Thank you for standing by and welcome to LegalZoom Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers presentation, there'll be a question and answer session. [Operator Instructions] Please be advised that today's call may be recorded. [Operator Instructions] I'll now like to hand the call over to Danny Vivier, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello, and welcome to LegalZoom's second quarter 2021 earnings conference call. Joining me today is Dan Wernikoff, our Chief Executive Officer; and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of word such as "believe," "expect," "plan," "anticipate," "will," "intent," "confident" and similar expressions, and they're not and should not be relied upon as a guarantee of future performance or results. Results could different materially from those contemplated by our forward-looking statements. We caution you to review the risk factor section of our reports the filings with the Securities and Exchange Commission for a discussion of all the factors that could cause the results to differ materially. The forward-looking statements we make on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relation section of our website at investors.legalzoom.com. The non-GAAP financial measures are not intended to be considered an isolation or as a substitute for results prepared in accordance with GAAP. Now, I'll turn the call over to Dan.

Thanks, Danny. And welcome, everyone. Thank you for joining us today for our first earnings call as a public company. Noel and I enjoyed meeting many of you in the weeks leading up to our IPO and appreciated all the support along the journey. Before we discuss our second quarter results and review our priorities for the duration of the year, I want to take a moment to reflect on our mission here are LegalZoom and so I remind everyone of the significant opportunity ahead of us. A little over 20 years ago, LegalZoom started with a vision to disrupt legal services by leveraging technology. We believe then as we do today that legal services need to be democratized so everyone can access and afford them. We take our responsibility very seriously, knowing that as we empower small businesses with the tools they need to thrive, we are in turn covering the success of the U.S. economy; a purpose all the more inspiring as these small businesses continue to navigate a global pandemic. Our journey to democratize law, brings with it a compelling economic opportunity. Despite the digital transformations we've seen across many other large and highly regulated end markets like tax prep, financial services or healthcare. The $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation. In that, last year just 8% of legal services in the United States were provided online. The majority of legal services are still conducted through with offline attorney, many of whom do not have a functioning website let alone software to automate routine tasks enabling lower cost of service. In a system plagued by inefficiencies, small business owners are left holding the bag or just spend their limited resources on services very difficult to navigate at…

Thanks, Dan. And good afternoon, everyone. And since this is our first earnings call, I'm going to start with an overview of our financial model. When we review our results for the quarter and wrap up with guidance for Q3, in the full-year 2021. We'll start with our financial model. We were driving a high growth business that scale and we're operating with positive adjusted EBITDA which allows us to reinvest operating leverage to drive durable long-term growth. That's why would also our business starts with a new business formation which we use as an opportunity to introduce customers to the LegalZoom ecosystem, allowing us to offer ongoing subscription services, enjoy higher customer lifetime values. Our revenues play evenly between transactional and subscription components. In both of our customer acquisition spends, it's covered by the upfront transactional purchase alone leaving behind a growing base at high margin subscription revenue and drive an attractive unit economics. Apart from the 85% of our subscriptions are built upfront on annual returns, providing a favorable working capital dynamic. In the near term, we are laser focused on growing the share overall business formations leveraging our market leading position, brand equity, and superior customer experience to further penetrate the large opportunity in front of us in the legal services vertical. So, half of this call, we are prioritizing growth over profitability and are focused on making the right marketing infrastructure and people investments to drive sustainable topline results. In the long-term, as we achieve our market share objectives, we expect strong possibility in cash flow metrics supported by larger mix of subscription revenue. Now, I'd like to take you through our second quarter financial results. Total GAAP revenue in the period came out at $150 million, up 36% year-over-year. Transaction revenue representing 49% of total…

Thank you. [Operator Instructions] Our first question comes from Sterling Auty of J.P. Morgan. Your line is open.

Yes, thanks. Hi guys, welcome to the public market. My first question is actually tying a little bit off of what Noel was talking about in terms of the guidance and COVID. With Delta variant kind of come into the forefront, have you seen any impact here so far in this quarter? And I know, nobody has a crystal ball but how are you thinking about the potential impacts to the business in the back half of the year?

