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

Okay. Great. I think we are on time. So we'll go ahead and get started. Good afternoon, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. I'm pleased to be hosting the LegalZoom team, Jeff Stibel, CEO; Noel Watson, CFO. Thank you so much for attending. I think this is at least third, maybe fourth year in a row. So we appreciate your continued support.

Jeff, let's start with you. The business is in a much different place than when you took over as CEO roughly 18 months ago, give or take, even as much of the longer-term vision is becoming a much more of a subscription-focused business remains the same versus that time. What are the two or three big wins this year as part of the strategy reset and efforts to reaccelerate growth?

Sure. And thank you for that, and we're incredibly pleased with the progress that we've made so far. I'd say the #1 thing is we have the business stable. We were not in a position when I joined the company to say that. We were beholden to some macroeconomic forces, to some competitive forces and we were watching subscription growth decelerate. And if you fast forward to today, we are now at a point where we've reaccelerated subscription growth, we've started driving top line growth, both organically and through M&A, and we've completed and successfully integrated an acquisition that was accretive.

You mentioned some uncertainty. And frankly, I think that's persisted even this year, right? We've had tariff uncertainty, government shutdown, probably maybe played a role in some business formation, that backdrop. What -- how would you assess like how those have impacted the business this year, tariffs, government shutdown, have they been impediments? Or has the momentum in the business remained solid and business formations remain on track?

So it's interesting. I'm not even sure if you can call it uncertainty since we don't even have a dial anymore. They're not producing metrics. I would say, holistically, it has helped us tremendously as a team because what we were able to do is say these external factors cannot be a reason for a success or failure. When we have tailwind, we can take advantage of that, and we'll call that luck and we'll own that. When there's a headwind, we've got to operate our own business. And we've got to use the levers we have at our disposal. So if you look at the first half of the year versus the last half, the first half, there was a bunch of pressure right up until, call it, Liberation Day or so. And the business ticked and tacked along just as we thought it would. We had to pull a few different levers, but we successfully executed around that. As we saw, in particular, small business starts to accelerate towards the middle of the year. We took advantage of that as well. So I'm actually quite pleased with the fact that we are relatively decoupled within a degree of freedom or two from this macroeconomic.

Okay. So some decoupling, but you mentioned that we have seen business formations firm up a little bit. So that's probably helped a little bit with results of late. Do you think that as we look into 2026, we are in a kind of a better business formation environment? Or is it still somewhat uncertain?

I think the print comes out tomorrow, if I'm not mistaken. I don't know whether we should be believing the print these days. But the point from the perspective of LegalZoom is we are less dependent on that. The good news is when you look at the small business economy, it's pretty robust, it's relatively strong, it tends to be a good counter-indicator to job growth because when people lose their jobs, they tend to start a business. And what we have been doing is focusing more and more on moving up channel. So working with do-it-for-me products, concierge-like service and focusing on our own existing businesses. So that gives us insulation regardless of what the print is seeing. But from a forecast standpoint, we're assuming neutral because we can't figure out which way it's going to go.

Yes. And we've seen small businesses consistently be resilient in a bunch of different macroeconomic scenarios and the latest of which was tariffs. And I think part of that is it's just -- it's never been easier to get a business formed through a company like LegalZoom, but then to get it operational with enterprise-like capabilities, and to do that at extremely low cost of capital. So to be operating without a heavy upfront investment. And so the trends, the secular tailwinds in the space, I think, help. And to Jeff's point, it can be countercyclical. And then the work that we've done around focusing on quality share, we're really focused with our premium positioning and increasing value in our products is in that core formations where people are really serious about starting a business if not on that real edge case of, "Hey, I'm going to defer that out because something is a little bit less certain than the macro".

That makes a lot of sense. Jeff, to borrow one of your terms, decoupling performance from the macro, how resilient is the current growth algorithm if we were to see renewed pressure on business formation trends. And then relatedly, what tools do you have at your disposal to execute through maybe a tougher macro environment, even if that's not what your base case assumption is?

