LegalZoom.com, Inc.

Good day and thank you for standing by. Welcome to LegalZoom's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You'll 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 turn the conference over to your first speaker today, Madeline Crane, Head of Investor Relations. Please go ahead.

Thank you, Operator. Welcome to LegalZoom's third quarter 2024 earnings conference call. Joining me today is Jeff Stiebel, our Chairman and Chief Executive Officer and Noel Watson, our Chief Operating Officer and 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 10Q 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 Jeff.

Good afternoon, everyone, and thank you for joining the call. Today, I'll be providing an overview of our third quarter results before diving into detail on the progress we've made in our three key focus areas. During the quarter, we focused on reimagining transactional products towards subscriptions and enhancing the value of our subscription products. We also began updating our customer education and pricing to better reflect the value we provide. Our efforts were guided by customer learnings and feedback, as we focused on delivering best-in-class expertise and improving the customer experience. If there is a single message we hope to get across during this call is that we are focused on driving durable results, improving the predictability of our business by re-accelerating subscription revenue growth and leading the business toward increasing profitability. Let's jump in. We achieved third quarter revenue at the high end of our guidance of $169 million. Our subscription revenue grew 5% year-over-year from strength in our compliance-related subscriptions. Our transaction revenue declined 7% year-over-year, largely due to softer business formations. Census CIN applications declined 9% year-over-year in Q3. And we saw a decline in our market share of business formations, which was expected as we conducted important testing with a goal of narrowing our focus to high-value customers. Market share versus quality share will be a key topic I will be discussing today. Overall, we're pleased with our early progress against shifting our business towards recurring revenue to drive long-term durability. We also achieved strong bottom-line performance this quarter. Third quarter adjusted EBITDA came in well above forecast at $47 million, which reflected a record 28% margin for us as a public company. While the outperformance included the benefit of certain one-time items, which Noelle will discuss, it also reflects success in key tests that we ran in support of our goals to acquire customers more efficiently and shift our business towards high-margin subscription offerings. This reinforces our conviction that we can drive durable margin expansion in 2025. This quarter, we spent considerable time listening to our customers and to our employees who are closest to our customers, particularly in sales, fulfillment, and service. Two things became abundantly clear. First, our small business customers are meeting us early in the tenure of their company building. They come to LegalZoom because they don't have time to spend hours researching how to form and maintain a compliant business. Similarly, our estate planning customers often come to us before speaking with other experts and are eager to plan ahead for their future. They come to LegalZoom because without expensive attorney help, they don't know the steps they need to take to protect their loved ones. Our customers depend on us to guide them through the process. As I noted on our last call, our customer experience has been lacking education on the problems we solve and the long-term value we provide. We will weave this education into our technology and our service. Prioritizing education will cultivate trust, engagement and reinforce why customers need LegalZoom to be successful. Second, we created the online legal services sector back in 2001 and we continue to be viewed as a leader in this industry. These points roll up to a clear message that our brand promises. LegalZoom is a trusted partner of needed legal and compliance services. It represents our core and in order to succeed, we need to embrace this fact. Our focus is to build the best core products we can, partner with others who offer best-of-breed ancillary products, and provide service that not only empowers but wows our customers. That will require some changes, and it will take some time, but we are confident that the outcome will drive long-term sustainable growth. Let's now turn to an update on the progress we made during the quarter. In Q3, We made important commercialization changes related to customer education and pricing for the value we provide. These will help drive the key goals I laid out in August. First, demonstrate the value of our subscription offerings, which will build trust, add value to customers, and support retention. And second, improve the quality of our subscriber base towards high-value customers as we focus on growing lifetime value. We know that higher-value products attract customers who build stronger businesses. This also drives a stronger survival rate for businesses and reduced churn for legal teams. We see this with our customers. Those who purchase, for example, between $500 to $750 worth of our services during their initial order have over a 10% higher retention rate than our customers who form, by way of example, for between $100 to $250. It is clear to us that higher intent customers are higher value customers and build more durable businesses. In September, we started the process of revamping our formation lineup to attract higher intent customers through education of the long-term SMB journey and the value of our subscription products. The results, while early, were shipped away from freemium purchases to more high intent products. We did so by first updating our $0 premium or basic formation SKU messaging to make it clear that customers could be left without important tools they need to effectively run their business and remain compliant. We also expanded the offerings in our pro and premium SKUs and enhanced our messaging on the value these services provide. These SKUs now include a mix of compliance solutions, business management subscriptions, one-on-one legal advice, and trials for some of our subscription offerings. We are still testing the right mix, but so far, we've seen a mix shift from our $0 basic formation SKU to our $249 pro and $299 premium formation SKUs, which has yielded positive results. Next, we reverted to historical pricing on certain compliance solutions with promising outcomes. Despite being a market leader in formation and compliance, many of our prices have declined over the past several years. while operating in an inflationary economy. Pricing is a leading indicator of value. And in this case, we may have sent an inappropriate message to customers who expect us to be the best in the industry. We are testing our way into these changes. And the paradox is with these changes, we expect to see lower revenue churn over time. In 2023, we reduced the price of a registered agent product by 20%. Just this September, we returned our registered agent subscription to its historic pricing level for new customers with strong initial success. Given the value of this product and the peace of mind it provides, our attach rates have remained relatively consistent. Our long-term goal is to have our pricing speak to the value we provide our customers. We are actively