Good day, and thank you for standing by. Welcome to the LegalZoom's Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tyler Drew, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's second quarter 2025 earnings conference call. Joining me today is Jeff Stibel, our Chairman and Chief Executive Officer; and Noel Watson, our Chief Operating Officer and 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 a 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 quarterly 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, and thank you for joining our second quarter earnings conference call. We are very pleased with the accelerated progress that was made this quarter and believe it will benefit us going forward. As I complete my first full year as CEO, I want to take a brief moment to reflect on the accomplishments we have achieved at LegalZoom. When I stepped into this role, my objective day 1 was clear: to build a more consistent, predictable and profitable business. One that could support sustainable long-term growth resilient to changing economic cycles. Our second quarter results demonstrate the work we have done to achieve these objectives, notably ahead of plan. First, we've stabilized the business and reignited subscription revenue growth. Second, we're building a premium brand and new suite of products that cater to the diverse needs of high-quality small business owners and individuals. Third, we're delivering operating efficiencies and expanding margins, strengthening our financial profile. All of this rolls into our second quarter strong results. Total revenue reached $193 million, up 9% year-over-year, ahead of expectations. Subscription revenue grew 10%, marking our second straight quarter of sequential growth and early achievement of our double-digit growth target, 2 quarters ahead of schedule. It is worth noting that our subscription revenue growth was led by our compliance offerings, including our new Compliance Concierge product suite, which we will talk about later. Further, our compliance offering showed encouraging improvement in first year retention, indicating that customers are appreciating the incremental value that we are delivering. With respect to our new concierge solutions, we launched and saw strong adoption of products that have shifted upmarket by adding additional value, leveraging artificial and human intelligence to allow us to offer the highest service levels to customers. On profitability, similar to Q1, we continue…

Thanks, Jeff, and good afternoon, everyone. We are very pleased with our second quarter results, which reflected continued progress in our key focus areas. As Jeff mentioned, our business has stabilized. We're seeing solid growth in our core and we've reached key financial targets ahead of schedule. I'll now turn to a review of our second quarter financial performance. Unless otherwise stated, all comparisons will be on a year-over- year basis. Total revenue was $193 million for the quarter, up 9% and ahead of our expectations. Looking at our revenue performance in more detail, we generated 10% subscription revenue growth, which resulted in roughly $120 million from subscription revenue in the quarter. Achieving double-digit growth in subscription revenue 2 quarters ahead of schedule is a strong indicator that our strategic shift is gaining traction and delivering results. Subscription revenue benefited from higher compliance-related subscriptions as well as the Formation Nation acquisition and our 1-800Accountant partnership. We will maintain our focus on our core strengths in legal and compliance services while also leveraging partnerships with top-tier providers to address the additional needs of our customers. We ended the quarter with approximately 2 million subscription units, a 22% increase. In addition to the inclusion of Formation Nation, the strong unit growth was driven primarily by higher forms, eSignature and bookkeeping subscriptions as we bundle these products into certain business formation packages. We continue to expect this growth to moderate as we have seen lower renewal rates with these initial cohorts. ARPU was $256 for the quarter, down 6% year-over-year and up 2% from the first quarter. The year-over-year decrease was primarily the result of the aforementioned mix shift of lower-priced subscription offerings related to the bundling of forms and eSignature and bookkeeping subscriptions into our higher-end formation SKUs. We expect to maintain…

[Operator Instructions] Our first question comes from the line of Brent Thill of Jefferies.

This is John Jin on for Brent Thill. So a lot of positive comments there. I wanted to see if you could maybe dig in a little bit more on the confidence in raising the growth for the full year by 3 points. Obviously, the trends are good, but the macro is still somewhat volatile. And so I don't know if you could dig into a little bit in terms of the drivers behind your confidence.

Sure. And thank you for that, John. Why don't I start at the high level and then turn it over to Noel to dig in on the details. But we're now running a more predictable subscription-driven business that isn't fully beholden to small business starts. And you're seeing that with some of the trends that are developing within the business. And that gave us confidence at the beginning of the year. It gave us confidence that the Q1 trends would continue and persist. It allows us to maintain margins and accelerate growth. I won't say irrespective of the formation macro, but with a much wider range so that we're not so limited. We are range bound now such that we can operate our business within our control in a way that we couldn't previously.