Yes. Well, thanks for the questions, Sterling. First off, I just want to acknowledge, a very strong quarter, great work by the team to deliver it, while in the backdrop of going public. So, I'm cleared that first but and yes we're actually its interesting. We're seeing the summer seasonality actually which there's been a little bit more of a normalized pattern in general. As we this year relative to last year because if we reflect on last year, we actually saw with COVID coming towards us, a shutdown which impacted us at the end of Q1 and the beginning of Q2 which is historically our peak. And then, instead of staying at those levels that increased, which normally you'd see the exact opposite. You'd see the peak happening at the end of Q1 and in the beginning of Q2. I mean, you're see a drop-off as you hit the summer month. So, we aren’t all that surprised to see a normalized pattern coming back a little bit and I will say July had a little bit more softness but that was not incredibly unexpected for us. As you said, it's a very unique backdrop. People travelling for the very first time and then right at that period of time we saw the delta variant creep up as well. So, while we're pacing well, we really do have to acknowledge we're in this unique territory. Now SMBs, are they completely open for business? Yes, but do they have some restrictions? Yes, they also have them. Our people locked downed know they are people starting to be a little bit more cautious, yes. And so, all that lack of visibility makes it a tough time to launch our business. But again I'm very surprised just by how resilient small businesses are. From a historical perspective, formations actually remain relatively strong. And so, for us I mean we definitely need to see how the next couple of months play out but there is no really large surprise at this point in terms of what we're seeing.

I'd have just to add on that, Sterling, maybe if I can jump in here and also take a quick second just to note the Q2 results how that we're pleased with the results that we presented for Q2 and feel like it represents continued strong execution by all of our Zoom'ers. To your point to your question, there are a number of variables at play and a certain level of uncertainty. But we believe that the ranges that we provided reflect a fairly broad set of outcomes and we're confident that we can continue to execute and deliver results within the ranges provided.

That makes a lot of sense. And then, my follow-ups a little bit of a loaded question. It's one of the most popular that I get. When you talk about the opportunity with tax, getting your former employer in to it, and that so is they're struggling to understand you compete, you partner, with the relationship going forward in the marketplace for your tax opportunity.

Yes. Thanks for the question and it's important to have this one we relatively clear. Intuit doesn’t provide tax services directly through experts. That's actually a really important channel and it's called the ProAdvisor channel where large practices that work with Intuit in both in terms of establishing the customers on clickable at online as well as providing advice on top of it and completing taxes leveraging products like Lizard for instance which is an Intuit product. You can think of LegalZoom as one giant practice now that partners with Intuit. And we have a wholesale relationship on the QuickBooks online side. So, we're actually helping to distribute that to our customers. We internally have our own CPA's and we also are providing full end-of-year tax filing for our small businesses. But really important thing to note here is that when small business has formed with us, they almost have as many tax questions as they have legal questions. And 70% of them they come to us just have no account relationship at all and they're looking for a trusted partner. So, it's just a natural place for us to play a role and we did not want to recreate the wheel. There's an amazing wheel out there called QuickBooks Online and so we just wanted to partner with them.

Okay. Thank you, guys.

Thanks, Sterling.

Thank you. The next question comes from Elizabeth Elliott with Morgan Stanley. Your line is open.

Hi, thank you so much for the question. And congratulations for a strong second quarter. I was thinking if you could help us either quantitatively or qualitatively understand some of the sign posted you guys are seeing on how marketing can translate to better digital penetration. Understanding that it has been a slow moving market, so what other signs points that are seeing at when marketing is really over seated to drive the better show penetration?

Yes. I mean, I guess what I'd point to is that there is a couple of things that we have opportunities. We talk about three different growth opportunities. 1) Growing the core. 2) One is adjacencies and 3) one is attorney assist. A lot of the growth that you're seeing right now is just us improving the product experience which in turn is helping with conversion and then becoming more efficient in our marketing spend. And we started from a great spot, I mean you can't get much more efficient than having a 90-day payback and then having lifetime value thereafter. But we're on the journey doing now is really scaling that up pretty significantly. So, we're trying to drive that up to a point where we're talking about north of 50% increases in TAM spend year-over-year. And so, that's exactly what we're trying to do at this point. You can see us doing that through different tools like Media Mix Modeling where we're able to use data and understand the interplay between different channels. We're also entering new channels such as digital video and OTT, social, and we're increasing our investment in search engine optimization. So, we feel like we have a lot of levers. There'll be two steps forward, one step back at times as you start to scale up a new channel, often times you'll have to then start to reassess the efficiency of that incremental spend but in general, it's an important level for us.

Okay. And then just a follow-up. Can it more longer-term, and thinking about business formations, understanding that right now there may be some tough comp as it relates to COVID. But I think the other side is that COVID has kind of fundamentally changed how many people operate in the world and that creates a business opportunity. So, kind of as we get through some of these tough comp, how do you think structurally about the rate of new business formations over the next couple of years, need to turning above or below kind of what you thought it pre-COVID level?

