LegalZoom.com, Inc.

Good day and thank you for standing by. Welcome to the LegalZoom's third 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 that session, you will need to press star 1 1 on your phone. 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, and I would now like to hand the conference over to your speaker today, Ms. Madeline Crane. Please go ahead.

Thank you, operator. Hello, and welcome to LegalZoom's third quarter 2023 earnings conference call. Joining me today is Dan Wernicost, our chief executive officer, and Noel 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. 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 considered 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 talk about our third quarter performance. Not only was it strong financially, but more importantly, we continue to lay the foundation for long-term growth through additional product introductions. As we continue to grow our formations business, we're building out a unique ecosystem of compliance and financial products while beginning to integrate higher value experts like CPAs and attorneys directly into our applications. During and subsequent to the quarter, we've expanded our ecosystem with the launch of business licenses, as well as the new legal forms experience, which we believe will be a gateway to attorney-assisted solutions. Let me begin with a brief summary of our financial results. Revenue came in at $167 million, up 8% year-over-year. Adjusted EBITDA was $34 million for the quarter, double the prior year period and reaching a 20% margin. In the third quarter, U.S. Census formations grew 12% year-over-year. Legal Zoom formations for the quarter increased 17% year-over-year. As a result, our share for the quarter grew 5%. As discussed on our last call, we expected the sequential deceleration in market share growth this quarter as we exited legacy partnerships and began to lap the start of premium testing. With the transition from the partner channel, I'd like to reinforce the strength of our direct channel where we've introduced the premium lineup. LegalZoom branded LLC formations grew over 30% year over year. And as we said in prior calls, the economic impact of the partnership exits was not significant, which was reflected in our financial performance. Our results for the quarter demonstrate strength in our formations business within a strong macro paired with ongoing financial disciplines. These results reflect our focus on becoming a product-led growth company. We're increasingly becoming the destination for small business starts. We continue to create a unique ecosystem of financial and compliance services, and we still have a big opportunity ahead of us to integrate legal and financial experts into our platform. As it relates to our progress for the quarter, I'll start with an update on our first strategic pillar, scale the business. Along with the growth in our LegalZoom Formations channel, We continue to evolve the lineup to make forming a business more affordable for small businesses by driving down costs to process and fulfill orders through automation. We've made significant progress in automation and still have opportunities ahead of us. Another key factor to enable greater scale and a better experience has been our investment in building a small business profile, a capability we believe will improve customer conversion and cross-up. Compliance products can require ID verification, as well as an understanding of key attributes of the business and its ownership structure, and our products inherently capture customer behaviors through usage. A business profile and the ability to leverage it to dynamically deliver the right offerings to the right customers through the right channel at the right time hasn't been a capability up to now, which means we often attempted to sell our products to business owners when it wasn't relevant or the business wasn't ready. We are making changes to our sales and marketing strategy to better align with our evolving customer base and enhanced targeting capabilities. Today, over half of our customers choose a basic SKU with a free formation. These customers are generally smaller and earlier in their lifecycle. Through testing, we've determined that these customers are better sold through the product and lower cost channels like email, oftentimes after formation. Tax, as an example, used to be sold to all customers across all channels at the time of formations, despite many customers not requiring return in the year of formation. Going forward, we will more actively leverage LZBooks and MyLZ as vehicles for upselling from books to tax. As a result, we made the difficult decision to reduce the size of our sales organization. This change was executed with careful consideration to the customer experience, And while we may see some short-term pressure on our results during the transition, our new sales strategy will have fewer outreaches to a narrower group of high-value customers, which we believe will benefit both NPS and revenue in the long term. One final note as it relates to scaling our business. We're not dogmatically focused on share alone, but think of it as one of many inputs to accelerating growth, no different than broadening our relationship with new customers. There will be times when we make decisions that are counter to our share objectives because we've identified a new opportunity to drive incremental revenue or profit per customer. I anticipate a few of those opportunities to present themselves in Q4 as we continue to test price optimization for the subscription portion of our existing lineup, as well as introduce multiple new products in advance of our peak Q1 season. Moving to our second strategic pillar, building the ecosystem, We continue to make very strong progress. Last quarter, we launched LZBooks. This was in addition to the previous launches of LZTax, Virtual Mail, and eSignature. And now, this quarter, we are announcing the launch of business licenses. In just over two years, we've launched five new post-formation ecosystem offerings. Business licenses are a natural extension to our compliance offerings. The typical small business requires several licenses or permits. oftentimes at the federal, state, county, and city level. In industries such as food service, the number of licenses and permits required can reach over 20. To build this offering, we've created a proprietary