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spk00: approach to the macro. So as you think about Q2 from a business formation standpoint, what we saw in Q1 should be a fair expectation for our performance in Q2 from a year-over-year growth standpoint and still staying conservative on the macro in the back half of the year.
spk07: Great. Thank you so much. Thank you. One moment for our next question, please.
spk08: And the next question comes from the line of Matthew Fowle with William Blair. Your line is open.
spk05: Yeah, great. Thanks for taking my question. Wanted to, you know, ask on LZ tax. So just to sort of clarify, how did that perform its second year relative to your expectations? And, you know, when you're thinking about areas of improvement, maybe what would some of those look like? Where do you think there's additional opportunities with that product?
spk01: Yeah, thanks for the question, Matt. Yeah, just to refresh, I mean, our tax business is pretty unique because we serve a segment of customers that a lot of people don't yet serve, which is someone who's even pre-formation and free operations. So if people have questions about what type of entity they should have, And then even if they've created an entity, sometimes it means that they're not yet in operation, and we give them a lot of tax advice. So it's a pretty unique business through a unique channel because, again, we can identify them, whereas other people would have to do performance marketing or brand marketing to acquire these customers. Progress here has been pretty amazing. I mean, one thing I reflect on is it's a practice that's less than two years old, and so we just finished our – Second tax season and the scaling that we're doing plus service improvements is phenomenal. But that said, I wouldn't say I'm disappointed, but I'm very dissatisfied in that we still see retention rates that we believe we should be doing better. Part of that is issues that we've identified ourselves just in the process of filing and some of the capabilities that we'd want to have on an ongoing basis as a tax service beyond filing itself. And, you know, we basically keep learning these things as we get out to market. And if you think, you know, what our philosophy is here is we're trying to balance speed of growth and scale and then also kind of listening to our customers and evolving the service itself. So, you know, it continues to be a strong performing service. And yet I feel like there's a lot of upside here as we continue to refine the end-to-end experience for our customers.
spk05: Got it. And then in terms of the share gains you're seeing, I mean, my guess would be a lot of that is coming from more of the price sensitive consumer. What are you doing then to address the large portion of the market that's still paying a much higher fee to go to a bricks and mortar attorney to do a business formation?
spk01: Yeah, that's one of the really fun parts of the lineup that we deployed is it both solves for the price sensitive at the low end with a free offering, but our premium SKU actually comes bundled with access to an attorney. And so the benefit there is we're introducing a lot of people to the idea of you can get access to an attorney through technology to handle some of the early questions that you have as you're forming. And then you can decide from there whether or not you're going to renew the service. And so that really is an entree into starting to disrupt the higher end of the market. Super early endings here. And actually, the volume that we're seeing coming in from this lineup is, again, what we're going to learn from and keep evolving the service. But the early read is quite positive. And that was the lineup that won overall in terms of both thinking about conversion as well as lifetime value.
spk00: The other thing I'd add just in the value that we bring is the fact that it's a full suite. of solutions and services that we provide either directly or through partners, which is a better customer experience. We're also improving our overall customer experience. We also mentioned this in our remarks around the automation wins that we've had in terms of the delivery of our services. And so we've been able to deliver a faster and better experience to our customers, which makes us a better choice overall.
spk05: Great. Appreciate you taking my questions.
spk00: Thank you.
spk08: Thank you. One moment for our next question, please. And our next question comes from the line of Mario Liu with Barclays. Your line is now open.
spk02: Hey, this is Jack Butler. I'm for Mario. Thanks for taking my question. My first question was surrounding the partnership side of things. When should we expect to see a meaningful uplift from these new partnerships, such as Chase? Is there any timeline you might be able to put behind that?
