LegalZoom.com, Inc. (LZ) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started. Stephen Ju from the Credit Suisse Internet equity research team. To my right, I have the management team from LegalZoom: Dan Wernikoff, who is the CEO; and at the end, Noel Watson is the CFO. So welcome, gentlemen.

Thank you.

Yes. So I think the first in-person conference in some time for everybody. So I think everybody's got to see each other. So -- and I guess kind of let's just sort of dive in then. I think as a company, LegalZoom has been around for a long time. I mean we -- I think we've all seen the TV commercials. And it's only recently that you've gone public and become a public company. So could you begin by introducing your business to investors that might be less familiar with the business? What do you do? What is the value proposition and what's the market opportunity?

Yes. So it's a 20-year-old company. Started with the concept of creating online legal forms. Has evolved a little bit over time to be more in the compliance space as well, which introduced the concept of a business model shift into subscriptions. Went through a phase of private equity ownership, which I think made it a little bit more cash flow generative, and now we've come out of that and really focused on this time right now and the digital transformation of legal services. So our mission is to democratize law. When you think about legal services, a lot of people don't have accessibility to them. It's either too expensive or too complex and confusing. And so we try to make that very, very simple. historically, this business has been more of a consumer business and look like estate planning, but really 90% of our business today is around business formations and the ecosystem around that, so all the things that you need to do right when you're forming your business. And a lot -- oftentimes, that means having access to an expert or expertise to help you form that business properly and keep it compliant.

Got it. I think you guys have previously spoken to about a $49 billion addressable market across your existing markets. And as you expand the solution set from just legal to now, you talked about compliance services and other adjacent services, which you guys will get to in a sec, and how big do you think that opportunity could eventually become?

Yes. There's multiple ways to expand our TAM. I mean on one hand, today, we think of it as SAM, that $50 billion. And it's just around the matters that we support, which is matters that are closely tied to business formation and some of the small business matters that happen post-formation and then things like estate planning. So if you then think about all the things that you could be doing to help a small business, it could be corporate governance, it could be litigation, that's one area where you can go broader. But I'd say the area that we're really more focused on right now is all the adjacencies around formation. So when you form -- right at the moment that you form, if you're a regulated business, you need business licenses. If you are -- if you have an employee, you need business insurance. If you're trying to work with a trading partner, oftentimes, they'll require that you have a business banking account. And so there's all these different things that you sort of need immediately right when you're forming, which is an opportunity for us to expand our relationship and expand TAM.

Got you. And within sort of online legal services, which was kind of like your core bread-and-butter proposition, can you talk about the competitive landscape there? And what do you think the point of differentiation for LegalZoom is? And what gives you the right to win?

Yes. Yes. So it's actually interesting. So we're not in the most competitive space. If you think about LegalZoom and the fact that we're a legal service provider in a space that has lots of local law firms on one hand and then oftentimes, a lot of self-directed consumers who do this on their own through Secretary of State sites, there's very minimal competition. So we have right now around -- aided awareness around 74%, unaided awareness in the mid-20s. And we know that, that's about 8x more than any like competitors' brand recognition. Now the competitors that we do have are very low-cost competition that's emulating our model. And actually, that's one of the things that we think is an opportunity for us, is to go after the price-sensitive small businesses a little bit more aggressively. But really, the bigger opportunity is most people still go to a traditional attorney, and they'll pay multiple thousands of dollars to get advice that is very consistent with many small businesses that they can get through LegalZoom for a fraction of that cost. And that's really the point of differentiation is we automate and we use software to sort of simplify the process around all the things you need when you form.

Got you. Now I think in terms of what people try to do to track intra-quarter what's going on with the company, I think a lot of people track the U.S. census data intra-quarter to try to gauge what's going on. And can you explain why that might not always be indicative? And how does that differ from the internal data that you guys track?

