Thank you for standing by. My name is Alex and I will be your conference operator today. At this time, I would like to welcome everyone to the LegalZoom Second Quarter 2024 Earnings Call. All lines have been on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the call over to Madeleine Crane, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom’s second quarter 2024 earnings conference call. Joining me today is Jeff Stibel, Chairman and 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 words such as believe, expect, plan, anticipate, will, intend and similar expressions and are not -- and should not be relied upon as future guarantee of future performance or results. Such forward-looking statements are based on management’s assumptions and expectations and information available to us as of today’s date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. In addition, we will also discuss certain non-GAAP financial measures. We use non-GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.

Good afternoon everyone and thank you for joining our call. I want to start by saying I'm honored to be serving alongside our talented leadership team, and I want to thank our former CEO, Dan Wernikoff. Under Dan's leadership, LegalZoom has built a deep bench of talent, improved its technology infrastructure, and created key assets that we believe are positioned to empower LegalZoom for long-term success. Let me briefly discuss my history with LegalZoom, our leadership transition and why I am excited to take on this role before diving into what you can expect from us over the coming months and quarters. I've been deeply connected with the needs of the small business community since the founding of my first business, simply.com. [ph] early in my career where I learned firsthand the complexities of business formation and ongoing compliance requirements. In 2006, as CEO of Web.com, I was introduced to LegalZoom as a large strategic partner. I quickly understood the power of the unique opportunity LegalZoom is capitalizing on, establishing relationships with small business owners at the earliest pivotal moment in an entrepreneur's journey; business inception. Watching the company's success unfold, I have seen a small business itself emerging to the powerhouse of the industry. Almost 25 years since our founding in category creation, our brand has 5 times the awareness of any competitor. We've incorporated 4.4 million businesses, helped over 4.2 million consumers with estate planning, and have over 1.6 million active legal and compliance subscriptions outstanding. Yet, LegalZoom only accounts for just over 1% of our massive addressable market of over $50 billion. I have strong conviction in the opportunity that lies ahead. I'm excited to be taking an active and direct role in executing the strategy of the business, operating on a day-to-day level, and driving accountability…

Thanks, Jeff, and good afternoon, everyone. Before I begin, I'd also like to express my gratitude to Dan, his leadership left an indelible mark on this organization and his contributions were vital to what was accomplished during his time here at LegalZoom. He has left us well-positioned as we move forward into our next chapter. Along those lines, I am very excited to welcome Jeff and look forward to partnering closely with him to drive LegalZoom to even greater success. I'll now turn our focus to our second quarter financial performance. Please note all comparisons will be on a year-over-year basis, unless otherwise stated. Total revenue was $177 million for the quarter or up 5%. Our results exceeded the top end of our outlook, primarily due to higher-than-expected fulfillment. Looking at business formations, we saw a softer macro environment in the quarter with Q2 Census EIN applications declining 6% year-over-year, below our expectations and a four-point deceleration from Q1. We expect the macro will decelerate further as the year progresses, and we'll discuss this in more detail shortly. We completed 134,000 business formations in Q2, down 17%. Looking at LegalZoom’s branded LLC formations, which excludes the impact of a partnership exit in the third quarter of 2023, formations were down 12% year-over-year. This is more closely aligned the Secretary of State formation data, which continues to show a steeper year-over-year decline relative to EIN data. Subsequent to the end of the quarter, we have seen a deceleration in Census EIN applications with the last four weeks of print averaging a 12% year-over-year decline. We have updated our macro expectations to reflect the softer environment, and this is a component of our lower revenue outlook. Our market share of business formations relative to Census EIN data was 10% for the quarter.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Andrew Boone with JMP Securities. Please go ahead. Q – Andrew Boone: Thanks so much for taking my question. Jeff, I just have one big picture question. As you look across the business formation, the SMB services segment, however, we wanted to find this, what do you think becomes the defensible strategy that you guys are going to focus on? How do you guys create something that is more immune to competition and allows you to build a long-term sustainable business.