Yes. And I would say, importantly, the increasing guide is driven by performance that's sort of multifaceted if you look underneath the covers. We saw strength -- as we mentioned in our remarks, we saw strength in our core compliance subscriptions, which is really important and that's partly due to pricing the value, but also we're starting to see some positive signs on retention here as we look at year 1 renewals, and that's tied to a lot of the work that the team has been doing to improve engagement with our compliance hubs. We've seen strength in our virtual mail offering, specifically with renewals outperforming our expectations. We continue to be very happy with our 1-800 partnership and that's driving growth. We have some added benefit for Formation Nation, and that still continues to represent a near-term opportunity as we look to shift a largely transactional business to subscription. So importantly, it's coming from a bunch of different areas. Some, to be frank, of the raise is built into performance that we've already delivered year-to-date, but we're seeing consistent, visible and predictable improvement in the initiatives that are underlying the guide increase.

Great. That's very helpful. And maybe a quick follow-on. On your announcements with Perplexity and OpenAI, I don't know if you're able to discuss any of the financial aspects or benefits that could be given there without getting into the details that you can't disclose.

Yes. Great question. Without getting into the details, I mean, what you're seeing here is a signal that AI is incredibly critical to what we're going to be doing going forward. And if you look from those companies' perspectives, they're choosing the market leader, which is us. And with 20 years plus of data, robust history, strong brand and this ability to move upmarket, it's a natural fit for us to start working with the best in this field, OpenAI, Perplexity, there are others that we're going to try to continue to work with. Probably more importantly, as we look to the future, it's a strategy that lends itself to what we're doing with do-it-for-me, DIFM. And this concierge model of being able to leverage AI not to replace, but to augment our expertise is something that we believe is unique to LegalZoom and something that only we can deliver. And then the last thing that I will say is that it speaks to a last mile problem, which most technology has. We believe AI does as well, which is something we've been talking about for a number of quarters. AI has the ability to do a lot of things in our space and in legal tech generally. But when it comes to that last mile, the just before a contract is signed, that's when you need to introduce some level of service and some level of product that is very tailored to the individual customer. We're uniquely positioned to drive that forward. And some of the pivot that we have made over the last year and most of what we're doing go forward is designed to actually align with that because we think that as the market evolves, that's where we're going to be able to sit and create real differentiation for LegalZoom.

Our next question comes from the line of Patrick Mcllwee of William Blair.

Nice results this quarter. So my first question, I may have missed this, but I didn't catch you mentioned your retention rates this quarter. So first, if you wouldn't mind sharing those, that would be great. And then second, can you provide an update on how the retention or attrition rates you've seen in some of those initial bundled cohorts has progressed now that I believe you're kind of lapping some of the changes you made to those SKUs last year?

Yes. Pat, this is Noel. Thanks for the question. So our aggregated retention rate for the quarter was 59%. That's down from prior quarter of 60%. So we've signaled this, I think, on prior calls, and we've mentioned a few times that it really relates to the fact that we started bundling these lower-priced, lower retention subscriptions in our pro and premium SKUs, specifically forms, eSignature and bookkeeping. So we've lapped forms and eSignature rollout, which is really in the first and second quarter of last year and we'll be lapping the bookkeeping rollout, which was more kind of end of third, early fourth quarter of prior year. And that we'll start to see absent further changes in commercialization, retention rates stabilize thereafter. I will say when you look at -- it's largely -- the change in retention is largely this mix in product. And when you look individually at our respective products, we're actually happy with the retention rates that we're seeing. And as we mentioned in our prepared remarks, we're seeing some positive signals within our core compliance subscriptions, which are the products that matter most to us.

