LegalZoom.com, Inc. ($LZ)

Good morning, everyone. Thank you for being here. Thank you for tuning into the webcast. I'm delighted to have Jeff Stibel, CEO and Chairman of LegalZoom and Noel Watson, CFO of Legal Zoom. Thank you so much for being here this morning. .

Thanks for having us.

So we'll talk about a lot this morning. I want to get into AI partnerships, your partnership channel, attorney and account network, concierge, a lot to get into after in 35 minutes, but maybe AI partnerships is a good place to start because I think investors have a lot of questions. Jeff, so you launched the Cloud Connector and the chat GPT formations app and called LegalZoom, the de facto choice for legal services across AI platforms. Can you give us any early KPIs, whether conversion rates, average order values, attach rates on the customers coming through those integrations versus your traditional web funnel.

Sure. And I'll preface this by saying we are still very early. The AI platforms themselves haven't figured out the revenue model for their free consumers. However, what we are seeing is pretty exciting and positive. I mean, when we look at it relative to other sources, we see a higher conversion rate and a higher propensity to upgrade to our subscription offerings, which means ultimately higher LTV. Early innings, but we're seeing strong signs there. Probably more importantly as we look internally at the things that we're tracking is how we're performing from the standpoint of AEO and as being a source of reference for AI. And in our category, particularly with respect to formation, we leave the charge out. So we are looking relative to our competitors as the #1 reference when it comes to formation generally, and that's inclusive of Chatbot and the others.

Perfect. And maybe this 1 is for Noel. But when you think about the revenue share economic structures of these AI partnerships, are we paying for placement, receiving referral fees? Or is it a rev share? And how do those unit economics compare whether you -- compared to when you pay Google for a click today?

Yes. Currently, we're not paying anything, right? So to Jeff's point, it's still very early stage. So I think they're still figuring out exactly what the business model is. And Obviously, whatever traffic we can get from them, we'd love to have. So as that evolves, we'll be there to figure out the economics. Chat now has ads, for example, I think, on their free experience. And so we're starting to play in that as a first test. But to Jeff's point, we're strategically in the right place, and we'll look to evolve as with them as their sort of model takes better shape?

And there's a fear among investors at times that's not unique to LegalZoom, but LLM would eventually handle the full formation workflow end-to-end filing included and there's a disintermediation risk. What do you think specifically prevents that? Is it the state-by-state registered agent infrastructure, the liability backdrop or something else?

Yes. Here, I actually think the markets have things a bit backward. And when you look -- whether we're talking about SaaS, software or the legal space, the question, it really isn't whether we're going to be disintermediated or disrupted. SaaS is going to get disrupted. Software is going to get disrupted. The legal space is going to get disrupted. The real question to be asking is who's going to monetize that disruption? And from my standpoint, without question in our category, it's going to be legal. And I'll give you 3 key reasons in each 1 of them is a differentiation. Each one of them is what makes them unique. First is positioning. And from the standpoint of the legal space online. LegalZoom's brand stands apart from everyone else's. What customers are looking for ultimately is trust. And LegalZoom's brand equates to trust. We offer value within our product. We offer a guarantee and the guarantee is backed by experts. No one else can do that. And to the extent that the AI platforms can do it, they do it with us not amongst themselves. They allow us to leverage AI to deliver that. The second is the regulatory side, which you mentioned, and it shouldn't be lost on anyone that unauthorized practice of law is not an easy thing to unpack and it is getting more and more difficult. We've been doing this for 25 years, not always in the best way in the beginning, but we have figured this out -- the other side of that regulatory aspect is privacy and being able to have privilege customers demand and require privilege at times, and that requires a lawyer. The third, and I think that's probably the most important thing is margin. And margin gets sort of conflated with cost savings. Make no mistake, we are leveraging on the cost side. And if you look at the back half of our year between fulfillment sales, service operations, we are seeing massive cost efficiencies, and that is driving our margins up in the back half and throughout 2027. But that's half of the story and the least important one. When it comes to margin, AI has become an enabler for us. If you look at 5 years ago, -- most of the products that we're leaning into to go after higher-quality customers, we couldn't have done otherwise. When I got here 2 years ago, we had expert products like trademarks and copyrights and patents. These business lines were unprofitable, right? They didn't scale. With our use and ability to leverage AI, we've been able to make those profitable, scalable and now introduce other products on the expert side like Concierge, where we're able to do something that is incredibly unique at scale with healthy margins.