Thank you, and great question. The bottom line is we in large part, created this category. And we've, in some respects, allowed it to be commoditized. The fact of the matter is we have the strongest brand around. This does not need to be a race to the bottom. So what we need to do and continue to do is build the best products and make sure that we're fitting the right products to the right customers at the right time. This is about orienting back to customer needs and making sure that we're aligned with the customer on their journey. They want to use LegalZoom. They have wanted that for a long time, and we do empower them to make sure that we're giving them the right products and services that these customers need as their businesses and their lives unfold and grow. I have every confidence that this is a highly, highly defensible business, and it's going to allow us to own this market again. And I'll end by saying I don't see a lot of aggressive competition. I see our inability to take ownership of what we can do for our customers. And then I'm watching a lot of others copy us. So we will continue to take the lead and build that defensible position. Q – Andrew Boone: And then Jeff, can I ask a clarifying question. It sounded like you're revisiting from the premium products in terms of maybe turning them more into subscription products and gating them differently. Can you just clarify anything there about as you guys think about what may be now moved into more of a pay package versus what's available from freight? How do you think about that strategy. Thanks so much.

Sure. And again, another good question. This one, I'm going to own the fact that I've only been in the seat for a few short weeks. So the right answer is we're going to test, we're going to listen and we're going to learn. But more specifically, to give a concrete example, we need to make sure that we're bringing the right customers into our ecosystem. And sometimes you effectively get what you pay for with free. We need to make sure that we don't have a look and lose. We have real customers who are trying to build businesses. And those businesses, frankly, shouldn't be leaning towards fully free solutions because they've got a business to run and build. And in the early first year, it is incredibly precarious. We don't want them focused on the things that we do better than they do and we don't want them wasting money on going to law firms or local lawyers. So, we want to help them incorporate quickly and efficiently. Then we want to get them a registered agent. We want to get them to be fully compliant initially and over time. And then eventually, we want to help them build web services, marketing services, tax, bookkeeping, all of the things that we've been talking about historically. But we need to make sure that we reorient back to the life cycle of the customer. And that is a longer journey. The first years are incredibly difficult. About half of all businesses don't make it through that first year. We want to focus on helping them make it through that year. Once they're through that year, yes, then they have sufficient revenues, then they're going to start thinking about marketing and expanding, and that's where we will have earned the right to offer more value-added services. Q – Andrew Boone: Thank you.

Thank you.

Your next question comes from the line of Ron Josey with Citi. Please go ahead.

Hey guys. This is Jake on for Ron. Jeff, really appreciate you giving more details on the three priorities. I really wanted to double-click on the first priority of focusing on subscriptions. You talked about segmenting your customer base, could you double-click on that and maybe give us one or two examples of key segments that you think has been maybe where there's an opportunity to market better and target those specific segments? And then Noel, just wanted to also double click on the headcount reductions. Any more details you could give on where those headcount reductions were focused or any products that you would expect to be deemphasized? Thanks so much.

Sure. Thank you, Jake. I'll take that first piece on customer segmentation. I'm going to answer it first in a slightly different way, which is what have we historically been focusing on because I think that will show you the clear opportunity that we have. Almost entirely, we have been focused on formation, which means a brand-new business or prosumer. So, someone who was coming in for the first time typically wants an LLC, and we are offering them a formation product, most typically in LLC. So, our go-to-market and our segmentation has been one and the same, try to drive people into that formation funnel. And from there, we drop off pretty rapidly. So, to give you some key segment examples, we know that from day zero to month 12 is a certain type of business, and they are very price sensitive. They are at risk of failure, and they are still trying to figure out what their business ultimately is. From then, you've got years one through three, where they're starting to emerge and build and gain stability and sustainability in their business. And after that, you've got from year three on where they're an established business, and they're looking to go from their core competency to broadening out whatever that means in their category. Those are three distinct segments that we sell in the exact same way right now at the exact same time at formation, and we rarely go back to them. So, that is one example of how we can spread out our go-to-market and then leverage or prowess in product and in value-added services over time when those customers need it. Other areas are just looking at different categories of business. And what a florist might want versus a pizza shop owner because those needs are different. And we are going to look over time to figure out what the right solution is rather than come up with a one-size-fits-all solution. And I would say, historically, we have tended to try to find these broad-based opportunities where a product can serve our entire customer base. And we lost sight of the fact that we aren't serving small businesses because there's no such thing as a small business. Every business is unique and distinct and either category and/or time segmented. So such that it affords us a much bigger opportunity to in the beginning own the market by establishing trust and relationship with these businesses and then over time, leveraging our data, figure out what the right product services and solutions are that they need and then either through our own organic products, through acquisition or through partnership offer those products to the customers as and when they need it.

