LegalZoom.com, Inc.

Good day and thank you for standing by. Welcome to the LegalZoom's second quarter 2023 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Madeline Crane, Investor Relations. Please go ahead.

Thank you, Operator. Hello, and welcome to LegalZoom's second quarter 2023 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 annual report on Form 10-K 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. We use non-GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. These non-GAAP financial measures are not intended to be consideration in isolation or as a substitute for results prepared in accordance with GAAP. 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. I will now turn the call over to Dan.

Good afternoon, everyone, and thanks for joining our call. I'm excited to discuss our strong Q2 financial performance and some significant product and platform updates. I'll begin with a brief summary of our financial results. Revenue came in at $169 million, up 4% year-over-year. Adjusted EBITDA was $30 million for the quarter, which equates to an 18% margin. Legal Zoom formations for the quarter significantly outperformed the market, growing 42% year-over-year, while U.S. Census formations grew 7%. As a result, share for the quarter rose 33% year-over-year, These results demonstrated continued momentum after a strong Q1 performance. Going deeper into the results, Q2 subscription revenue of $102 million grew 12% year-over-year, benefiting from both an increase in ARPU and new subscription growth from the premium lineup roll-up. Transaction AOV declined 26% year-over-year as a result of the premium lineup. Q2 represents the drop of lower year-over-year AOV performance and we expect a reversion of this trend in the back half of the year as we lap the new lineup rollout. Now I'd like to lead with an overview of an important product addition to our portfolio. Last week, we announced the launch of LZBooks, which supports all three of our strategic pillars to scale the business, build the ecosystem, and integrate experts. One of the biggest challenges our customers face when launching their businesses is navigating the complexities of bookkeeping and taxes. After being in the market with LZ Tax for two years, we've recognized there's a gap in the market for solopreneurs. These businesses have tax questions at formation that require an expert. They want a simple accounting solution to replace tedious offline methods like storing bank statements and receipts. And they want an integrated and simplified tax experience. Their main alternative today is to navigate complex and expensive accounting software and couple that with an offline accountant. These solopreneurs are a key customer demographic for LegalZoom. Based on a recent customer study, roughly two-thirds of our formation customers are solopreneurs, which we define as either single-member LLCs or sole proprietors. Over 90% of our formation customers form with us before they consult a business tax professional, and only a little over 5% have established a bookkeeping method prior to forming with us. We've built what we believe to be the most well-designed solution for this large market. With LZBooks, you'll be able to create your first proposal with access to an attorney if needed, send it for digital signature, go from invoice to electronic payment, download and auto-categorize expenses from your bank account, and even more importantly, seamlessly integrate with LZTax. During the launch, we'll also be providing free unlimited access to a CPA through the product to introduce and promote the value of our highly vetted network of accountants. LZBooks reaches across all our strategic pillars. Our first strategic pillar is to scale the business, and LZBooks represents a new customer entry point for LegalZoom. LZBooks can serve an SMB that formed with us already or someone who has not yet formed but is looking for a simpler, lower priced alternative to today's bookkeeping solutions. Our second strategic pillar is to build the ecosystem. LZBooks is a tool our customers will leverage beyond the point of formation, driving engagement while also opening up a new financial ecosystem of subscription services. Our third strategic pillar is to integrate experts, and LZBooks is designed to cohesively integrate with our expert offerings. Accounting and taxes go hand in hand, and LZBooks users who subscribe to LZTax will be able to transfer their data to our CPAs to simplify tax time. We believe this represents a meaningful opportunity to naturally upsell our LZTax service at the moment of need versus selling LZTax to customers that may not be required to file a return at the time of formation. In addition to our LZBooks announcement, we also continue to make significant progress across our entire subscription ecosystem. On prior calls, I've noted the lack of an integrated post-formation experience. In line with our second pillar to build the ecosystem, the creation of a cohesive experience within MyLZ has been a top priority. Along with the launch of LZBooks, we've launched a complete redesign of the MyLZ experience. This is important for a couple reasons. First, many of our solutions are more valuable together than apart, like forms and e-signatures, or proposals and attorney consults, and now books to taxes. And so the experience needs to be fluid across offerings. But equally important, as we're creating a central hub for small business compliance, our goal is to drive engagement that will enable post-formation discovery and cross-sell. Our