 12% year-over-year in Q4, while U.S. Census formations were slightly down in the period. This resulted in 12% growth in share, the largest increase over the last two years. Adjusted EBITDA was $26 million for the quarter at an 18% margin. These results are reflective of our freemium test ramping and are an early indication of the opportunity we have to drive meaningful share gains. As we make the product more accessible, we'll continue to see improvements in conversion allowing us to reduce our marketing spend. In Q4, CAM spend was lowered by a third, contributing to a margin expansion for the period. We remain confident in the target provided on our Q2 2022 call of growing share by 15%, while also expanding our adjusted EBITDA margin to 15% in 2023. As we've mentioned in previous earnings calls, our revenue growth is decelerating because one, our business is roughly 40% transactional, and has a correlation to the health of the formations macro, which has been declining. And two, we're experiencing consecutive years of a reduced formations macro, which negatively impacts compliance subscriptions revenue that's attached at the time of formation. As a result of those two factors, we expect revenue growth in 2023 to be 2%. As we make this business model transition, we expect the shift to a freemium lineup to be revenue neutral in this calendar year, and accretive in subsequent years given the shift to subscriptions. This is an unexpected positive result of our testing to date. As we enter 2023, we're erring on the side of profitability as macro conditions remain unclear. As the year progresses, we'll reassess marketing spend levels, but in all scenarios, we anticipate an improvement in marketing spend ROI. As a result, we expect adjusted EBITDA in 2023 to be $100 million or a 16% margin. We want to provide additional clarity on the macro assumptions embedded in the guidance that I just shared. We expect U.S. formations, as measured by census data, to decline mid single digits for the year. We're also working off the assumption that the decline will accelerate in the back half of the year with an expected recession. At this point, we are not yet seeing that in our business, nor is it observable in the census data. Philosophically, having experienced multiple down cycles, I very much believe you should plan for the worst case, managing capital conservatively. But also, as the category leader, we need to be aggressive and consider it a time to accelerate customer growth through more accessible pricing and products, meeting customers where they are. With that philosophy embedded into our plan, and with an accelerated decline in the macro due to an expected recession in Q3 and Q4, we still would expect revenue to begin to show improvements in the back half of 2023. driven primarily by a buildup of our subscription revenue with the new lineup. When I joined LegalZoom, I laid out three strategic goals. One, to scale the core formations business. Two, to create an ecosystem of subscription services. And three, to introduce integrated experts. Since 2019, we've increased the number of formations from 295,000 to 474,000, or 61% growth. During the same period, the formation's macro has grown 44%. Subscription revenue has grown from $206 million to $358 million, or over 73% during the same period, which translates to a 20% CAGR. And since then, we've introduced new, higher-value products that integrate experts, such as LZ Tax and attorney-assisted trademarks, both of which are meaningfully contributed to growth. While in the near term, we're seeing revenue growth slow down alongside the macro, it's worth pausing to consider a longer, more normalized view, absent the peak or valley caused by COVID and the post-COVID slowdown. We're now moving from a period of marketing investment to one of product. Looking ahead, we are beginning to benefit from the significant infrastructure investments required to enable scale. Our focus is on building the product experiences that we believe can help businesses better succeed at the time of formation and beyond, especially during this economically challenging time. Given actions already taken in 2022, we expect overall non-CAM operating expenses to remain relatively flat year over year, while materially increasing our investment in technology and development. Within technology, our investment in infrastructure is declining, enabling our engineering organization to more than double the size of the team working on a product and product platform. You'll begin to see the fruits of that increased investment through more product announcements this year. Our product pipeline is robust. As we enter the year, we continue to make end-to-end progress around our growth priorities of scaling the formations business. We expect to be rolled out to 100% of traffic with a new lineup by the end of Q1. We'll continue to test different components of the lineup for some time to come, but a free formation will be a consistent foundational element. We also continue to make progress in automating our fulfillment process, A precursor to deploying the premium lineup was driving more efficiencies in the cost to fulfill and ensuring we are meeting our customers' SLAs with much higher volume. With these investments, we've reduced the time to fulfill and the cost of revenue excluding filing fees on a per unit basis for our formation transactions is also down. We continue to invest here and believe there are more opportunities to drive higher efficiencies along with a better customer experience for multiple years. Our second strategic goal, creating a robust ecosystem of subscription services, is what allows us to reduce formation pricing. But more importantly, what we are building here simply doesn't exist anywhere else. Running a new business is challenging enough. In 2022, over 70% of the LLCs we formed were a business of one person. And the majority of small businesses formed in recent years operate out of their home or somewhere other than a company office. The landscape of legal, regulatory, and compliance changes occurring at the federal, state, and county level is overwhelming. Our product development is focused on bringing order to it, especially for those businesses of one, without a staff or the time to navigate this complexity. By mid-year, both e-signature and virtual mail will be completely integrated into the experience. Virtual mail is already part of our formations process, and the business performance continues to exceed our expectations. Additionally, in the quarter, we launched an embedded experience with Next Insurance, and we also launched a banking partnership with Chase. Both are critical services at Formation, and both are best-in-class providers. Moving to progress in our third strategic goal, integrating experts, we've been very busy leading up to tax season. Recall that last season we launched quickly, considering it an opportunity to learn fast. Since we were focusing narrowly on a group of businesses right at Formation, we sought to understand their unique tax needs. Our product at the time was not well integrated, and as a result, we erred on higher staffing to ensure a good experience at the cost of efficiencies. During the course of last season, we discovered some challenges in how we had commercialized the product, and as a result, we experienced higher attrition than expected. But we did prove two things that have become the foundation of this season. We have a powerful channel. And given our focus on the needs of the new-to-the-world businesses, we have a novel accountant experience with a Net Promoter score above 80. We're excited about this tax season. We have a new complexity-based lineup. We brought all of the customer onboarding and tax intake online, integrated into MyLZ, and we tuned our scheduling experience, also adding asynchronous access to our experts. Our advisory sessions are trending materially higher than they were last year. NPS has held. and we are demonstrating improved efficiency per customer in return. We are now selling LZ Tax through MyLZ, expanding access to our whole base of subscribers. We are prepared for tax season this year and are already in the heart of it. Stepping back, while we acknowledge the external environment is putting near-term pressure on revenue, our new freemium lineup is providing an opportunity to go after customer growth, and we're in a unique position to do that while expanding our profitability. We remain cautious on the overall formations market, planning for the worst case. But we can't help but be optimistic that small businesses are resilient, and some emerging trends, such as side businesses for those working from home, will persist. Our goal is to fuel that trend by building a world-class product that unlocks this entrepreneurial spirit, removing all the roadblocks so that our customers can build successful, thriving businesses. With that, I'll turn it over to Noel.