spk01: So there's two forms of partnerships on our side, just to back it up and provide some context. On one hand, we have partners where we're marketing their service through our formation workflow. And then on the other hand, we have the partnership channel where some of the partners that we have are actually marketing our formation service as well. And so I think your question was more on the services that we're marketing through our platform. And I'd say that that's actually a lot of moving parts. We've talked about we exited another partnership on the uncontested divorce side last quarter. So that's a bit of a headwind. While at the same time, we're really ramping up our partnership with Wix. We added Chase as a banking partner. And I'd say Next Insurance is another meaningful partner for us. Those are all growing very healthy. And I'd expect that that starts to, you know, that continues to accelerate. But again, it's just lapping some other things that we're exiting. And, you know, if you think about it, if you can go back further a couple years, you know, that has been a consistent theme of ours as we're trying to build out an ecosystem that has an integrated experience for customers. At times, that means if something we feel like is directly in the compliance space, you know, we should have more ownership over that experience, and we brought some of those things in-house because, as you guys remember, tax used to be a partnership, and now it's, you know, core to what we're offering our customers as well. On the partnership channel, it's kind of similar. We have some partners where we feel like it's a very symbiotic relationship where we're marketing their service and then in turn they're marketing our service. And then in some cases, we have a legacy of almost acting as a vendor, as a very low-cost vendor to alternative providers. And so on the case of the bilateral side, we love it. We want to have partnerships where we feel like it's symbiotic and we're both helping each other. On the vendor side, we feel like that's probably not core to what we want to be doing longer term, and we think those economics don't fit aligned with what we're trying to do from a from a lifetime value perspective. So there's going to be places where there's puts and takes where we're exiting partnerships from a channel perspective.
spk02: Great. That's helpful. And then in terms of customer acquisition marketing, I know you indicated earlier on the call that you would expect to see a decline in that in 2Q on a year-over-year basis. Is that largely as a result of just shifting towards product and maybe weaning off after
spk01: you know season maybe with heightened marketing on LZ tax or is there some other factor at play maybe you could call out yeah there's there's a couple different factors here I mean we we've really scaled down our brand spend and that's a reflection of thinking relatively to our competition and awareness is just extremely high and we have a we have a strong lead and in this environment we didn't feel like that's the place to commit and have long-term investment so we backed off on the brand side of it but it's also just gotten more efficient when you start to think about the performance side given the free messaging that we're using some of the channel shifts that we're doing you know within performance marketing and then even beyond that you know sales and marketing So thinking about the OpEx side, we adjusted as well. And sales, for instance, has come down as an expense. So it's, you know, when you think about the headcount side, you know, that's down 8% for the quarter. So, you know, CAM down 24%. The sales and marketing, you know, headcount expense down 8% with the program dollar in there as well. It's sort of across the board a reduction as we become more and more efficient to align with our new strategy, which is, you know, a lower AOV product.
spk02: Really helpful. Thanks for taking my question. Thank you.
spk08: Thank you. One moment for our next question, please. Our next question comes from the line of Ron Josie with Citi. The line is now open.
spk04: Great. Thanks for taking the question. Dan, I wanted to follow up on a question or a comment you had earlier. The most disruptive tech, I think you said, gets announced horizontally, then tuned vertically. Talk to us about how that might impact LegalZoom or how you're thinking about LegalZoom from a verticalized LLM support perspective. And then I know we've talked about freemium on the call here, and forgive me if this has already been answered or asked, but I know we got insights on how the quarter progressed. But talk to us just about lessons learned here in terms of demand. And more importantly, I really want to focus on the upsell process and driving awareness of everything else that LegalZoom has to offer. Thanks, guys.