And Jacob, this is Noel. With regards to your question on the headcount reduction, the reduction was dispersed pretty broadly across the company. I would say it was somewhat heavier on the cost of sales side, in particular, given the lower volume expectations and with a concentration as it relates to LV tax. The rest was pretty well split across marketing, G&A and technology and development. And so I'm sure there will be areas of narrow focus as we continue to evaluate testing and sort of our new execution priorities. But as we mentioned in our remarks, we feel confident that we have the right level of resource to sufficiently deliver on our existing initiatives.

Okay. Thanks a lot.

Thank you.

Thanks, Jacob.

Your next question comes from the line of Trevor Young with Barclays. Please go ahead.

Great. Thanks. First one, it just looks like the long-term guide slide was removed this quarter. Is it fair to assume that as part of the management transition and the shift in strategy here, we might get some sort of updated framework at some point, perhaps maybe as we look towards 25 expectations in a few quarters. And then bigger picture, as we progress through this shift in strategy, it seems like you're looking to move it quickly and that's really great, Jeff. Very encouraging to hear. At the same time, macro might be getting a little bit worse. These sorts of transitions do take some time and some legacy headwinds to persist. So as such, should we assume 25% starts the recovery? Is it 2H, 25%? Or is it more of like a 26 story at this point?

Thank you, Trevor. I'll take this at a high level. Noel, you can give some more details because you have more context in terms of what we've said in the past. Your first part of that question, in many ways, has asked and answered. You're exactly right. Our expectations are that we're going to move quick. We're going to be testing regularly. We're going to be leaning into sustainable growth through recurring revenue. And our expectation is that's going to put us in a really good spot over time. That said, we're still too early to speak to long-term guidance. However, we will, as soon as we can start providing interim updates and then long-term updates as we get more visibility into some of these changes. But again, we are moving aggressively because we do see that path forward.

Yes. And on your other question in terms of the softer macro, you pointed out, we did see a decel in the macro in Q2, and we've included carrying forward that softness relative to our expectation into our full year guide and now expect mid- to high single-digit declines in the macro for this year. So definitely a headwind that impacts us both on the transaction and even more importantly, on the subscription side, that will be a headwind in 2025 as well. And then we mentioned some of the softer retention rates that we're seeing relative to what we had forecasted. And part of that is relative to some initiatives that we had that were targeted at improving retention. Some of it is just a softer trending relative to prior performance, which I would also box into just being in an overall more challenging economic environment for small businesses. And to the extent that impacts the back half of the year, the subscription side has some carryover as well as the decision right now, our forecast does not have us re-commercializing LZ tax in the formation flow. And so that impacts the back half of the year and into 2025. So to your point, there is definitely some headwinds heading into 2025. But we are squarely focused on driving the subscription side of the business, focused on lifetime value, and we'll be aggressively testing in the back half of this year. And we've built in some room in our guide for those activities.

And the only thing I'll add, Trevor, before we hand over to another question or a few of it. Second one is the macro is a problem to solve for. It is not an excuse. And this is a solvable problem, and you see this solved across many other businesses with many other macros and businesses that are affected by our primary macro, which is small business formations. So from our standpoint, this is a solvable problem and a scalable growth business irrespective of where the macro is, despite the fact that we have pronounced headwind. The bigger concern that we have and the reason that we're attacking this concern so aggressively is we don't want to see deceleration in our subscription revenue growth, and we have seen that in the prior couple of quarters. That is the core problem to solve because that creates greater defensibility long term. So that really is our core focus and why it is the first of the 3 things that we're focused on in order of priorities from an execution standpoint.

