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

All right. We are on the clock. So great. We'll get started here. I'm Ron Josey, I cover the Internet sector here at Citi. And I'm really happy to have with us today, Jeff Stibel, Noel...

Watson.

I almost said a different name. So Noel Watson, of course, from LegalZoom. Jeff, you've been the CEO now, you stepped into the CEO role about year and a quarter ago. Is that about, right?

Yes.

Noel, you and I have known each other for a while now. I think you've been here since IPO.

That's right.

So actually, I'm really looking forward to this conversation because LegalZoom is a market leader. I think we all know that in online legal and compliance services. But we're expanding to newer businesses. We're doing a newer mix shift to subscriptions. And so hopefully, we'll dive into all this stuff. So Jeff, we'll start off with you, right? So you're about a year and 2 months, year and a quarter in -- at this role. Of course, you've always been part of the company and aware of the company. But a lot has changed in the past year. And so I would love if -- talk to us a little bit about the changes that you've put through at the organization and sort of where we are in that journey of the evolution of LegalZoom.

Sure. And I think when you look under the covers deeply, you've been deeply involved with the business, so it looks like a lot has changed. But strategically, we've only made two relatively simple shifts and done that using a third to open up TAM. First, we started to reemphasize our subscription business. So we have an emphasis on driving that subscription business forward. And that's been punctuated over the last quarter with maybe showing accelerated 10% growth. We expect that to continue. And the second thing is leveraging this notion of augmented intelligence. So LegalZoom being the leader, one of the things that we do better than anyone is provide premium legal and compliance services. But we were in our zeal to capture more of the market, we were going down market. So we moved back upmarket. We started launching another number of do-it-for-me products, both in compliance, legal and otherwise. And we did that by expanding our TAM by focusing on other channels outside of what was historically our top of funnel, which were in corporations. You look at those 2 plus 1 thing strategically, a lot underneath it, that's what's driven the transformation and the success to date.

So one of the things I think we -- when we went through the call and we spoke afterwards, there's sort of three key focus areas for the business. And you mentioned subscription, of course, but then also leveraging AI as well. And of course, there was the acquisition of Formation Nation. Let's -- maybe we can unpack of those three, so organized subscriptions, go-to-market strategy, leveraging AI. Let's unpack each one of those one by one and try to understand sort of help us understand where we're going. So subscription business, back to double-digit growth ahead of plan, I think, was the comment. Compliance packages were highlighted as a strong demand, booking, et cetera, but do-it-for-me is sort of like going forward. So just walk us through the drivers of double-digit growth is fine for 2Q. But when you see this going out for the next umpteen quarters, like what's going to drive that subscription growth to this consistent greater visibility so Noel can sleep better at night, et cetera, et cetera?

And again, that really three-part strategy is what drives it. It creates durability because it insulates us. If you look at that push to subscription, why? Because a business that is oriented towards subscription drives durability, drives sustainability. Ultimately, if you're providing greater value for your customers over time, your cost of acquisition is lower and you retain those customers, and it's a lot cheaper to keep a customer than it is to bring in a new one. The notion around finding new addressable markets, right, different go-to-market channels. The idea there was we were so beholden to small business starts that we were only able to grow so much as that macro was growing by decoupling from it, which we have largely done at this point. We're able to use that as a key channel, but not the exclusive channel. And we do all of this by creating a new product strategy around AI. And this is what I was referring to when I said augmented intelligence. What most people are thinking about when they think AI, they're thinking about using AI to replace humans and experts. What we're talking about is to leverage AI to make our experts and expertise more scalable. So what we were able to do with a lawyer covering 10 customers, we can now do with 1,000 or 10,000. That's ultimately the goal in those umpteenth quarters because ultimately, that will drive scalable, profitable growth. And we're in the early innings, but we've already seen some pretty strong proof points. We're seeing long-term churn trends going down, particularly in our compliance products, we're adding value. We're seeing ARPU in those products going up. And the services that we're launching around do-it-for-me and concierge and these higher-level services that are leveraging both robust technology and AI as well as expertise, we've got more demand than we can fulfill right now. So it's pretty exciting.