spk01: Yeah, thank you for the question, Ron. Yeah, so LLMs and verticalization, I mean, it's almost like another form of saying fine-tuning where if you think about LLMs and you think about ChatGPT, it does a little of everything and it doesn't do anything perfect. And if you think about that, some of it's going to be related to the data sources where those models might not have access to things that are analogous to the segments of customers that we're serving. So I'll give you an example. you may be able to go and scrape terms of service from every site that exists on the web and immediately be knowledgeable in drafting terms of services and really calling out anomalies in services. But do you have access to small business vendor contracts? Or do you have access to some geographically based terms tied to a lease. And that's where volume players will have a little bit of an advantage. And that's when you start to think beyond API driven platforms on the LLM side into more open source and where you have the ability to fine tune with your own data set. So it's such early innings. We get really excited here though because we also have lots of data and we have a way to accumulate data that other people don't. That's also why having your own expert platform becomes really important because that is the step that you train the models on. And so you'll see more and more investment from there over the coming quarters. On the second question, lessons learned on the lineup and how we drive demand. I think here we did so much testing going into deployment of the lineup. that we really understood all the commercialization challenges, but to your point, the thing that we hadn't yet fully understood was what was going to be an impact on the marketing side and how we drive demand. There are some sub-channels. There's new channels that we've identified that we haven't really participated in, and I don't want to get into the details of that, but that's one big learning that I think we've pulled out. The other thing here is we're just really getting a sense of how you apply free messaging and where you specifically apply it. In some ways, it has the effect of bringing down AOV the more you amplify the free message, which we knew it was going to do. So you have to find that right balance of how do you make sure it's there for the customers who are price sensitive, but at the same time that you're not over-indexing on all the free messaging as well. And I'd say this is a place where, you know, we are just getting started. I think there's a lot of opportunity for improvement as we go throughout the year because, you know, we really didn't have a chance to test it. And so that's all happening in market right now.
spk07: Thank you. One moment for our next question.
spk08: And our next question will come from the line of Brent Thiel with Jefferies. Your line is now open.
spk07: Hi, this is Champion for Brent Thiel.
spk09: Thanks for taking the question. The two questions, one on the freemium, wondering if you could talk about the pace once they kind of come in through that door. you know, how quickly do they end up buying, you know, a paid product and typically which products get attached. And then second, on your decision to keep your recession or macro outlook the same for second half, just wondering, you know, what do you see? I mean, it looks like last quarter you mentioned January, February pretty good, and obviously Q1 turned out very well, but just wanted to see your thinking behind that thought process or the guidance around the macro assumption. Thank you.
spk01: Yeah, thanks for the question. So on attach rates on this new cohort of customers, it's actually been relatively predictable. Again, through testing, we saw what customers were attaching, and there are a set of standard solutions that we offer. One we call a pack of essential docs, which is things like an operating agreement, EINs, helping them with business licenses. And then separately, the compliance subscriptions like registered agent and we have a compliance subscription that does all your annual filings as well. Those are pretty standard and they attach very well because when you get down to it, they're sort of required still. And so they're not only kind of value add from a perspective of thinking through what is relevant as you form, they're actually required. So they still attach pretty strong. What I'd say is we haven't really commercialized these products in any way to adjust to the new segments that are coming in. So when you think about a very price-sensitive customer, they may not be looking for as broad a feature set or as rich a product, and they might be looking for something that's a little bit more simple, which gives us the opportunity to consider commercializing it slightly different to drive those attach rates up. But again, the really interesting thing here, and I'm just going to keep saying it, we were extremely happy with the launch of Freemium. There were zero surprises. And what I'd say coming out of it is we have a somewhat under-optimized lineup now where we haven't tested a bunch of the add-on subscriptions or add-on products and transactional products And so there's opportunities that we're going to start identifying. We have a whole queue of tests that are kind of sitting there waiting to be run that have been sitting behind this freemium lineup for quite some time.
spk00: And on your question with regards to the macro, we feel like we're being appropriately conservative there. We're obviously still in the midst of an uncertain macro environment, kind of high inflation, increasing interest rates. environment, so there's a general expectation that the economy will slow. We also, from a historical CAGR standpoint, look at the historical growth rates and macro formations and do some triangulation there on what the new slope could look like over an extended period, given that we think the slope has shifted more favorably, given all the tailwinds as it relates to forming and getting a business operational. So we factor in a lot of different things, but overall believe that it's appropriate to stay conservative as we look out farther and we'll start to, we'll normalize our forecast to whatever we're expecting for the upcoming quarter based on what we're seeing. But for now, as you look out extended quarters, we're going to continue to stay conservative.