Yes. Well, the last 2 years, the census data has really deviated from the internal data that we have, that goes directly to the Secretary of State sites. And that has a lot to do with a combination of the PPP program, which required many people to get EINs as well as just the behaviors that were happening with stimulus and lots of smaller companies forming that probably weren't as significant or legitimate as you typically see in a normal season. And so on one hand, we think it's kind of directionally appropriate to look at the census data. But over the last couple of years, it would be very hard to track what's happening in the macro. There's a separate trend too, which is the census data, provides monthly reporting, and then they provide weekly reporting. Oftentimes, their weekly reporting and their monthly reporting don't necessarily sync up all that well. And so you'll see anomalies on a monthly basis that we also typically, we can correct for internally. But if you're looking at it from the outside, it's actually not that accurate. Now on a quarterly basis, it kind of fixes itself oftentimes. And actually, I think we're going to get a lot more cleaner directional reads from the census data going forward, but the census data will always overinflate the number of businesses forming because many businesses get an EIN without forming a business like an LLC or an Inc.

Yes. I mean at the end of the day, as you said, traditionally, this has been a very offline process, the process of finding an attorney, finding the right one. Probably if you're offline, probably still a broken process.

It's a very broken process. If you ask anybody, "How did you find your attorney?" They'll say, typically, "Well, I asked a friend." And the reality is everybody's legal needs are very unique. And so your friend probably has a completely different situation. So assuming that attorney can provide the right advice is not the right thing. In our case, we really focus on the higher volume transactions. We do them at a high degree of scale. We do them in all the geographies, and we have attorneys that specialize specifically in those transactions. So when we collect data and we have an intake about a customer and we understand more about their business, we can get them matched up with the exact right attorney that has done that transaction many, many times. And so when you look at the Net Promoter Score of our attorney network, it's in the mid-70s. If you look at traditional attorneys' Net Promoter Scores, it's a 25. And so like what you're really seeing there is a better matching capability because there are great attorneys -- off-line attorneys, but really finding the right one is the biggest challenge.

Do you think it's kind of up to you to help propel online adoption at a faster rate? Or do you think it's just going to happen at the rate that it's going to adopt? And is there anything you can do?

It's absolutely up to us. I mean whenever you think about a new category developing, the industry leader is the one that develops it. In a lot of ways, you almost want a little competition because then the competition is spending in to develop the category. Right now, the onus is really on us as the leader and the most well capitalized of the players in the space to actually develop it and make people feel comfortable doing an online legal transaction because they have to overcome the fear of essentially, I'm doing this on my own, I can make a mistake, and there's a legal liability associated with it. And so that's really the benefit that we try to create for our customers. Increasingly, you'll see us do a better job of integrating attorneys into the package to try and overcome that concern that they have but still do it in a much more efficient way than the traditional way of finding an off-line attorney.

Got you. Now within total formations, I think you currently have approximately about 10% share, right? What do you think that could be/should be because -- over the longer run? And what are some of the strategic priorities that you have right now to execute against additional share capture over the long run?

Yes. Yes. I think -- so as an industry leader and as really the sole scaled digital provider, I mean it feels realistic to me to be in like a 30% or 40% share. That's typically what you'll see in other industries of the leader themselves. To do that, it's going to be a combination of that marketing spend that we talked about and developing the market. But really, a lot of it is around the offering itself. And today, if you look at what we do today, we're a little bit premium priced for self-directed small businesses. What you'll want is -- over the next year or 2, you'll see us spread out in different directions a little bit. On one hand, we'll probably go after more price-sensitive customers with a premium solution and really focus on marketing the ecosystem as an add-on. And then separately, you'll see us go upmarket as well and go after customers who don't have the confidence to do it on their own. And so they need to find an attorney, but we'll provide that attorney at a lower price. Both of those expand the addressable base significantly and go along with that marketing spend as well.

Got it. Now let's -- that's a good segue into the overall marketing strategy. So as you as part of the new management team came on board -- you and Noel came on board, I think this was circa like 2019 thereabouts.

Yes.

The strategic focus has definitely shifted, as you said earlier, from harvesting profit dollars to now aggressive, given that long-term opportunity out of you. So -- and to that, I think the marketing and customer education seems to be a very important pillar like you said. So how is the education coming along? Is there still wood to chop there? And it seems like your brand awareness continues to improve overall. And how are you overall measuring that performance? Is there like an output that you can talk about?