Perfect. And we'll talk more about AI and concierge a bit, but I want to ask you about partnerships more in particular as well because I think that's been a big focus area for you in the last 2 years since you've taken the CEO seat. So maybe if there's first anything that you'd like to say about the partnership business and your focus there. And then as a follow-up for Noel, I was hoping you could help us understand the economics of that business because it's opaque for investors at times.

Did you want to say something first, or you want to me to...

Yes. Yes, I'm happy to talk about it. And I mean I think the first conversation we had when I joined as CEO, we talked about this a lot and how we had a lack of diversification in terms of our go-to-market and how partnerships were critical and key but weren't prioritized. We announced this past quarter that we went from 4% to 10%. And from my standpoint, that's not enough. I mean when you look at best practices, we should be at 25% plus which gives us a lot of room to grow that channel and accelerate. Working with other partners in the SMB ecosystem it gives us scale. It gives us a new channel. And it gives us customers who have a higher propensity to pay and higher likelihood to be in business over the long run because they've already determined that they're going to do something else with their business other than just for them. So we're incredibly excited about the channel. We're incredibly excited about the partners that we've already established, and we're excited to announce new ones throughout the year.

Yes. strategically important. It's growing fast, and it's clearly an area of focus. And we've announced some partners recently, and we expect to continue to announce new partnerships as we here. On the economic side, it can vary pretty widely by partner. We try to be spoke and customized to the situation. With that said, -- and I guess there's a little bit of the maturity cycle of it, right? We'll invest early on. And the good thing about partnerships is we like to be really integrated and embedded and partnered closely so that we can optimize those relationships over time and the experience over time. We generally structure them as either a rev share or some sort of fixed fee, but it's tied to a conversion. And so it's fundamentally different than our traditional search where you're essentially buying clicks and then its intent, you're responsible for the conversion. So that's one aspect that I like, in particular, the certainty of it. And we'll focus on other aspects of the relationship in terms of exclusivity. If we can get exclusivity that's something we often try to strive for long-term commitments as well. We have -- again, it runs the gamut. Some are shorter term, some can be really long term in nature. But fundamentally, and Jeff mentioned this as well, -- there -- we're dealing with a customer that is already somewhat established. They're already spending money. They have a case of, let's say, one of our website partners, they have a domain, they have a website -- and so the propensity for them to be around longer, given that investment and to be a different, stronger profile for us higher. And so overall, the economics, when you look at in aggregate with some earlier stage and later stage, it's kind of at or better than we see through traditional search.

That's really interesting because in the past year, I think your partnerships went from 4% to 10% of order volume. And I think you said, Jeff that you're expecting maybe down the line 25%, and that should continue to grow.

Yes. I mean to be more emphatic. I hope it's more than 25%. If I just look at best practices relative to what we have done, we can do better here. And this is an ecosystem, small businesses benefit when we as businesses work together to provide them the services that they need and they want so that as they're growing, they don't have to think about this. Who is the best web services provider? Who is the best compliance provider who is the best on legal services. That isn't something they should have to spend mind share on. We should be able to provide all of that at Legal zone.

Perfect. Maybe one more on the partnership channel before we move on to some other topics. You mentioned exclusive relationships. How important are these to you? And typically, maybe how long are the exclusivity windows? And what does Legal's in commit in return for those partnerships?