And so let's unpack the -- a few of this. Decoupled from macro, hard to do. Talk to us, I understand leveraging AI to scale up and to do -- to be able to service so many more, but how do you decouple from macro?

So you can't decouple from the macro, but you can decouple from a macro. And our -- the macro that we were dependent on was formations and small business starts. And the reason was because our top of funnel was exclusively focused on driving new customers who just started the business. So when you think about some of these new products that we're building right now, so let's take our concierge compliance product. Historically, what we were doing was we were selling someone of formation and then attaching a compliance product because that's all we could do. That was the only value that we add. Now with a true DIFM suite of compliance products, we go to existing customers and sell them compliance. So we can upsell and cross-sell. We can go to partners and leverage those partner channels, whether it's with one of our existing partners or a new partner and say, you have existing small businesses that we weren't able to penetrate into before because they've already incorporated. Now we have a suite of products that will make their lives easier, will be robust across the board and where you can earn a bounty. And that's just on compliance, that changes our macro from being solely about small business formations to being about small business, longevity and success. But moving more into consumer is another good example. Right now, we have a relatively small trust and will set up products, and that suite is largely transactional. As we move that to subscription, that is yet another macro. So what we're trying to do is diversify across multiple macros, so we're protected from risks of cyclicality and seasonality that keeps us more insulated.

And so how are we merchandising our products? So as we move from a macro to subscription, so completely understood. And we have a good amount of subscribers already, a good amount of everyone -- the brand is very well known. And so you need the products to sort of decouple from a macro. So talk to us about the merchandising. So the -- I love the concierge comment earlier. But how do we -- how does LegalZoom better enable users to say, oh yes, I would like this product or the merchandising of it all?

So it's interesting. It starts before we productize, before we package, before we market with education. And it is one of the things that I think we have gotten better at, and we'll start to excel at. It's a filtering process. Rather than enabling the customer to filter themselves, what we're now doing is we're pushing education their way so that they can make informed decisions, and they can understand what it is that they're about to embark on.

And how are you pushing it their way?

Yes. So we're doing it in a multifaceted manner. So if you look online at our website, we're now orienting people to the areas where we think they will succeed best, not necessarily the cheapest product, not necessarily the most expensive product, but where they will succeed based on the category, based on their longevity, based on their experience. We're working with AI right now. We see the same risk that others see in AI. But for us, it is a far more exciting opportunity than it is risk. Rather than just market through performance marketing and Google and SEO, leveraging AI helps to expand our addressable market. The TAM opportunity, particularly in legal with AI versus search is enormous if you think of it as a way to educate your customers. Most customers, when they go and they think about searching for something, don't realize initially that they have a legal problem. With search, you're going to get a result that is based on the query that you get. With AI, you're going to get a result based on a question-and-answer interface. And what we're seeing is that's actually a TAM expander for us. So it is one of the reasons why we decided to start collaborating with OpenAI and Perplexity because what they are doing for us is opening up the TAM. And there is a last mile problem in AI, like there is with all technology. And we solve that problem in legal, and we can solve it for SMBs more broadly, which is when you need that human interaction, when you need that expertise, when intelligence fails to deliver expertise and you need to do a handoff, you need a company that is as versed on the technology side as they are on the knowledge worker side. Lawyers and law firms can't do the technology piece, and the technology-only providers can't and don't want to do the service piece. We do both.

That's a great way to say it. And I think having that interactivity with an agentic approach, you can get to the bottom line of what people are looking for as opposed to links that may not go anywhere.

100%.

And you don't know where that goes. So let's talk about your Perplexity. And I think we announced partnerships with Perplexity, with OpenAI. I think we have Doc Assist as a new tool. So where are we today on these tools? I think we're awfully early. And then say a year from now, we're sitting here, what are we talking about?