Yes, I mean we definitely think it's going to trend above where it was pre-COVID. I mean, there's just the reality of people adopting digital enablement tools. There is also the reality of people realizing that they can form a business in their house relatively quickly because in some cases they've been forced to do it. And then, there's some really interesting regulatory tailwinds in that. Some platforms are now requiring or were requesting that the people who work on them actually form as an entity to help from a legal liability standpoint but also from like an employee status standpoint. So, we see this continuing and actually you're right, there is a little bit of a bump in Q3 because as Noel mentioned in the opening comments, last year we just saw a dramatic increase in Q3 in formation. And so, we have to lap that but we think it'll get back to a normalized level that was significantly higher than where it was when we were back in 2019 for instance.

Great, thank you so much.

Thank you.

Thank you. Our next question comes from Mario Lu with Barclays. Your line is open.

Great. Thanks for taking the questions and congrats on the first quarter all again. The first question is on retention. I was just wondering if you could provide some additional color on how retention has trended in recent months. In particular, from the newer cohorts that came on during the pandemic a year ago. And I know it's still a bit early if I has addition of expert services aided retention thus far. Thanks.

Yes. It's just maybe just to make sure everybody tracks the commentary here. What we really talk about what we look at as the leading indicators, that 13 month retention on annual subscriptions. And they are primarily driven by business formations as well. And the one thing I'd say here is that it's probably too early to tell. We need to bake a little bit post the annual subscriptions and most of the accelerated growth happened in July and August of last year. And so, there is an element right now of not having complete visibility into what that looks like. I will say we haven’t seen anything in interim periods that has us concerned and if you were just pointing to for instance the Q2 data which sort of has this subscription units forecast within it. It was essentially right spot on it where we expected it to be. As it relates to expert services and the impact that that will have on retention going forward. We know that when people work with an expert whether it'd be an attorney or an accountant that small businesses have a much more likelihood of succeeding. And so, we do expect that over time it'll improve. And it's probably more of a factor of just how many of our customers adopt those expert guidance services which will drive it. So, that's why we're so if you think of our strategy, there's two big pillars in there. One is the adjacencies and LZ Tax where we're layering it a CPA but also just that attorney assistance side. So, people can get off on the right foot and then have an expert that they can go through to get advice along the way.

Great. That makes sense. And then, just one the competitive landscape. You guys are reinvesting back into marketing in this back half of the year. I guess, any color in terms of what you see from your peers, are they doing the same and any color there would be helpful. Thanks.

Yes. I mean I don’t think we've seen any changes with the competitive landscape. I think we expect there to be over time as people continue to emulate our model. The thing that we're squarely focused on is that only 8% of legal services are delivered digitally today. And so, when we think about competition, it's really an offline attorney or it's an offline accountant now as well as someone who doesn’t leverage technology. And so, we feel comfortable that we have a superior solution relative to those alternatives. And it's as measured buying that promoter, you can see it. When someone works with one of our experts, they're three times the net promoter score of when they work with an offline attorney. When they work directly in our product, it's over two times in net promoter score of working with an attorney. And so, I think that's the competition we focus on the most. And we know that there's going to be people who emulate our business model and try to compete with us directly.

Great, thank you.

Thank you.

Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open.

Okay. Thanks, so much. So, I'll add my congratulations as well. So guys, following-up on the earlier tax question. I think, you came out with new subscription products like Tax Advisory last October. So, as you go around this path of widening your product offerings, it's like what has been the adoption rate in like so far. What kind of tax rates and perhaps incremental ARPU that you're seeing. Thanks.

Yes. Thanks for the question, Stephen. We tend not to provide tax rates on individual products. And actually the reason why is because often times there is a relationship between our cart and one the tax rate will go up and one will go down depending on how it what we're solving for in terms of the mix of subscription and AOV and ARPU. But what I will say is we have been surprised by the attach rate that we've had. I think I've noted this before that we're seeing an attach rate that's pretty much on par with our tax rate for our legal attorney subscription which when you think of a company named LegalZoom, you wouldn’t necessarily think right off the bat that the tax product would have a similar attach rate. So, we're feeling really confident about where we are. We're just getting started here too by the way. We initially we're doing outbound sales primarily to access this customer base. And right now we're doing lots of testing of how we put it in the product itself. And you have some early reads there are showing some promise. We think there's lots of opportunities to continue to increase attach and like I said one of the interesting things here is there is a symbiotic relationship between once you start to have one expert that is helping you with the business, it probably helps in terms of when you start to feel the success and you start to feel the support they're providing in helping us do other cross sales and some of our other expert services. So, I think but very early in the journey and but feeling good.