It's a great question. I think it's critically important, not just for us as a business, but for our customers, right? We want consistency. We want predictability. And we want to make sure that we're working with the best across that SMB ecosystem, can't always get exclusivity. And in other cases, it doesn't even make sense depending on which side of the equation that you're on. But we find a good fit. We want to lean in on a long-term basis. We want our partner to lean in on a long-term basis. And for the most part, we've had great success over the last couple of years being able to do that.

And from an infrastructure standpoint, we can provide a really embedded and integrated experience which goes a long way. Obviously, we have a really strong brand. So from a branding standpoint, we're dealing with great brands as well. So that it's benefiting both the equation. And then we just bring a great experience on the back end for customers, which is super important for any partner that's passing off 1 of their customers to us. They want to make sure that, that partner is taking great care of them offer a fantastic service.

Perfect. Moving into the Attorney and accounting network, this is one of my favorite parts about your business, honestly, because I don't think there's another publicly traded company out there with the network of accountants and its own law firm. So that's really exciting to me. So maybe first for Noel. For legal plan consultations outside of Arizona, where your ABS is based, LegalZoom pays independent law firms, a monthly fee, I believe and recognize as revenue net. Can you walk us through how that fee is structured? Is it per consultation per subscriber or flat retainer? And then if you could say anything about the margin profile that be great.

Yes, absolutely. So as you said, we have our own law for ABS in Arizona that services that state and then our federal matters. And then we have a large independent network across the other states with independent law firms. The structure is on a per subscriber model, and it's the subscribers that are assigned to a firm in a particular state. And it allows for -- and then we've got 25 years of experience around the and prediction around the patterns of utilization. So we understand how to price that. And I would say it's an attractive subscription-oriented margin similar to our other subscription and accretive to our [indiscernible]

Is there any seasonality to that revenue?

No, there's seasonality in the same way that our overall business has seasonality in terms of the point in time where we attach new subscriptions much, it's more first quarter and first half weighted than back half. But outside of that, in terms of the utilization patterns, it's more episodic based on the individual business, but average is from a true calendar year.

Perfect. And we'll dive deeper into Concierge in a couple of minutes. But I believe on one of the recent earnings calls, you mentioned the potential of adding accountants to the concierge product. How would that network be structured? And would it be the same independent contractor model as attorneys and if you could speak to any regulatory complexity that you might also face with the layers.

Sure. And we already have a path and pattern. So we're going to follow that with what we did with our legal network. And if you look at our current partnership with [ 1-800 account ] and we've had other partnerships as well, there's a natural group of experts that we can work with and bundle in these products and services. So we've already actually started testing this with our legal plans and our business plan. And we see a relatively high take rate and propensity and interest level from our customers. I don't think that the margin profile changes dramatically. I don't think that the pricing shifts dramatically. The nice thing is between legal and accounting you've got a very, very similar framework, but you offer far higher value, which means we can either play with the elasticity curve on price or work towards creating greater retention because what we're doing is we're adding value.

Perfect. Also, maybe now to move on to the Concierge product which is another new opportunity that I'm very excited about because it's entirely a greenfield opportunity, and you're uniquely served to address it, I believe. So -- the Concierge product, I think you've said that it has a 3 to 4x average ARPU than your existing products widely. The list prices can go up to $1,400 per year. And you haven't sized this business yet, but can you give us an overview maybe of what the various Concierge tiers are and how they are priced. I realize it's been about a year at this point since it's launched.