Yes. We measure brand awareness pretty regularly. And I'd say that, that's been stable and it's starting to tick up with more advertising spend. The bigger challenge has been product familiarity. So people know LegalZoom, but again, they associate it more with the estate planning product, even though that's only 10% of our business. And so a lot of our focus on the brand spend side is to be aggressive in redefining what LegalZoom does in the small businesses' eyes. So like we have an NBA deal that we just did. It's called Fast Break for Small Business. We're the online business formations partner. And so it's very explicit. It's not just about legal services. We're getting very much into small business and business formation. The one thing that surprised me when I joined in 2019 was just how profitable the business was on marketing dollars spent. So for every dollar we would spend, when I joined, we were getting $1.40 back in profit on day 1, which led us to really think about, okay, we have opportunities to expand our marketing spend. And so we've been doing that. And over the last year, we've expanded that to really spend to a 13-month return. And keep in mind that we have customers who have a lifetime value, 5, 7, 10 years. And so there's still room to expand further, but it does look like it's becoming less efficient when you look at it relative to the prior years, but the reality is that's because we were overly efficient in prior years. And what we're really trying to do is accumulate this very large base of subscribers, which is essentially we're acquiring customers into -- through a business formation. We're getting them as a subscription, and then we're managing the lifetime value of the subscription ongoing.

Right. So if that's going to be the tactic then why not expand the size of your funnel?

Yes.

So the entry fee maybe could come down?

I think that's one of the things we look at is you can look at our marketing spend and almost think of it as a trade-off between marketing spend and a lower cost on the business formation transaction. And again, you could go all the way down to free. And you see this in a lot of small business and consumer offerings. There's always a free offering as an on-ramp. And in our case, we have a bigger and bigger ecosystem to cross-sell into that base. And so you'll probably see us being more aggressive on pricing in the future.

Okay. And once you continue -- as you continue to build out that ecosystem, then theoretically, the LTV of that customer continues to expand and you can continue to hopefully run away from the competition.

That's right. That's right. And that's when it becomes much more of an ongoing relationship as well. We have more touches on those customers. So one of the interesting things is customers who purchased through us, 25% of our purchases in a year are repurchases. So many customers are coming back and forming multiple businesses. That could be I have multiple properties on leasing. It could mean I have multiple product lines. And so it's actually -- it's not a one-to-one relationship necessarily on a business being formed. You actually see lots of serial entrepreneurs. And so you want to have more touches. You want to have more engagement with them on a regular basis. And that's why subscriptions are so important.

Okay. And regarding the step-up in marketing, I guess, as long as you as the management team are comfortable with the ROAS, ROI or LTV cap ratio, whichever way we want to look at it, you should probably continue to spend aggressively, right? So in terms of marketing as a percentage of sales or however which way you want to look at it, that it continues to increase should be a great indication of future revenue growth.

That's right. It's super formulaic. I mean the reality is we're not spending beyond that 13-month return still. So if you're seeing margins degrade, that means that we're accelerating our bookings growth, which we don't release any bookings numbers, but it's essentially us having visibility into we're building up that subscriber base.

Okay. Slight tangent, I know anybody that -- who are acquiring traffic over the last couple of quarters, the Apple's deprecation of IDFA has been an unavoidable topic, right? So was there anything that you guys noticed in terms of incremental challenges to customer acquisitions, perturbations to the price? I mean I think you have a higher LTV. So I would imagine not so much of a difference, but...

It's interesting. We haven't seen that much of an impact on CAM. I think in general, Google has been more aggressive in pricing just as a baseline. But we haven't seen any changes due to those changes. I'd say part of that is probably a component of us having a recognizable brand as well. A lot of our search is branded search. One of the things we have seen is our competition thinks of our brand as probably their best channel in. And so we see conquesting and people trying to squat on our brand because some of the other channels are probably eroding for them. But I think if anything, this is just -- it kind of makes it even more important to get the brand out there and sort of be slightly independent of some of the changes that are happening in the industry.

Got you.

And we're still learning a lot in terms of our marketing spend, and we think that over time, we can make the dollars work harder for us. And within that, the marketing guardrails, we're affording some space to be testing aggressively into new channels. And so we're still on the front end of what we think is the opportunity to unlock and spending into newer channels like some of the social media channels, like Facebook and YouTube, and so there's more opportunity there.