Yes. And by the way, great question, and we pressure test that base case against pressure from various forces that are outside of our control, one of them being that small business formation macro. And I think it's quite resilient. And I think the reason is when you look at how we're going to market now, we've significantly diversified away from what was purely if not exclusively small business formations. We, first and foremost, started moving away from free formations. This hurt us on market share, but ironically, but not surprisingly, didn't hurt us, in fact, helped us in terms of total revenue and revenue growth because these were not quality customers. These were lookie-loo businesses, hobbyists. Second, we started to reposition the brand as the premium leader in the space. So where we might lose some revenue and some customers at the low end of the fringe. This is a point Noel has repeated to me over and over, and I now believe it intrinsically. When these macros soften, particularly on the economic side, generally, what you see is the fringe cases start to go away. The good small businesses, they double down and their time becomes more valuable than the cost that they're paying us. So we're reoriented towards that premium brand and reinforcing that. And then the last thing is we're, in some ways, penetrating further into our TAM by creating multiple serviceable markets. You've got formations. Now you've got existing businesses that we can go after, you have do-it-yourself, which we are doing. We're now doing do-it-for-me. That level of diversification, it insulates us because we haven't penetrated it further, which means we see formations contrast. We can go after a different piece of the market that's greenfield opportunity for us. We see -- Google search market are getting too expensive, we move into a partnership or into AI, same general theory. It's something that's an external factor, it hinges on our ability to grow as long as we've got that diversification, we've got multiple ways to execute and still hit our numbers.

Okay. So go-to-market has certainly changed. It sounds like a focus on those higher -- potentially higher value customers, they will be the ones that stick around better throughout a cycle. They're not going to be the weekends at full, that type of thing. That makes a lot of sense. Related to that then, how has the customer funnel really evolved over the last year? And where do you want to take it from here? How effective have you been graduating users from maybe entry-level bundles to some of the higher-value compliance and advisory subscription products?

So I think it's evolved pretty dramatically so far. I'd almost say it has revolved over the last year because of how aggressive and blunt we have been. But I will tell you '26 and beyond much more exciting. The ways in which we evolved, we were, in many ways, a one-stop shop 18 months ago. We drove most of our customers inbound through search marketing. Most of that search marketing came specifically from Google. We now see less than half of our marketing efforts being driven by that channel. That's a huge shift. We've leaned into brand, we've leaned into AI, we've leaned into affiliates, we've leaned into partners in a way that we hadn't done historically. The vast majority of our customers were DIY. We're now broadening into do-it-with-me and do-it-for-me. We had a disproportionate amount of revenues coming in transactionally, and we were pulling in those transactional revenues, and we're seeing subscription degradation as a result. We're now seeing subscription acceleration, which is driving our top line growth, but also bookings, which is going to lead to '26 and beyond. More importantly and more excitingly, next year, as we look ahead, we have this opportunity, and I talked about it a little bit before of going from just new businesses and then attaching products to establish businesses. And that opens up a whole another channel. To give one example, just think about partnerships. There are many existing partners that we have. Take Bank of America, for example, that we really can't sell anything to because in order to be a banking client at Bank of America, you had to have already formed. And the way we used to do business you had to form with us so that we could attach a subscription. Now we can go directly to them with a compliance concierge product, as an example, or a legal plan. We wouldn't have been able to do that historically. So as you look to next year and beyond, those are the green shoots we want to see because it creates a whole new addressable market for us.

Okay. So clearly, go-to-markets changed, customer funnel, massive evolution there, for sure. Clearly, a push up market. How should we think about the implications for ARPU evolving over time? Can you get back to like 4Q '23 peak? Does that even matter in your view? Is the business so different now that that's not the aspirational goal?

So it matters, but it matters as a larger function of the LTV equation, right? It's about retention, subscriber growth and ARPU and that calculus is what we focus on each and every day. We're seeing retention increase and improve across our core products. we're seeing improvement across our core products. When you pull away some of our basic bundle products, ARPU is going up. So our LTV curve is actually moving in the right direction. As far as I'm concerned, if ARPU dropped by 90%, but retention improved by 10,000%, that would also be fine. The reality is our customers, there's a tighter band which means we need to drive both of those. So I would expect that we can get to those levels that you were mentioning and beyond.

Okay. But there is some calculus there contemplating what potentially...