Yes. That's exactly right. It's been about a year. We launched with an MVP, so it started quite small. So we're just getting through that first renewal curve now, but we're already pleased with what the renewal rates look like and the engagement and the adoption. When you think about concierge, and look more broadly at the SMB space. You generally have this notion of do-it-yourself and do it for me. And then in the middle, you've got these do-it-with-me type type of propositions that tend to fail. You don't hear a lot about them because people tend to gravitate into either I'm very cost sensitive or I'm very time-sensitive. What we did with Concierge was we created an effectively downsell mechanism for people who wanted expertise but didn't think they needed a lawyer or an accountant specifically. And an upsell mechanism for customers who said, I can do some of this myself. But in the end, I don't trust myself. I don't trust technology. And that comes back to some of that defensibility around AI, where it's not good enough to have an okay solution or a good solution. These are binary situations. You have to be right -- so we introduced this concierge model about a year ago to say, we've got a group of experts who see thousands of formations, thousands of wells. Rhey do tens of thousands of reinstatements a year. They dissolve companies when needed. We can give you some of their time and all of their technology to make sure that it is done right and then LegalZoom will back whatever is being done with a guarantee to make sure that if it isn't done right, we'll do it again for free. That has resonated tremendously with customers and has become kind of the benchmark for what we think our services should become. So I'm as excited maybe even a little bit more so than you because we've seen more demand than we had supplied for in the beginning with the MVP. Ironically, the supply issue wasn't a function of expertise. It was technology. we didn't have the technology built, the automation and the AI when we launched because the trick here is we wanted to give that technology to our experts to make them more efficient so that they didn't have 10 customers worth 100 or 1,000, but they could have 10,000. But every customer engagement felt one-on-one personal and it felt like they had all the time in the world for people. We've gotten to that point now, and that's why we've been able to launch more and more of these products at higher and higher prices.

Perfect. And how should we think about those various tiers? Does the service differ meaningfully? And I believe the sticker prices might go from $1,000 a year to $1,400. What would be the service difference for that.

So it's largely results-driven or value driven. So on the results side, it's when someone has a real issue. So complaints is probably the perfect -- we think that there's upwards of 1/3 of all small businesses that fall out of compliance from time to time. That's when a small business, a real small business relies their time is more valuable than spending $500, $800, $1,200 for a product that makes sure that it is done, it's guaranteed. And then all of the other things that you might have been doing, you can offload on to us as well. That's the first is from the standpoint of value when they are looking at using a law firm. So nonprofit is a good example. We've got a nonprofit concierge. That is our highest price they're comparing what we do to something that's going to cost them tens of thousands of dollars. There, we want to make sure that we are value priced, not cheap, but value price. So we have to be very careful with how we price that so that people don't say it's too good to be true. Because in many respects, relative to going to a law firm, it is too good to be true because we are that good -- so we continue to make sure that we've got that pricing right. That's how we get to the variability of pricing with those concierge suite products.

Yes. And some of it is product driven for a specific -- so if somebody is doing an entity conversion, then that's a particular product if somebody is dissolving entity, then we have a concierge dissolution. If somebody has fallen out of compliance and needs to get reinstated, that's its own product as well. And then a lot of times what we're seeing, especially with our base where we can -- we're up to date on their level of standing with a particular state. If they're out of good standing, we can let them know and say, "Hey, do you want us to help you reinstate your entity." A lot of times, they just don't know. They're not paying close enough attention. And so, yes, I'd like you to do that. And then by the way, can you please handle all of my concierge needs moving forward because clearly, it's either gotten too complex or I haven't had the time myself. And so that -- the good news about that as well is it's proving out a use case for general -- the broader SMB population where some percentage of them enhanced compliance needs or may even not being good standing themselves. And so it gives us the opportunity through some of the partnerships that we've talked about and just through that channel. -- to approach bases in a way where we've learned a lot through rolling these products out to our customer base.

Perfect. And maybe that's a great segue into how you slice and dice the concierge market because there's a lot of different ways you could look at it. You could look at it as LegalZoom's existing customer base, which might be 0.5 million businesses you form in a given year. or the 5 million roughly that's being formed right now in the United States or the 30-plus million that are in existence. How do you -- what do you view to be currently the prime market for the concierge product? And how do you anticipate that could change?