testing price points across our product portfolio as we focus on attracting high-value customers who will grow with LegalZoom over the long term. During Q3, we also focused on reimagining transactional products into subscription offerings. We ran successful tests to reorient two of our transactional offerings, the Beneficial Ownership Information Report, or BOIR, and business licenses for subscription services by adding more value to these product offerings. Reorienting our products for subscriptions is a key driver of growing the lifetime value of our customers. It's also what our customers need from us to succeed. Staying current with legal and compliance business requirements is not transactional by nature. It's an ongoing obligation. Beginning with the OIR, there is a recurring nature to this report, but more importantly, customers see it as a compliance requirement. In August, We began testing an online promotion where our BOIR product was integrated with an annual subscription that included BOIR and our compliance subscription alongside a standalone BOIR transaction at an equal price. It's a little surprise we saw a meaningful increase in the attach of our compliance subscription, significantly improving the expected lifetime value of these customers. We've also seen similar traction in our sales center, with our sales associates now emphasizing the value of our compliance subscription bundle versus the standalone BOIR transaction when speaking with our customers. Another product that lends itself to a subscription offering is business licenses. On average, small businesses need over five licenses to operate legally. Remaining compliant is a time-consuming and error-prone process. And failure to comply can materially impact a business through fines or temporary closures. Our transactional business license offering, launched in November of 2023, matched a small business profile with relevant licenses and permits using a proprietary database, but through a one-time transactional product. This September, we repackaged our business licenses into a subscription offering by adding more value to our customers. The new subscription product includes license storage, license sharing, notification of due date renewals, and alerts regarding any changes where a business may no longer be compliant due to changing regulations. This is a smaller product offering, but an important test case where we believe the expected lifetime value of these customers will increase as a result of these changes. Looking ahead, We'll be rolling out new promotions, products, features, and offerings more broadly across our customer base to enrich our subscription offerings. Turning to our consumer channel, over the past few years, we've been singularly focused on our small business opportunity. This is a market we have largely neglected as a result. And given our strong historical brand recognition and our market position, we feel reinvestment in consumer is warranted. Further, as I noted on our last call, every business has an owner behind it that needs estate planning products. In August, we launched a marketing campaign for National Make a Will Month, which included a limited time discount on estate plan products. We saw strong traction during the campaign, including an increase in estate plan sales to our existing small business customer base during the promotion period. We're continuing to invest in this area of our business, including a complete redesign of the user experience for estate plan offerings. This includes an improved customer experience via simplified customer intake questionnaires. We believe enhancements such as data validation tools will result in higher completion rates and instantaneous document generations, saving our customers time. This will also drive increased efficiency with our fulfillment and service centers. Our long-term goal is to better lean these products towards subscription offerings to help our customers over their lifetimes. This is a market where we believe we can create an enduring subscription channel that can be used to offset periods of weakness in small business starts. Finally, I'd like to provide an update on our AI efforts. The first prong of our AI strategy is to build a foundation from which we can leverage our 20-plus years of legal documents and business formation experience. LegalZoom has robust data that we can utilize across nearly 4.3 million estate planning documents and over 4.5 million business formations. We are working to capitalize on this in an ethical way by first scrubbing personally identified data using privacy enhancing technology. The outcome will enable our artificial intelligence engines to leverage a vast number of legal documents that have worked for our customers over many, many years, alongside edits, changes, and the legal nuances that come only from having a rich historical record dating back to our founding in 2001. Our service and fulfillment teams will leverage these tools with a goal of providing faster, more efficient, and personalized customer service. And over time, our goal is to use this intelligence and other AI tools to empower our own law firm, LegalZoom Legal Services, as well as our network of over 1,000 independent attorneys who support our customers. This will require more time and care to ensure that we are empowering and not displacing the experts that drive our business forward. But once unlocked, we believe these tools can drive significant efficiencies for our legal experts and faster, more cost-effective legal services for our customers. It is important to remember that generative AI alone cannot replace attorney advice. LegalZoom stands apart from our competitors as a technology platform that sits alongside an established network of independent attorneys available to leverage the power of AI to unlock what we believe is a massive opportunity. Finally, we're working on launching more AI power tools to help our customers. We know that finding a valid and available business name is a clear point of friction. Last month, we introduced an AI-powered business name generator to help our customers with this important and often difficult first step. As this product rolls out and is perfected, we expect it to help increase close rates and become a natural path to cross-selling other products, such as trademarks and website domains. In closing, I'm very pleased with the hard work we've accomplished during a very short period of time in just about a quarter. I am proud of our teams for embracing our new priorities and driving immediate, tangible results. As a final word, I want to follow up on our ongoing commitment to transparency and communication. Despite hitting the top end of our revenue guidance, our year-over-year revenue growth was still only 1% this quarter. I'm nevertheless proud of the team for delivering at the top end. But we still have a long way to go. We are early in our roadmap of execution against our new initiatives and laying the foundation for the future trajectory of our business. This includes changes in our execution to enable us to disconnect from our dependence on small business formations for growth and accelerate our subscription revenue, both of which will improve predictability of our business and drive continued margin expansion over time. We will continue to communicate with you openly and transparently on our progress driving durable results. With that, I'll hand the call over to Noel to discuss our third quarter results and outlook in more detail. Noel?