Yes. And specific to those compliance products, which are the majority of our revenues in subscription, we're seeing positive trends, both in retention and in engagement. So it gives us a proof point on retention, which speaks to what we've done in the past, but that engagement number speaks to our ability to drive retention higher, churn lower over time in those core products, which are the products that we want some of these bundles to graduate into anyways because what we're trying to do is actually cross-sell and upsell them ultimately into those compliance products.

Right. Okay. And then my second question, Noel, I think you mentioned that Formation Nation contributed $8 million in revenue this quarter, if I caught that correctly. But I believe there's a decent amount of seasonality in that business. So I just wanted to ask if you could frame expectations for that in the second half, just so we can kind of back into a more organic growth rate.

Yes. So Formation Nation delivered $8 million in the transaction revenue side of the business for the quarter. In total, it was a little over $12 million that they contributed. And you're right, because it's more heavily transaction oriented, there's more seasonality in the business than LegalZoom. We're not breaking out the guide, but you would expect that seasonally, the first half of the year is stronger than the second half of the year generally in our category. So we would expect the contribution to be somewhat similar to slightly lower than what you saw in Q2.

And I'll just caution you on a couple of things because we've been doing deep integrations with Formation Nation. So number one, we've been accelerating our marketing efforts towards Formation Nation. And that complicates that decoupling if you're trying to do that. Number two, we have been rebranding LegalZoom and then Formation Nation's lead brand, Inc Authority, with LegalZoom being premium, Inc Authority being discount and free. And then number three, we've now taken a sales center and -- from Formation Nation and redeployed them on LegalZoom's higher- end products. So it is not a clean look when you're trying to do an apples-to-apples.

Our next question comes from the line of Elizabeth Porter of Morgan Stanley.

Jeff, I wanted to follow up on your comment about moving some of those sales heads over at Formation Nation. I wanted to touch on just the success you may be seeing thus far around attaching subscriptions to Formation Nation's higher-value customers. So I know it might be early, but what are the signs of success you're seeing so far? And what products do you think may have the highest attach rates to this type of customer base?

Sure. Good question, something we are deeply focused on. Let me unpack it a little bit. What we've done is deployed a sales center focused on LegalZoom selling model, which is disproportionately more subscription than what Formation Nation's was historically and even is today. That, by default, by pulling those customers through our funnel will immediately move people into a subscription base more quickly than with Formation Nation. In terms of where we think we can take these Formation Nation customers over time, I think it is very similar to what we have done historically with LegalZoom. So first and foremost, it's our core product offerings, those compliance offerings. Some of which Formation Nation had but didn't lean on because they were more focused on being cash generative day 1 because they were run with being cash constrained. Number two, some of the products that they didn't have. So some of the things that we're creating around DIFM, some of the compliance calendaring, some of the automatic filings that we're doing now and then some of the product lines like virtual mail that they weren't able to offer prior. So I think that there are a lot of areas where we will be upselling and cross-selling both the existing base and porting over new customers. But I'll reiterate, we're very, very early in that process. We're going after low-hanging fruit right now because it's there, it's available and that integration is already proving very successful. But over time, I think that there's a lot of opportunity and it points to our ability to do that with potentially other M&A opportunities and within our core base as we grow as well.

Great. And then maybe a follow-up for Noel. Great to see the revenue upside. I was wondering if there are incremental areas that you're pushing the lever of investment on that just may be mitigating some of the upside to margins that we have for the full year outlook.

Yes. I think Jeff hit on one of the areas that we're pretty excited about, which is in the, call it, concierge or do-it-for-me offering, which is much more of a hands-on white glove service that we're providing and this is part of our march towards focusing on higher- value subscriptions toward higher-quality customers. We're having really good early success there. And as you start to scale new products like that, it generally takes a larger investment. And so that's the mode that we're in right now and you're seeing that in the results, but we're expecting it to continue to scale quickly. And so we'll invest behind it. And as we build the tools and automation to create efficiencies in supporting it, we'll see leverage from a margin standpoint as we move forward. So that's a particular area of focus for us right now in terms of investment.