Solving for LTV, but I think just to add to that, when you think about our product level, we think we have pretty good positioning in elasticity in some of the pricing opportunities there. Where you're seeing pressure on ARPU in the last several quarters is because we're bundling, going back to some of the commercialization changes we made, additional subscriptions that are higher in SKUs, which is driving the behavior we want. We're seeing people engage with our higher-end SKUs and select them and then get exposed to more of our products. The incremental products we've been adding there have been lower ARPU products, so they're driving down sort of the aggregate mix. But on an individual product level, we still feel like we have pricing opportunity, some of which we've realized in 2025, but probably more to come.

Okay. Got it. Jeff, you mentioned Formation Nation earlier in the conversation, that's -- for the audience, that was an acquisition we completed earlier this year. That has been a contributor to growth as well as enhancing some of the customer segmentation and providing a higher touch sales force. How has that integration been going? What are some of the milestones that you're still working on in terms of the integration?

Sure. And I'll back up to give some context for anyone who isn't familiar with the story. We effectively, over the past call it, 3, 4 years, took our brand and our product set and bifurcated between our traditional high-end services and a free offering, thinking that if the market for formations was moving towards free, we want to dominate in that market. What it effectively did was it shipped to market, that's a positive, while devaluing our brand, which is a negative. You're the branded category leader, you don't want to do that or at least not for a long time. We went after Formation Nation for a couple of reasons. But paramount among them was that they, in effect with their "inc Authority" brand, we're the category leader in discount or value-oriented formations. And they did a very good job of acquiring and then rotating those customers that succeeded up the funnel. In that respect, our integration has been a huge success because what we've been able to do is now reorient our brand to be a premium brand. We've taken our basic SKU, which is our free formation SKU and reduced it by, call it, 20, 30 basis points overall without eliminating it entirely. It's there, it's still positioned but through education, we're able to move our customers, LegalZoom customers up the stack prior to their first purchase, while spending an incremental amount of marketing on that discount value offer for a certain subset of customers using the "inc Authority" brand. So I highlight that because that was the underlying thesis. Second, the business is performing really well. This was a slower growth business when we acquired it, and that growth has accelerated, largely in line with our growth. So we've been able to share best practices. Where we have not been successful yet on integration is cross-sell and upsell. And that was deliberate and by design, but not planned. It was one of those planning is everything, plans or nothing. As we got in, we realized how successful we were being and said, first, do no harm. So for us, that's now a lever. They have a handful of products that are really powerful and potent for our customers. They have a credit building product, as an example, that we know we will cross-sell and upsell. We actually took a team to do that cross-selling and upselling and realize that, that team was so good, they should actually be selling LegalZoom services. Then we shut that down and said, "start selling LegalZoom services", and they're now exclusively doing that. Next year, we will build a team on credit. We have products like our legal plans products, our compliance products, our RA products that are, in many ways, superior to theirs, some where theirs are superior, a perfect opportunity for cross-sell and upsell. We will get to that in time. We didn't need to do it now and didn't want rock something that was working and was already accretive.

Okay. And is it on the plan for maybe next year, next couple of years to see that cross-sell?

Correct.

Got it. Sticking with that, what role does the white glove kind of do-it-for-me services offered by Formation Nation in acquiring those higher touch and higher-value customers? Are some of the capabilities here contributing to the compliance concierge offerings?

Sure. And in many respects, one of the things we got effectively for free with Formation Nation was this white glove model where they had a service model, both for credit, for business advisory and then a very high-touch brand known as Nevada corp. And we actually use that as an archetype in many respects for our concierge product. In hindsight, I won't tell my product team in this. But in hindsight, I don't think we would have had as much success as we have building that concierge product if we weren't learning from the formation Nation team. So we've taken the best of what they offer. And then we improved it to be a level at which it fit well under the LegalZoom brand, not just the inc Authority or the NCH brand.

Okay. And on the compliance concierge offerings, how much runway for adoption do you have there? Like among the existing subs, as well as historically transaction-based customers, is there a long prospect list where you can check for compliance on behalf of those folks and then go to them and say, like, "Hey, wait a second, like, we went out on your behalf. We see there's some compliance issues. We can take care of this for you." What does that like runway look like? And how much runway is there?