formations channel is incredibly powerful. And over time, we believe we can expand our relationship post-formation through the MyLC experience. I'm excited by this significant redesign and by the realization of our goal of creating a new software category serving small businesses' legal, compliance, and financial needs in a single destination, which is something that doesn't exist anywhere else today. And while it's a meaningful first step, we'll continue to invest, and our customers can expect ongoing enhancements as we continue to build out the experience. Turning to our core business and our first strategic pillar, scale to business, In Q2, we drove impressive market share gains while also improving operational efficiencies in our core formation business. We're benefiting from our infrastructure investments to streamline fulfillment, which are lowering the cost per formation unit while helping us fulfill orders quicker for our customers. In the near term, these efficiencies will continue to be offset by higher filing fee costs and the scale of LLC tax and virtual mail. Our premium offering continues to resonate in the market. In Q2, CAM was down 18% with traffic improving and almost all marketing efficiency measures showing strong results. Overall user session growth was strong, up 13% for the quarter. A better measure to assess health and intent is SMB product sessions, which was up more than two times our user session growth. This metric strips out the consumer side of the business as well as lower intent educational traffic and focuses solely on people that begin the product purchase flow. As a result of increasing traffic, we believe there are more opportunities to improve conversion as we refine the offering to fit this new expanded audience. Finally, regarding our third strategic pillar, integrate experts, we continue to make steady progress. In our first tax season, our focus was on understanding our customers' needs while beginning to build out an online experience. In our second season, we rolled out enhancements to the LZTax product and platform improved commercialization, and increased service levels. As a result, we remain on track to double the number of tax returns we file in 2023. But as I mentioned in our last earnings call, we remain constructively dissatisfied with the retention rate of this service. In anticipation of our third tax season, we've identified a clear set of opportunities within our control to make sure that we're getting the right experience to the right customers and retaining them for longer. Our actions here will focus on driving higher customer consideration of our tax products. As we narrow in on the right audience, the resulting impact will likely be a period of lower attach rates while still experience higher attrition rates from our existing base. We expect this will drive long-term positive results, but will be a headwind to revenue into 2024 as we work to implement these changes. We remain confident in the long-term opportunities surrounding ELSI tax. especially as you consider the most important feature of taxes is integrated bookkeeping, which we now offer. We're also hard at work to integrate experts with a generative AI-powered product. By the end of the year, we expect to have a reimagined product and platform that will help small businesses review, understand, and collaborate with experts on legal documents. As I've said before, generative AI can't replace attorney advice given challenges with accuracy, as well as regulations around the unauthorized practice of law. We believe that only when coupled with access to an attorney can the full power of GenAI be realized. LegalZoom stands apart from our competitors as a platform with an established network of independent attorneys available to unlock this opportunity. We believe this platform will drive many growth opportunities. Recall that legal documents are a very small portion of our business today. As the brand and market leader in the SMB legal services space, This is an unrealized opportunity that we feel like is ours to win. In addition, it will leverage the power of our ecosystem. Our attorney network and e-signature offering are core components needed to bring legal forms to life through a very contextual cross-sell. We look forward to providing more details on our efforts here in the coming quarters. Last quarter, we unveiled our new mission to unleash entrepreneurship, and it's clear we're making significant progress against this goal. We're setting ourselves apart as the sole online platform providing the solutions small businesses need right at the time of formation and beyond, all under one roof. Product innovation is what drives long-term growth. I've been mentioning product velocity as a focus over the last couple of quarters, and I'm energized by the pipeline. There's still more to come this year, both in terms of our LZBooks roadmap and other new product releases in the queue. In closing, I'm extremely pleased with our second quarter results. During Q2, we demonstrated solid performance with record share gains and continued fiscal discipline. I'm excited about the talent we have in place, the customer growth we're achieving, and most importantly, the pace of our innovation. I'm also excited for what's to come as we're still in the early innings of our product evolution. I'd like to acknowledge and thank all of our LegalZoom employees for their hard work and dedication towards helping unleash entrepreneurship. And with that, I'll turn it over to Noelle. Thanks Dan and good afternoon everyone.