spk01: In April, as an example, because the census publishes weekly data, you can see it stayed pretty healthy as well. But yeah, to Noel's point, we really want to control the things that we can, and we feel like the discipline of assuming a negative macro is healthy to how we manage to headcount. It's healthy to how we think about how we're spending, and we want to be as conservative as possible in this environment.
spk08: Thank you. Thank you. One moment for our next question. And our next question comes from the line of Jackson Adder with SCV Moffett Nathanson. Your line is now open.
spk03: Oh, great. Thanks for taking our questions, guys. Actually, just one from our side. Is there like a different contemplation for the lifetime value of a customer, you know, that kind of matches the willingness to accept a lower upfront price? Maybe that might impact either, you know, the long-term model or the long-term margin profile. Thanks.
spk01: Yeah, I want to make sure I understand your question. Are you asking whether or not we should expect a different LTV for the customers coming in through this lineup?
spk03: yeah because i'm just thinking like you know if we think back to the ipo a couple years ago your your long-term model probably just contemplated like a certainly a different upfront price for most of the transaction you know and then also a different price for the subscription units that would be attached so i'm just wondering like this new you know the new product offering how that interacts with your long-term margin profile that I think, mostly unchanged since you guys came out.
spk01: Yeah, well, it's somewhat unknowable as you start to get to the out years what the LTB impact will be of this customer base, but I think the way we're looking at this is on a relative basis to what the CAM spend is, and when we look at the AOV reduction, for instance, or if we look at the total cart value reduction that is happening due to this new lineup, we actually see the CAM cost per customer going down at a faster rate than the actual cart value. So that should lead to a bit of an expansion, but it also just depends a little bit on what we're talking about in year two behavior, year three behavior, Of course, we're shifting more to subscriptions, so to stand to reason that the margin profile improves, but it really depends on some retention rates, and that data is just unknowable right now. Right.
spk07: Okay. All right. Thank you.
spk08: Thank you. One moment for our next question, please. And our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.
spk06: Great, thank you so much. I wanted to touch on the share gains in business formations. The 27% is very impressive in Q1. And while you expect that to moderate in the year, how should we think about the trend versus your original target to achieve about a 12% improvement this year? And has that target changed at all just given the strong Q1 performance?
spk01: Actually, when we talk about it moderating, that's moderation of the growth. rate, which is really just starting to lap the testing that would happen in the back half of the year. So that, you know, what we're really trying to drive is increased share throughout the year. And I talked about this a little bit earlier. There might be things that we decide that we think are not share that we don't want because it's not the right value associated with that share. And there's places where we know today there's incremental investments that we can make that can drive more shares. So, you know, an example there is we still only optimize the LLC portion of formations, but that's, you know, three-quarters of the formations transactions roughly, but there's still a quarter of them that, you know, are still traditionally priced. So, you know, this is... It was a very strong result, and we're super happy with it. We feel like it sets us up to now optimize more and start to build off of it as we go throughout the year.
spk00: And one thing I'll just add there, Elizabeth, we had stated that our goal was to grow market share by 15% this year, and we're still highly confident that we are going to drive at least 15% growth.
spk06: Got it, thank you. And then I believe you noted about half the work so far has been done on the automation of filings. So when could we see that other half completed? Is this a driver that is more likely to come kind of beyond 2023 or something that's more of a near-term dynamic? Thank you.
spk01: Yeah, so the way automation works is we really prioritize based off of the number of transactions that are occurring and as you can imagine because we do a lot of different types of transaction types, you get to a place of diminishing return eventually and it becomes a little bit more of like a long tail of smaller improvements. What I would say is we expect some significant improvements by the end of this year that should drive incremental efficiencies. And then at that point, we start to move to transaction types that have a little less impact thereafter. But there are parts of our product, for instance, that I mentioned before that we really haven't touched in many years. Even when you think of our consumer business, that still has a lot of manual processes underneath it. And most of what we've talked about on the automation side has really been on the small business side. So still opportunities, a lot of... larger improvements should happen over the next six months, and then it starts to moderate.
spk06: Great.
spk08: Thank you. Thank you. I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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