Yes. I hope we're at one one-hundredth of a percent of where we can be. And I believe that there is that much opportunity here. And I would argue that a lot of what we are doing is testing and signaling. We're open for business. We're leaning in aggressively. You've got the largest players in AI wanting to work with us because they see the same problem on their end that we see, which is that last mile of when you need that human interaction. And we're inserting both product and partnership to fill that gap. Very early. OpenAI, we announced less than a month ago and Perplexity, not much before that. We're testing and feeling our way through it. The one thing we're not doing is giving out data.

So that was the next question. So why would -- why do Perplexity and OpenAI want to partner with LegalZoom, why does LegalZoom want to partner with.

So they're doing it because ultimately, they'll fail their customers if they don't.

They don't have that deeper knowledge.

The deeper knowledge and the ability to connect in our cases with a lawyer, a lawyer, a paralegal, service rep because even when you look and prepare a document, say, a will, with ChatGPT, for example, and it looks good. And you say, wow, they do a pretty good job. You're doing that as a researcher. When you do it as a human being and you then print it and you hand it to your spouse and say, let's sign it and put in a safe. The next thing you do is say, I want to talk to someone because I don't know what that word means. I don't understand that paragraph. I don't know if we're doing it in the right state. And I don't know if Darren Beattie is the right person to be given my cat to. So the reality is they're getting that feedback themselves, and they realize that we solve that problem with a smile on our faces. We're doing it because they're opening up TAM for us. We've got customers that didn't realize they had a need for a legal service that are going on OpenAI and Perplexity and others and saying, wow, I didn't realize that was even a legal question that I was asking. I better talk to someone. And their choice is going to be talk to a lawyer that's going to be $1,200 an hour or $10,000 flat fee or for $1,000, all you can eat, you'll get to work with LegalZoom who is technology enabled, but will also complete that last mile and when and where you need to talk to someone, we'll have someone available for you.

That's great. So a year from now, one 100,000 of a way there, right? We have a long way to go, but a huge opportunity, understood the macro and the subscription. Let's talk about a pretty interesting change that we had earlier in the year with the Formation Nation acquisition. So we're about 6 months into this. Still early days, but we're starting to see the benefits. And so walk us through just the vision here and more tactically sort of the integration and the change to the business. And then Noel, from an M&A standpoint, why don't I have you get involved here and sort of like how you view the M&A sort of deal strategy. But maybe, Jeff, let's start with you, talk to us about the vision and more tactically with...

Yes. And I'll answer that through that -- through the lens of those 3 strategic pillars because it fits perfectly, which is why this has been such a successful acquisition that we bought right? It was an accretive deal. And I'll start with the addressable market point. We were devaluing our brand at LegalZoom by selling transactions and going down market and selling free formations. It wasn't what we should be representing with LegalZoom. LegalZoom should be the premium in the space that is offering value relative to lawyers. Instead, we were competing with Secretary of States. So in part, we bought so that we had a second brand so that we didn't lose that market. We didn't cede it to competitors, but we didn't dilute our brand value. Second, from a subscription standpoint, this business was predominantly transactional. It looks like LegalZoom did 8, 10 years ago, which means we know what we can do over the medium and long term to port those customers over to be a subscription-oriented business. And then from this notion of augmented intelligence, AI with human expertise, they were sitting on 120 experts. These are reps and customer service people who are each and every day solving problems for customers, and we effectively inherited that for free. So that was the core reason.

And we're now 6 months in, it's hit your 3 pillars...

And then some, although even there, early innings, we have been slow to push them on the subscription side. I would say we're lightest there. On the AI and service side, we have been really quick. In fact, one of their expert centers is now exclusively focused on legals and customers. And the addressable market situation happened day 1, meaning we were in a long-term M&A deal with them and felt right, looked right, and we started to reorient our marketing efforts even before we closed, which is great. So 2 out of the 3. And the third, you've got to get right, having done a lot of subscription optimizations in my career, you want to be measured in terms of how fast you move.

Sure. Noel, on the build versus buy or as you evaluate M&A, what are the criteria that the team looks at?