Yes. I'm excited to jump in on this one. So that's exactly one of the early approaches that we've taken is to looking at our customer base, and letting them the folks that are become out of compliant with their secretary estate. That fact. And we've got a very high response rate of folks raising their hands. These folks are very busy running their businesses, right, raising their hands saying, "I didn't know, first of all, can you help me get reinstated?" And then "Clearly, I need somebody to manage this for me going forward because I'm not doing a good job. Can you do that for me as well?" And that's where that white glove service -- sure. It's not the easiest of things once you become out of compliance to necessarily get reinstated. So that's where that white blood service is very helpful for them. And what that does for us is it gives us confidence that this could extend beyond our base, right? If it works for folks that have been -- they may not have any of our subscription products, helping them to stay compliant today. And they may be a couple of years since they had a formation. So now you think about the 30 million-plus businesses that are out there that are existing and operating, some healthy percentage of them have the same profile. They're either at risk of not being compliant or they're already there. So that's our next step is to go and try to attack that part of our TAM that we haven't tackled yet today.

There's over 30 million existing businesses in the U.S. we largely set them aside from what we were trying to service, all part of our TAM. Every one of them needs to be compliant. They'll be fined if they're not. Many of them are out of compliance, many of them are in compliance, but they're paying way too much money to do it. And even their service providers want to do it. And still others are doing it themselves and are frustrated. So it feels like a huge opportunity.

So a huge opportunity in-house as well as outside of...

And through -- and outside partnerships as well, right? When you think about some of our larger partners, take Wix for example. They have a huge base of customers. A lot of them are established businesses that may have some type of increasingly complex set of compliance needs.

And when I got here, I went around to our partnership team and said "Stop selling our customers. We want to buy other people's customers, from partners", and they kept saying, "Jeff, I use Bank of America" -- as the example like "We want Bank of America's customers. We don't have anything to sell them, they're already incorporated. What about our compliance part? Well, you kind of have to form with us to use that." I'd say, "Well, let's build a product that's decoupled from it." And we now have. And the beauty is we can not only market to them. We can tell them which businesses are out of compliance. And that's a huge failure point for Bank of America and for many other businesses.

So let's hit on partnerships since you mentioned it. Historically, it's been a focus. It then went through a period of deemphasis and now once again, an area of focus. What's different this time from a partnership perspective? And can you give us some examples of real wins in terms of customer acquisition or revenue from some of these deals?

I'd say the biggest is customer acquisition. It wasn't a focus. By the way, even in the early days when we were focused on partnerships because I was on the other side of this running Dun & Bradstreet credibility. We weren't -- LegalZoom was not looking at partners to drive business to them. They're looking to monetize their customers. And I think that deemphasis was because of that focus. What we're now focused on is where we have a hole in our ecosystem that our customers want. We will sell that customer so that we have a tight partnership. It's integrated and we control that environment. But the real focus on a go-forward basis is to drive subscribers to us. And that comes with really everything we've been talking about in these conversations.

Okay. So drive that customer acquisition and really it's subscription customers?

Correct.

And then really key adjacencies as well. And so one of the important partnerships this year that we spend a lot of time around is our 1-800 accountant partnership for -- we're kind of replacing our owned offering on the tax side which has done extremely well, and we're excited where that partnership can go.

It's been a tremendous success and a good archetype for how to do partnerships as well.

Got it. So let's shift gears a little bit to the cost side of things in some of the investments you're making in the business. How confident do you feel about the direction of your technical development, especially with some of the new leadership changes there? What sort of road map do you have planned? And what are some of the obstacles in achieving this vision? And have you had any key unlocks this year?

Sure. So one of the obstacles is, hard as this always is, was leadership. And we were oriented long to take advantage of the technology stack and integrating artificial intelligence. So what you're alluding to is we restructured a large portion of our team so that we could put technology, product sales, service and fulfillment under one roof. And the reason was we realized holistically, that's what makes up a product. Product is not technology. And if we were going to be successful with this notion of human in the loop, being able to have technology prowess where something can be done with technology and then insert a human being for expertise where it is needed. It is a place where we cannot only win but we will dominate because no one else can compete with us. So I'm incredibly excited by the changes that we've made. The proof points that we've had, particularly in Concierge and our growth in our legal plans and watching that SKU shift from do-it-yourself to do-it-for-me and from what I would call products that either can be or have the potential to be commoditized to products that are unique in market to the extent that our competitors want to work with us. It feels very, very potent.