Yes. And maybe just to add to that with that. One of the important focus here is for us around tax is really on the operational side making sure that we're focused on scaling up operations to meet the demand that we're seeing through our formations flow and that we're protecting the consumer experience as we do that and really investing the right way in that business. Yes. It's a really good point. Right now we have no demand issue whatsoever. We actually in many ways are actively throttling demand, in some cases to make sure we get the experience perfect before we sort of unload and get all of the attached the entire base. And so, you'll see us do a little bit as there is testing the channel and making sure that the channels working and then there's insuring that the experience is perfect for the customers and at that point we're getting close to the point where we're really ready to just go broader on it.

Okay. Thank you.

Thank you. And next question comes from Matt Pfau with William Blair. Your line is open.

Hi guys, thanks for taking my question. And great results. I wanted to ask on the partner program. Can you just give us an update on where you're at in that revamp and when that line item could become more of a contributor to revenue growth?

Yes. Thanks for the question, Matt. I think this is one of the areas that I think we've made the most progress and yet at the same time it probably looks the worst. Because in a lot of ways we're revamping everything that we've done with partnerships. So, historically they’ve been somewhat tactical bounty, one-way directional relationships with brands that couldn’t necessarily offer traffic back to us. We just didn’t have established large bases of customers. And we’re really rethinking this to on how to be more bidirectional the brands that were really excited about offering our customers but also brands that are willing to market our services directly to their customers. This last quarter, we actually signed four different partnerships and all of them with strong brands. All of them, I would say in a pilot mode right now but the early results are very strong. And one of the things that we're also doing at this point which had never historically been done is we're targeting and leveraging the data that we have in a couple of cases and you can see it almost immediately you can see conversion of improvements just by offering them the right solution this or for the type of business they are. So, this has been an area where it's been almost flat to down in terms of its year-over-year growth rate. Flipping hopefully to being accretive to our growth rate in the next couple of years. But it will be a slow build back up because most of these again are more ratable relationships. There again more bidirectional and there's a lot of testing, we want to make sure again the experiences is good between these companies who are partnering with.

Great. And just want to follow-up on the business formations. As you guys look can you direct the quarter or the first half of this year, did BG continue to take share of business formations in your estimation?

Yes. And one of the things we've decided and it's actually interesting. So, the EIN date that most people look at the census data, is a great directional indicator of the macro but it's also pretty noisy. For those who've been looking at that data, it's inclusive of companies that are trying to get a PPP loan. And it typically it has to be processed through a bank account which requires an EIN. So, you might need an EIN but you may not have formed the entity. If you go bankrupt, you actually have to get an EIN, and if you hire an employee and you it's your first employee, you have to have an EIN. So, these are things that are kind of dislocated from the true macro which is looking at businesses that are forming through secretary state data. It's proprietary data that's something that we have. We choose not to release it and we don’t want to on a regular basis. We'd probably will consider doing it on an annual basis. And but, as I have said before, our whole strategy is to take share and drive like term value and we're feeling pretty good about how things are going this year.

Got it. Thanks a lot, guys. I appreciate it.

Thank you.

Thank you.

Thank you. The next question comes from Andrew Boone with JMP Securities. Your line is open.

Hi guys, thanks for taking the questions. Understood we're in a dynamic environment currently and that marketing spend is all wide based but it's done with a 77%. And it has I think about this is probably the biggest swing for profitability and understood you guys aren’t giving guidance there. Why didn’t you spend more like how do we think about that?

Do you want to take that?

Sure.

I better not.

Yes. I mean, Andrew thanks for the question. We -- our spend was up from a customer acquisition marketing standpoint 61% year-over-year which is still a massive uptick. In spend, to your point it is the vast majority of our allocation is to against performance and ROI and it's ROI based and so we're setting guard wheels for the spend. We will tweak that dial up or down as we see different opportunities where we can be more aggressive. And we also keep an allocation for kind of testing and learning new channels so that we can make sure that for the longer-term there are opportunities for us to continue to spend up. The approach that we're taking on the ROI base is we are stepping into it. As we're learning and making sure that we're just paying attention to our efficiencies. And also, in conjunction paying attention to the other opportunities that we're creating to monetize our customer relationships and to expand LTV through things like LZ Tax, and through things like our partner channel which we are looking to grow. And so, as those become additional monetization opportunity, is that our material to our overall LTV equation. That'll allow us some visibility into spending up even more aggressively. Or we do plan to continue to stay aggressive in our marketing spend.