Yes, it's actually worth building on that because Noel is making a great point. When we all joined, I mean the marketing strategy was really purely SEM and then with Pulse brand spend in Q1. And we put media mix modeling in like the first week I was there, started to instrument for it so that we could think about the interchannel interactions and get a better sense of when we should be spending across different channels. And that's -- surprisingly, we hadn't been in things like digital video or we hadn't been on things like social. And so these are all new channels for us where right now, we're not highly efficient, but we know we will become efficient. And that's sort of the evolution of when you have a media mix modeling in place.

Got it. Well, that is not as efficient as it could be lots of opportunities?

Yes, definite opportunities.

Got you. So let's switch gears a little bit to the ecosystem and sort of the product suite. So I think on the tax product, I think last quarter, you talked about the ongoing uptake of legal and tax, and I think there was a 50% increase in the tax units quarter-on-quarter. So how should we think about the longer-term mix of the tax units versus registered agents versus others?

Yes. So the really interesting insight that we had a couple of years ago was that 70% of our customers who come to us don't have an accountant relationship yet. And as they're forming, they're making tax decisions. Like whether you choose to be an S Corp. or C Corp. So they kept asking our agents for tax advice. And so one of the things we started to recognize is getting people started properly on their books, providing some upfront tax advice and then comfort that there's someone that's going to help them with tax filing was an interesting opportunity. Originally thought they were going to just want tax advice, but we've now tested this multiple times. And the reality is people really want tax filing, and then they want the other services embedded with it. So we launched about 9 months ago, 10 months ago in the market. Immediately saw attach rates that were near our attach rates even for our legal subscription, which is really pretty fascinating. The ARPU on this product is north of $1,000 annually. Once you've done a tax filing, you have very high retention rates typically. We have more demand than we necessarily would like to have at this point, which is a good problem as well, which means that we've only introduced it to our LLC customers, not to any other customers, and we're not marketing to our existing base. And we're ramping up as a very large tax practice and really focus on the first tax season and providing a great Net Promoter experience. So we're throttling a bit, but this is a pretty significant opportunity and a pretty high ARPU opportunity as well.

Got it. So I think you just touched on $1,000 sort of per-year ARPU. So as you progressively get greater buy-in from a greater number of clients, that will drag the overall aggregate ARPU higher. So how should we think about that longer term?

Yes, it's going to be a lower attach rate than things like registered agent, which is like a compliance subscription that many people are required to get right at formation. And you're not necessarily seeing the ARPU right now because a lot of the revenue will be recognized in tax season. But really in Q1 and Q2, you'll start to see a little bit of a pop-up, and that will be the indication of how successful tax is.

Okay. And going back to what we were talking about earlier in terms of engagement, this is another area we're excited about how that impacts our relationship with our customer because through this tax subscription, we're engaging with the customer frequently for ongoing tax advice, quarterly filings, we'll have the annual prep. So it creates a different connectivity so we can understand how those businesses are growing and evolving over time and then can shape how we offer them other services in our ecosystem.

Got it. Now I mean beyond the sort of pure like numerical $1,000 incremental layering on per year and how that impacts lifetime value. I mean if -- as you're saying, like the retention goes up -- the engagement goes up, theoretically, the retention goes up and that should also have a halo impact for lifetime value as well, but it's like -- is that still TBD in terms of...

Yes. No, I think the more we're interacting with our customers around compliance events, the more valuable partner you become. And to Noel's point, once you have a tax relationship, it's a pretty natural access point to having a payroll relationship or an integrated payments relationship. And so there are lots of different opportunities to keep expanding the ecosystem as we kind of get into something as core as bookkeeping and tax.

Got it. So any other sort of adjacencies? You mentioned payroll. Any other like adjacencies you guys are thinking about?

Yes. Well, we just did an acquisition of Earth Class Mail, which is a very obvious adjacency for us because many businesses are now forming as home-based businesses or businesses that are remote. And right when you form, you have to create a business address. And that business address, it's important to both looking professional, but also it's the place that essentially your customers are going to know is your location. And so a lot of people don't want that to be their home. And so we bought a very small company for the capability primarily where we can integrate that directly. When you're forming, you assign your business address and you can also sign up for a virtual mail. What virtual mail is it gives you the ability to take your physical mail, send it to an address that's in your state and then digitize it and display it on a mobile device and have access to it anywhere, anytime. It also does things like takes a check and truncates the check and deposits it for you, or it also can take an invoice and it can enter it into Bill.com. So it's API-driven. And so it's a very high-engaging service in that case. And another example of how we're creating subscriptions that are highly related to -- right at the moment when you form.