Yes. And I'll give another one as well, which is less clear from a financial perspective, but I can give something very tangible, engagement because we know engagement will reduce churn. And if you think about what we do on the compliance side, if you have everyone trying to do it yourself, it's like herding a bunch of [indiscernible] and cats. I mean it just doesn't happen. So what we have done is we've started to build a bunch of technology-oriented automation that allows us to do this deep engagement in our compliance products. And we're already seeing proof points that, that is reducing churn. And the example, I think that we mentioned in the prepared remarks, was what we're doing for annual reports. And we've seen a dramatic uptick in annual reports. Ironically, that falls in our compliance line, the dollars because there are filing fees associated with it sits over on the transaction side. But what it does is we deliver those transactions in an automated way and they reoccur naturally, it ends up reducing churn in our subscription products.

Yes. I think one other important piece...

And -- sorry, that is an investment that is lower margin because of the filing fees.

Yes. One ongoing investment that we've been making and we continue to see bear fruit is just around our operations, the tools, the automation, some of it leveraging AI to help our team deliver our services to customers. It's just driven a lot of efficiency in how we deliver and improvements in customer experience. And so that is an offset to any investment that we're making as we're driving more efficiencies there.

Yes. And that's also an important point just to put a pin on this because we're leveraging the economies of scale. So we're still working on margin improvement. We're not talking about deterioration here, which is why we reiterated our margin target.

Our next question comes from Michael McGovern of BofA.

When we think about your AI partnerships and even agents creating documents for users that aren't necessarily in your ecosystem yet, can you just discuss what the playbook looks like for creating a longer-term customer there or monetization of that use case? And then second question, with that last mile delivery piece from your prior answer, does that lend itself to adding more AI partners in the future if you're really focused on that last mile?

Yes. Great question. And I mean, this is a real opportunity to expand our addressable market. I mean AI can be a very big TAM expander if you have something differentiated. And in this case, what we see is many people have legal questions and legal problems that they don't know are legal in nature. So by leveraging these partnerships, they will lend itself to prompts that the customer themselves might not think is legal. And that can pivot them to you need to get legal help for this. And that's where LegalZoom comes in and that really is our differentiator. So the short response to your question is, yes, we expect more of these. Part of the reason why we did press releases for these is we want to signal that we are open for business. We see the opportunity and the value of doing this. And what we give away to the extent that we give away anything is an opportunity to expand TAM because that's a marginalized part of what we do. It is not core to our business. What is core to our business is solving that last mile problem that we don't think anyone but LegalZoom can solve. And what that ends up meaning is we open our aperture for -- from the addressable market standpoint. And then we start going after the old line lawyers and law firm market that we weren't addressing prior because we were focused on top-of-funnel formations. So we think this is a really exciting new opportunity for us. We've even seen this in some of our marketing efforts to date.

Our next question comes from the line of Matt Condon of Citizens.

My first one is just on -- Jeff, you talked about engagement multiple times on this call. Can you just talk about maybe how the improvements in engagement with your products is informing your future product road maps and how you can cross-sell into that base of users? And then just a follow-up also on cross-sell. Can you just talk about how you're optimizing the purchase flow to just increase attach rate and what's really working there?

You bet. And good insight here in terms of how our customers more than anyone are driving our product experience and where we're headed. I mean this concierge suite of products was an out [ drop ] of what we were hearing from customers and what they needed. What we realized was a surprisingly high percentage of small businesses are out of compliance. And unfortunately, that includes customers who have our compliance products. And the reason is because this isn't easy. This isn't fun. This isn't anyone's expertise as a small business owner. Instead, we're giving them the tools to do something that they don't have the time, wherewithal or inclination to do. So they just fall out of compliance until fees build up and say, now I have to do something. So what we have realized is if we make it simple and seamless for real functioning businesses to remain compliant, they're willing to pay more for that because they see value in getting back their time. And as we begin to tease this out, we're going to learn more and more about what it is that customers need. And we've got a very good model for testing very cost effectively, the next do-it-for-me product, determine whether it works, then build automation and AI to make sure that it's streamlined and margin accretive and then relaunch it as a fully-fledged product. So I think you will see much more here in that respect and DIFM will be a larger and larger percentage of total revenues over time.

I am showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.