database of licenses across all jurisdictions, triggered not only by industry and location, but also adaptable to the nuances of specific businesses in an industry that may trigger additional regulations. Similar to how we help customers interact with the Secretary of State to keep their entity compliant, We're excited to help small businesses navigate the complex and ever-changing regulatory environment with other government agencies. This launch is another example of how we can build and leverage a unique business profile to bring value to small businesses. We believe owning and integrating this experience will afford multiple future growth opportunities. We also continue to build out LZBooks. Since launching in August, we've added mileage tracking, receipt capture, bulk expense classification, and reporting, all important features to drive trials into paid subscriptions. We're already seeing strong engagement metrics as measured by bank connections, invoices sent and paid, and overall repeat usage. As we enter tax season, you should begin to see the power of integration into our tax ecosystem and experimentation around commercialization. While to date we've been conservative in the rollout, focusing mainly on the experience, We like what we are seeing, and we will begin to scale our marketing efforts in advance of the upcoming tax season. Our new MyLZ platform, which launched last quarter, centralizes all of our offerings in one simple experience, creating a vibrant post-formation ecosystem and the ability for ongoing engagement and tighter connections between our services. We are now beginning to direct all of our activities, including compliance alerts, order updates, chat support, and most importantly, product engagement through this unified experience. This will be a gradual process over the coming year and represents a large, untapped opportunity to build ongoing engagement. Today, an immaterial amount of revenue is derived from post-formation cross or upsell. But we know that many of our customers form before beginning to operate and their needs continue to evolve with time. Growing with our customers is critical to our long-term growth strategy. We're excited to see how active usage of LZ books will lead to a seasonal cross-selling to LZ tax, or how the usage of legal forms library will drive an upsell to our e-signature offering and attorney advice, or how forming your entity before operating can lead to pulling licenses and permits months later and just before a business opens their doors to the public. There are abundant opportunities to expand revenue per customer post-formation. Today, it's almost entirely unrealized. Turning to our third strategic pillar, integrate experts, we continue to adjust our go-to-market for LZTax now that LZBooks is in market and its targeting capabilities come online. In parallel, we are investing in the filing experience as we get ready to enter the 2023 tax season in early January. We feel good about this coming tax season and look forward to sharing our thoughts on the newly retooled tax business on our next earnings call. We do have a couple updates to share today. The first being around the beta launch of DocAssist, a free document summarization product that uses generative AI and leverages our years of experience in the legal form space. Our belief is that the biggest opportunity in the legal space is non-consumption. 85% of our customers have never spoken to an attorney despite having set up an entity to benefit from the liability protection it affords. We believe the overwhelming majority of small businesses simply take and live with legal risk, all to avoid the cost and effort required to engage an attorney. DocAssist is designed to foster an accessible and approachable gateway to a more efficient interaction with a vetted attorney. We are in the unique position of having a strong small business brand, a software capability, and a scaled independent network of attorneys who have expertise in the specific matters where our customers have concerns. and we are now beginning to stitch them together. To be clear, we're at low volume today on DocAssist, but the most important measure in our beta is whether a user that's uploaded a legal document clicks through to get legal assistance. To date, we've been pleasantly surprised that over 40% of users that uploaded a document click through to our attorney offering. That intent is the signal we've been looking for as we consider how we both integrate DocAssist into our core offering and how we commercialize our internee interaction, which is different from our existing more general legal advice offering. GenAI is an invaluable technology unlocked to demystify legal documents and a new opportunity for us to more aggressively address non-consumption. DocAssist is now there to provide insights when a document is shared with us, but we've also been working to reimagine our legal forms offering. Earlier this week, we launched a revamped legal forms library. allowing users to access over 160 attorney-certified forms completely free. Similar to how we've been adding new post-formation software capabilities and then bringing them together through MyLZ, you will now begin to see us integrating DocAssist and this new legal forms library into our product with the ultimate goal of revolutionizing how businesses collaborate with attorneys through legal documents. Taking a platform approach, We believe that over time we can help small businesses and consumers with a wide array of legal matters through a highly efficient and cost-effective interaction with attorneys. I'm excited about the progress we continue to make across each of our strategic pillars and the growth opportunities ahead of us. And I'm equally proud of the financial discipline we've demonstrated while investing aggressively in the product. That said, we're still early in the journey of demonstrating post-formation monetization and the integration of high-value experts. All the ingredients are now coming into place to realize these opportunities, and it will be a big focus as we turn our attention towards 2024. All the progress we continue to make would not be possible without our LegalZoom employees. I'd like to thank them for their hard work, innovation, and overall dedication towards our mission to unleash entrepreneurship. And with that, I'll turn it over to Noel to discuss our third quarter results and outlook.