Yes. Got you. Now let's switch gears to Attorney Assist. So -- and I guess one of the outlets for increase the value proposition for your products and in turn raise the AOVs appears to be Attorney Assist. And this is, I believe, the option where you -- as you go through the process, you have the option to get that professional personal assistance in your product. So it currently appears to be only available in trademarks. And at the time of the IPO, I think it was approximately -- that was approximately 1/3 of the business. So how should we think about the impact of this model going forward sort of riffling through to your other products? And what is the -- ultimately the right mix? I mean, is it 30%? Is it 80%? And...

Well, the 30% has already increased on the trademark side, which just shows again that a lot of people are uncomfortable completing these transactions on their own. Like it should make sense to everybody conceptually. You have 2 options in the world right now. One is I'm going to muddle through this and do it all myself. The other is I'm going to spend a ton of money, and I'm going to spend a lot of time and I'm going to have to find the right attorney. And what we're trying to do is thread the needle in the middle and say, the attorney is going to be on demand and available only to ask that small number of questions that you really have, so you know that you're getting the best price possible, and it's more like a per-hour type fee. And so we've done that today with trademark -- close to 50% of our trademark business is Attorney Assist. The goal is to deploy that all the way into our formations product and have the ability for a customer to choose upfront having access to an attorney for some period of time when they're forming for all the different things that they encounter. So you may get -- you might have just opened up a storefront and you have a lease and you've got to sign a lease. You may have just hired an employee and you need to do your first employment offer letter. You might have your first contract with a partner that you wanted to be reviewed. This all happens in that first 2, 3 months of being a business. And so bundling that together with the formations transaction is a pretty significant opportunity.

And you're seeing these people kind of model their way through that whole process. So you kind of know at a certain point when they've hit a wall and I say, hey, would you like some assistance?

They're hitting a wall right when they form typically. Because there's questions even about how should I form. Should I be an LLC or an Inc? Like what are the differences? What are the liability protections, but then also what are the governance requirements of each? And what are the filing requirements of each? And so it's like right off the bat, they need access to -- some people need access to an attorney if they're trying to make a decision about how they form. And so that's the entree into the next decision, which is well, now I have an employee, like what's the employee compliance requirements? Just a cascading effect of things that are compliance and legal related.

Got you. I think we only have a couple of minutes left. So let's talk about some degree of the capital allocation. So it seems like these reinvestments into the business is the primary use of capital right now. So can you comment on what the overall, your philosophy on capital allocation and furthermore, the build-versus-buy decision in certain adjacencies?

Yes. Let me get on the build versus buy and then I'll throw to Noel on the overall capital allocation philosophy. On the build versus buy, we are looking for acquisitions only if it provides a capability that we plug into our platform. So we're not looking for large bases of customers. We're really looking for domain expertise and a capability. And like Earth Class Mail was a perfect example of that, not a significant base of customers or revenue but a team that knew how to provide a virtual mail service in the existing operations. And I think you'll see more of those types of smaller tuck-in type opportunities. On the build side, it's when we know the domain. So tax is a good example of I have a background of tax. There's 4 of us who -- on the leadership team who come from a tax background, where we knew how to build out that ecosystem directly. And then partner will be when it sort of gets to a vertical opportunity or something that's outside of compliance entirely where we know there'll be someone who's best of breed. But outside of that, on the capital allocation side...

I mean I think you hit it well. To start with, we're going to continue to be aggressive in organically investing in the business. I think you mentioned that because we just think that there's still a massive growth opportunity there. And we'll continue to look to add incremental services to bring to bear for our channel -- our demand channel as well as if there are opportunities to accelerate our product road map through acquihires and bringing on great talent, we'll look at those types of opportunities as well.

Got you. And with that, Dan, Noel, thanks again for coming in person. This is great.

Thank you.

Thanks, Stephen. Appreciate it.

Enjoy your stay here.

Thank you, guys.

Thank you. Thank you.