Yes. The only thing I'd add there, is we -- because we're entering a lot of new channels, well we really are sort of a measure twice cut once on that, and we look at the marginal spend return and also the interplay between the different channels. And so, there is almost the spend up and that to measure and then reallocate and then spend up. And what you see is its sort of gentle increase in the marketing spend that should continue on a dollar basis. But it's going to start looking smaller on a percentage basis just because we're at a different scale. The one thing I would also add in there is that we are looking for what I would call more brand partnerships in that. And areas where we can make investments just lays awareness. One of the bigger opportunities that we still have, we have a high awareness level but if you ask small businesses what we do, you get a lower level of understanding of our product and that we're really squarely focused on this concept of being the platform, the destination, the starting place to form your business. And so, we're looking for ways to get that out in a broader way through brand arrangements. And so, you'll start to see a little bit more of that activity probably in the back half of the year.

Okay. And thanks. That tells very nicely and then the next question. So, just given the fact that LegalZoom is faster and cheaper than offline alternatives, what's the biggest hurdle to getting people to move online? Do you think assist unlocks that or how big of a step function is awareness versus just that education piece versus quoting from hand?

Yes. I think it's a little about those things, I mean there is an awareness component of this which is I don’t think anybody really knows of this category. There's not like a defined category around business formation. And so, we're trying to establish that. But as soon as you establish that, you'll have some people who just have a fear of doing it on their own and that's where the backstop of having attorneys available if you need them. And again, we don’t really feel like most people will require an attorney and may just help them try the product knowing that if they run into a problem, they'll be able to access that attorney. And so, having them be part of our ecosystem and a core part of our ecosystem is extremely important. But those two factors together are what are really going to drive people's acceptance out of the category and then obviously we want to be putting more fuel on that with our team spend.

Great. Thank you.

Thank you, Andrew.

Thank you. The next question comes from Brent Thill with Jefferies. Your line is open.

Thank you. This is John Byun for Brent Thill. I have two questions. One, if could then maybe remind us of the peak proceeds not in my quarter and how you expect it to be different this year due to COVID or other factors. And then, in terms of product investment, you should maybe delve into between what are the biggest priorities from a near-term, thank you.

Great. Thank you, John. Yes, the seasonality traditionally we've seen it's almost sort of an aspirational component at the beginning of the year where people start a new business, we also see a lot of people get a tax refund the consumer tax refund and that becomes the seed money for their business. So, there is it's kind of a natural peak that happens at the end of Q1 and at the beginning of Q2. And then you generally see it taper off for the rest of the year with Q4 being the lowest quarter for formations. Last year was the exact opposite with COVID. Q1 was one of the weakest quarters, Q2 it's of lot to build back up, Q3 it started to accelerate momentum. And we've been sort of off cycle really until we got all the way through April of this year. And we started to see some normal pattern return in seasonality. And so, I actually think that's encouraging because the normal seasonality that we're now seeing is that at a completely different level of what it was relative to where we were in FY'19 which again gets to the secular tailwind around the idea of businesses being easier to form now. From a product investment standpoint, I mean again I'll go back to the framework that we use. There is a lot we can do in our core platform and in our core products today. This year, we launched a whole new redesign of the site. We also made it completely mobile responsive and pretty quickly we saw improvements in conversion that gets building as we've gone throughout this year. And since then, we've now been investing in the purchase experience and recomercializing it with new parts of our ecosystem like LZ Tax and then we're also now focused on the engage with experience post formation where we're creating a hub where we call My Account, where you can go in and schedule with your experts or you can message with your experts on-demand. You can start to get compliant stash forward where you can see different compliant events happening in your company. And we want that to be a place where customers are coming back on a regular bases and seeing the value that they're getting from the services that we offer. But in terms of product investment, I'd say right now probably the big investment is on LZ Tax where we are spinning up essentially of an extremely large tax business which is offering full service tax filing, tax invoice and again the wholesale relationship within too in one the QuickBooks Online site. So, I think that adjacency opportunity doesn’t really stop at LZ Tax. We think there is other areas where we can be investing in the future. But we really want to get that one right before we go to our next one. And today, that's a significant area of investment.

Great. Thank you.

Thank you. And we're currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Dan Wernikoff, Chief Executive Officer, for closing comments.

Yes. I want to thank you guys. It's obviously it's a lot of work to get to this point. Noel and I in the broader team, they'll feel like we're really just at the very beginning of the journey here. I want to thank all the Zoom'ers out there who've done the hard work when we've been on the road to go public and excited to get dinged back into the business in a deeper way. And we're really excited to keep innovating for small business. And look forward to catching up with all of you next quarter. So, stay safe. Stay safe everybody and we'll be talking soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.