The primary market is some percentage of that $30 million -- this is a TAM expander for us. Those businesses need a product this -- and even the businesses that are using a law firm, the law firms would prefer to have us do this at that price, then deal with a really expensive bill that doesn't have a lot of value to it. What we are focused on right now is proving this out within our base. We want to make sure that there is excess demand that we're serving our customers well, that these products are renewing at a high rate. From there, we'll go to channel, which is why we are leaning in and expanding that partner channel. By the way, both ways. It's why we want to, and it's why partners are now coming to us because they're saying, "Wow, you have a product for us now for the customers that we have that have already formed." And and then ultimately, we'll go direct to market as well.

Perfect. And something I think that's also exciting about AI in your business is that you've said that AI has driven 55% reduction in trademark search time, 30% faster patch in drafting, 40% of chat volume handled end-to-end by AI, and you're uniquely providing this human in the loop option. But how do you prevent malpractice issues, especially as it relates to your accountants and warriors.

It's an important question, and it's something that our teams do and look at each and every day. Luckily, we've been working with and dealing with this for 25-plus years and have never had a significant issue. The trick is to have layers of protection and layers of security, 1 on top of another, so that we've got redundancy. And that's why using AI alone. We're using for that matter, technology alone really doesn't work at scale. So we do is we use technology for that first layer. We use human and artificial intelligence for the next layer. And then we have redundancy built in on before we send something out. And then we do. And a mistake happens because mistakes inevitably happen, we are quick to acknowledge it and then fix it with a guarantee.

Perfect. Noel, are you excited about Concierge like Jeff and I?

I'm more excited...

He's jumping out of seat...

Great. I'm going to ask another question about AI and then get into some more modeling growth questions. But maybe 1 more on AI. Jeff, the stock has traded at times, and again, not unique to LegalZoom like an AI loser. And maybe 60 seconds or so, can you please make the case, why is LegalZoom and AI winner.

Sure. And I'm going to go back to my earlier statement. The question to ask is who is going to win when you see this dislocation and a foundation model isn't going to do this. a start-up isn't going to have the strength, breadth or power to compete with us. They never have -- they never will. And a small business owner isn't going to want to build a dozen agents and then maintain them over time. What do we have? We've got the positioning. We've got the regulatory moat that we've built and expanded. And then we've got the margin profile that allows us to do this at scale for customers.

Awesome. Maybe no else time to shine as well, getting into organic growth and financial frame question. So Noel, I think there's a lot of puts and takes with the 2026 revenue guide. So in the first quarter, revenue grew 13%, guidance implies 8% for the full year. But there's a lot of puts and takes between the formation Nation acquisition and I think some one-off benefits for the first quarter, so could you maybe sum that up for us and let us know if those puts and takes?

Yes, absolutely. First and foremost, talk about shining. We're very excited about our first quarter results, where we exceeded our expectations. I think coming off of a year in 2025, where our organic growth was around 3%, and you noted guided to 8% for this year. In the first quarter, that 13% growth was partially benefited by the formation Nation acquisition, where we're just getting to that final stage of lapping. So with Q2, we will have fully lapped the formation nation inorganic benefit and there was about a half quarter's worth in the first quarter. And then we saw really strong annual report filings in the quarter tied to some of the automation that we've done around delivering that service, which is a really nice customer experience value add that we know is going to provide really nice medium- and long-term retention benefit, and we're starting to see that in our earlier cohorts now. That was a big driver in Q1 as well. And it's heavily concentrated from a seasonality standpoint in Q1, just given regulatory time lines. So that benefit will moderate as we move through the rest of the year. So if you take the combination of those 2 factors as drivers and adjust our growth for the quarter. It looks much more like our Q2 growth. And then that implies some modest acceleration in the back half of the year.

So it's clear that the annual report filing outperformance is flowing through. Are there -- is there any other structural improvement in the subscription business that gives you more confidence through the end of the year? Or anything surrounding subscription AOV or ARPU?