Okay. And how should we think about striking the right balance between R&D spend to drive product improvement versus kind of traditional sales and marketing muscle and dialing up advertising? Typically consumer and SMB Internet companies sometimes struggle to find the right balance of R&D spend versus sales and marketing. How do you feel about the balance that you have right now and on a go-forward basis?

I mean I'm actually pretty comfortable with the balance right now. And I think we've proven that we can drive growth with efficiency in this business and continue to expand margin. The way that we're thinking specifically about the newer AI opportunities is to leverage AI first to drive efficiencies, put some of that to the bottom line and use the remainder to go after customer opportunities, kind of product opportunities. To me, that feels like a balanced approach to not take undue risk. So I'm pleased with the way the team who predominantly went by Noel has driven a thoughtful approach. It's not that we won't hit the gas if we see something working really well. But we're not going to do that if it's a big bet on what we do with it incrementally and make sure that we've got proof points, leverage those proof points to make an investment decision and then lean in from there.

There's a number of ways that we're using AI today to drive efficiency in our operations. But we still feel like we're kind of early to middle innings on it. So there's a lot more room to go. And to Jeff's point, as we generate more efficiency, we'll look to reinvest part of that into different areas that we think can accelerate the business. And then we're also being conscious of wanting to make sure we continue this balanced approach to revenue growth and margin profile.

Yes. And on that point, I know you don't have formal guidance out there yet for '26, but how should we think about the margin path from here? Is there any reason you wouldn't be able to achieve double-digit top line growth and expand margins such that EBITDA growth trends better than revs over some medium-term time frame?

Yes. I mean it's certainly our focus, right? That's certainly what we're driving towards. We don't have any formal guidance out there. I will say all of the initiatives that we've talked about over the last few minutes here have -- are really clear to us and feel like they're durable and sustainable. So we're excited about what we're doing. We're excited about the acquisition that we did and the opportunity for organic growth, leveraging that acquisition. There are some grow overs that we have next year, specifically related to the acquisition and the tax partnership and still some BOIR in Q1. But overall, like that's certainly where we want to be, and we think it's realistic for us.

And qualitatively, we've made that statement, right? We said that we intend to accelerate top line growth, and we don't think we need a dip in the margins to do that so saying anything to the contrary quantitatively would contradict those.

Yes. Makes sense. On free cash flow and capital allocation, there's clearly really strong EBITDA to free cash flow conversion on pace to have $250 million or more on cash on hand by year-end. With Formation nation, it sounds like that integration has gone pretty well, maybe some more work to do, but largely done. How should we think about appetite for further M&A from here and balancing that with ongoing share repurchases?

Yes. I think balance is the right word. We've been pretty consistent from a share repurchase standpoint. Obviously, we still feel like there's some dislocation in our valuation today that warrants us being opportunistic there. And we have plenty of cash, we're debt free. We're generating a lot of cash, as you said. And that doing that will still allow us the flexibility to be opportunistic around M&A as well. And we have a very healthy pipeline. We're having lots of conversations there. We don't feel like we absolutely need to do anything. But if the right set of circumstances occur, we have the firepower to go and act. And we have the success metric with the last couple of acquisitions that we've done to feel confident that we know how to integrate -- yes, we built that muscle internally.

Okay. Great. So as we come up on time here just to wrap. If we have you back here a year from now, what would be the one or two KPIs that we should be looking for to assess whether LZ has been successful at the end of the year of '25 here as well as in '26?

Yes. A $30 stock price. Working backwards from how we get there, accelerated top line growth, maintaining or growing margins, so accelerating EBITDA and driving that through subscription acceleration. I think those are the key things. I mean, those are the fundamentals of any subscription-based business. And it's no different with us.

Okay. Great. Well, congrats on the success so far.

Thank you. Appreciate it. Thank you.