Great. Thanks for all that color. Appreciated.

Your next question comes from like of Josh Beck with Raymond James. Please go ahead.

Yes. Thank you for taking the question, and Jeff, thanks for the detailed update there. I guess kind of high level, are you envisioning that the product footprint doesn't really change maybe as much as the go-to-market and the onboarding? Obviously, that's a very high-level comment. But strategically, is that how you're approaching it? And then just on the comments around compliance, I think you kind of mentioned the idea of maybe having a free formation that could include compliance or other packages. Is that kind of moving away from the maybe more purely transactional freemium model for obviously some transaction that's in place today?

Yeah. That's a good point, Josh. And I do agree with the comment. I think our product ecosystem is really strong. One of the things we've done incredibly well is reduce the amount of tech debt that we've had over the years, built a really strong technology stack. Our underlying platform, including MyLZ, is industry-leading. And both the core products and the ancillary products that we have built are really, really good. So I think that this is more of a go-to-market focus. And I mean that in two respects; one, in terms of business model, so that push towards recurring revenue and following customers' journeys over their life cycle. And then second, how we actually go to market, making sure that we're doing it with greater breadth, if you think back to the last question, so that we're more insulated and protected from small business starts. And then with regards to your second point on the free model, I see nothing wrong with a freemium model. But there too, we have to make sure that we're bringing the right customers in for the long-term. And the overall objective is to be bringing more businesses into existence that can be sustainable and sustained long-term. So what we need to do is rethink the types of businesses that are coming into our free channel. And as we said earlier, the businesses that we are seeing in our basic SKU, which is the free SKU relative to some of the others, they have higher churn and a worse profile. So we need to re-look at why that is. And our hunch is part of that is because we have a lot of looky-loos because it was free. Part of that is just the way in which we're going to market; by saying something is free, people automatically get defensive about paying for things, even if they need it, just because it costs something relative to free. And then finally, part of it is because these businesses think that if something is free, that everything should be free, such that maybe they don't need these other products and services that actually are valuable to them in the medium and long term. So that's the reorientation that we're thinking of. It's hard to be more concrete, so I apologize for that. I'm glad you asked the clarifying question, Josh, only because we're in the middle of testing what the right solution is.

Okay. That's super helpful. And then maybe just a follow-up on what you're observing in the macro thus far. Obviously, it sounds like kind of down 6% for Q2 in terms of formations, and overall macro data points are pretty mixed. Obviously, the jobs report disappointed some folks, and you've had GDP okay, but this does seem like a market that's maybe slowing down more than I would have expected. So I don't know if it's maybe the effects of a pull-forward or maybe how you would characterize that? And I know we obviously don't have financials going back to a major recession or a financial crisis. But generically, how would you think about the sensitivity to the macro as we look ahead?

Look, at a high level, we've been about as good as many others have been at predicting the macro, which is pretty poor. So I see our job as building this business around -- around a set of macros, not just the -- not just small business formations so that we can insulate ourselves from the risk and uncertainty that we're seeing. The reality is, I don't think that this is a pull-forward situation necessarily so much as a regression to the mean. We had a very, very high increase in small business starts from COVID to about the mid to end of last year. We have to regress to the mean. And I don't think it is clear yet what that mean is -- and whether that regression to the mean will pull us into a number below or at where we roughly are right now. So we've seen recent acceleration. We are acting in a conservative fashion from a modeling standpoint. But from a business standpoint, from an execution standpoint, we're saying, what do we do to be independent or more independent of that macro? And frankly, how can we lead into some of the other macros as they evolve and develop where our business tends to find strength. As an example, we know that small business formation tends to happen towards the middle end of recessions. We know that when joblessness increases, you start to see more businesses form. So one of the things that we're looking at more broadly is the macroeconomic environment and where we can play to create that independence, not just to build the business, but to create that independence so that we have an insulated business.