Yes. I mean from -- you saw AOV improved nicely in the first quarter. I think really what it's coming down to from an ARPU standpoint is customer mix. We talked about Concierge being a driver we talked about some of our partner channels starting to drive really strong, more established businesses through the funnel. And then Jeff mentioned the delivery of these sources helping margins -- so alongside of some of the commercialization that we've done in our lineup, where we continue to add more value in our upper-end SKUs, particularly our Pro and premium SKU by bringing stronger value subscriptions there. We've expanded legal services in terms of the placements in that SKU. And so that's helping to drive ARPU as well. So we see ARPU as a meaningful driver of the business in the back half of the year. And we're always looking at pricing opportunities as well. The combination of those things has ARPU as an important driver. We think long term, it will be more of a balance between subscription units and ARPU. And really -- and we've said this a lot over the years, like with the testing that we do, we're kind of agnostic as to whether it's subscription unit growth or ARPU growth. We're looking to drive LTV and from that equation. If there's a bunch of really low-priced subscriptions that make sense for the customer. And ultimately, that's what they're buying. We're more than happy with that. Or if it's fewer higher-priced ones, we're happy with that as well as long as it's driving overall performance in the business. And so that's helping us to unlock margins as we think about the back half of the year as well. There's a couple of things from that standpoint. One is the annual report volume that I described in Q1, that's a sort of neutral to gross profit neutral to EBITDA. And so filing fees as a percentage of revenue in the back half of the year. Our CAM spend is lower in the back half of the year as well because peak seasonality is in the first half. And then we're expecting to continue to expand on some of the AI efficiencies that Jeff talked earlier, and that's baked into our expectation for the year as well. So the combination of those things is really lifting margins in the back half of the year.

Perfect. And I'm sorry, were you going to say the. Okay. And what we've seen happen in the public markets in the past few years is there was a time where software investors would focus more on EV sales, EBITDA but times are changing, they're looking at GAAP more -- so stock-based compensation is increasingly a big focus for investors. And you have made great progress there. I believe that in the first quarter, SBC was at $21 million, down from $30 million a year ago. But how do you think about modeling full year 2026 stock-based comp? And how should we think about stock-based comps in years out?

Yes. It's certainly a focus for us as well as it is for everybody. It's an important tool. Let's be clear for recruiting and retention. And with that said, we're trying to optimize overall profitability as well. And so we've been focused on it. And we did see it come down meaningfully here sequentially the last few quarters. I think this is a sort of a new baseline right now. So I would kind of model off for the full year as a good sort of quarterly number to be around with some puts and takes, depending on -- it's somewhat hard to predict because there's forfeitures and there's maybe some unplanned happen. And so that can move the needle a bit. But we're generally in that right baseline. And it's something that we'll continue to try to optimize as moving forward.

Perfect. And maybe anything on M&A? How interesting is the pipeline right now? And if you were to pursue it, what do you think would be attractive in your existing portfolio?

Yes. I think we're always -- we have a team that's always having great conversations and keeping the pulse of what's happening in the market. We are very intentional about making sure that our balance sheet is healthy, so we have the flexibility to be opportunistic if something happens. Our framework has stayed pretty much the same. We're looking at anything that is a really strong adjacency to some of the service offerings that we have today that might help a small business owner either get compliance, they compliant or run their business. And so that continues to be how we think about it. At the same time, are open to if there's something in our space where we think that we can drive some meaningful synergies in the relationship, we'll look at that as well. But it's -- it's not something that we have to do. It's something that we can be opportunistic around.

I would argue M&A is another leg of that stool, like our part channel. So when it makes sense, where it fits, it's a great use of capital. We haven't seen it since formation nation. It's a tremendous acquisition. So I think we've proven as a team that we can buy right, integrate and leverage it to be a series of pieces in our puzzle. Right now, we're predominantly focused on the partner side and growing that at we're literally going to leave here and go to our first-ever Partner Summit in New York. We've got 100-plus people who are partners, potential partners, soon to be partners. So that's the core focus for now.

Awesome. Great. Jeff, Noel, thank you so much for being here today.

Thanks, Ella. Appreciate it.

Really appreciate it.