Understood. Thank you.

Yes. Thank you.

Next question comes from the line of Elizabeth Porter with Morgan Stanley. Please go ahead.

Great. This is Katie Kieran [ph] on for Elizabeth Porter tonight. I wanted to ask one on kind of leaning back into that consumer side of the business, maybe taking it from two sides. First, are you able to size that kind of potential revenue opportunity and maybe relative to that with small businesses? And then is the go-to-market strategy pretty transferable there? Or are there any kind of incremental changes that will allow you to win with consumers? Thanks.

Great question. Look, from a sizing standpoint, we don't have specific details, but the consumer market is obviously significantly bigger than the small business market. And when you look at the needs of consumers, wills and trusts are way up there. I think the stat we used was that two-thirds of people we surveyed self advocate for needing a trust or well and about one-third actually have them. And on top of that, very few go back and look at those wells over time. I mean I, for one, have a will. I don't like looking at it ever. It's very morbid. But I know I need one, and I know I should be looking, and I know as my family evolves as my life situation changes, I should be going back. So our thinking is we can productize this space to make it easy and convenient to do the right thing for the people you care most about. So from our standpoint, there is a very big largely untapped opportunity. In terms of the go-to-market, it is very much in line and incredibly transferable from what we've been doing. In fact, when you asked most people a portion -- a big portion of the unaided awareness comes from the consumer side, not from the small business side. So most of us still remember how LegalZoom got its start, which was on the consumer side with wills and trust. So we can go back to leaning in on that. And the beauty there is our marketing can serve double duty, because every small business has a small business owner behind them that needs a trust and will. So as we build our brand in one respect, it adds some strategic advantage in the other. So we see this as very symbiotic.

That’s great. Thank you.

Great. Thanks a lot.

Your next question comes from the line of Ella Smith with JPMorgan. Please go ahead.

Good evening, Jeff and Noel. Thank you for taking my question. So maybe first for you, Jeff. So LegalZoom has retention rate from the prescription business around 60% or so, whereas there are website builders, which service somewhat similar customer base with rates in the 80s. Do you think the LegalZoom can get there? And in general, what else do you think to happen to improve the quality of your subscribers?

Good question and I'm going to unpack it a little bit. And I think this is a good way to think about subscription businesses in general. I know you look at this as well. There's early life churn and late life churn. And in all subscription businesses and everyone defines what early life is differently than others, mostly in the web services space, that's about three months. I think what you've got to do is unpack our business and look at it as a tale of two cities. So our early life is not similar to web services businesses at all, because included in our early life are new business formations where we have a much higher failing rate than you would see in a web services business where someone has already been in business likely or at least in some cases, might already have incorporated or formed an LLC or an S Corp. In our case, these are prosumers in the best case or people who have an idea otherwise who then form and ultimately try to build their business, many of whom fail. So I think the way I would answer that business, and I think this is the right way to think about it is our late-life churn should be similar to other SMB ecosystems. Our early life churn will likely always be higher as it should. And that's because part of what we do for these businesses and business owners is we help them get their start despite the fact that we know and they know that many of those businesses won't survive even to the time when they're going to have a website.

That's very clear. Thanks you so much, Jeff. And Noel, maybe for you. So this evening, you announced the reduction in the force but made no change to the profitability guide. Can you just remind us why that's the case? Thanks so much.

Sorry. I didn't quite get the second half of that. Can you just repeat that? So we gave you some details on the risk, but then you said...

Absolutely. So you announced the guy -- excuse me, you announced the risks today, but there was no change to your profitability guide. It was unchanged from last quarter. And I'm just curious, despite the newly announced risk, why are we not seeing an impact to the guide because of that?

Yes. So that was contemplated in the guide that we held. So we had already kind of factored in an estimate for that.

Okay. Thanks so much.

Thank you.

That concludes our Q&A session. Ladies and gentlemen, thank you all for joining. You may now disconnect.