LZ - NASDAQ

Good day and thank you for standing by. Welcome to the Legal

Thank you, operator. Hello and welcome to Legal

Good afternoon, everyone, and thanks for joining our call. I'm excited to talk about our third quarter performance. Not only was it strong financially, but more importantly, we continue to lay the foundation for long-term growth through additional product introductions. As we continue to grow our formations business, we're building out a unique ecosystem of compliance and financial products while beginning to integrate higher value experts like CPAs and attorneys directly into our application. During and subsequent to the quarter, we've expanded our ecosystem with the launch of Business Licenses, as well as the new Legal Forms experience, which we believe will be a gateway to attorney-assisted solutions. Let me begin with a brief summary of our financial results. Revenue came in at $167 million, up 8% year-over-year. Adjusted EBITDA was $34 million for the quarter, double the prior year period and reaching a 20% margin. In the third quarter, U.S. Census formations grew 12% year-over-year. Legal

Thanks, Dan. And good afternoon everyone. We had a very strong third quarter. Our results outperformed our expectations and reflect our continued focus on driving revenue growth and profitability. I'll now shift to provide additional details on our results for the quarter. Please note all comparisons will be on a year-over-year basis unless otherwise stated. Total GAAP revenue in the period was $167 million up 8%. Transaction revenue was $57 million down 2%. We experienced 5% growth in transaction units offset by a reduction in average order value driven by the full rollout of our premium lineup in Q one of this year. We expect to return to year-over-year growth in transaction revenue in the fourth quarter as we continue to lap our premium rollout, which ramped significantly in Q4 of last year. We recorded 237,000 transaction units in the third quarter. The 5% increase was driven by higher business formation transactions partially offset by a decline in our consumer offerings. We completed 137,000 business formations in Q3, up 17% and led by growth in our LLC formation product. Our market share of business formations increased 5% year-over-year to 10.2%, however, declined sequentially. As signaled on prior calls, the moderation of shared growth in the quarter was primarily due to an intentional decision to exit certain channel partner relationships, a share headwind that will persist for the next few quarters, but we strongly believe the right long-term decision for our business. As we look forward to Q4, we expect a continued deceleration in market share, primarily due to the aforementioned partner exits and the lapping of an expanded premier rollout in Q4 of last year, as well as a short-term impact from the transition of our sales organization and certain product driven decisions that look to optimize for the best long-term financial outcomes. As Dan noted, given the changes in our own product offerings, the fourth quarter presents an optimum time to test and iterate on our product lineup in advance of our peak Q1 season. Average order value was $242 in third quarter, down 6% year-over-year, driven by our lower priced lineup. On a sequential basis, average order value increased 13% quarter-over-quarter due to a typical seasonal mix shift in our offerings. We expect our AOV to continue to improve on both a sequential and year-over-year basis in the fourth quarter as we lap the expanded freemium rollout. Subscription revenue was $105 million in the quarter, up 14% due to an increase in the number of subscriptions due to better than expected retention in our compliance-related subscriptions and growth in ARPU. We expect subscription revenue growth to slow sequentially in Q4, as we experienced an increased impact from changes in our L

Thank you. [Operator Instructions] Our first question will come from Matthew Pfau of William Blair. Your line is open.

Hey, great. Thanks for taking my questions and nice quarter guys. Just wanted to first ask from a macro perspective, maybe some more detail on what you’re seeing there and versus last quarter? And how any key metrics such as retention, top of funnel activity, conversion, how those have trended in the third quarter versus last quarter? Thanks.

Yes. Thanks for the question, Matt. Yes, it remains healthy. I mean, if you look at the EIN data it’s sequentially improved each quarter, so it’s been up 4% in the first quarter, 7% in the second, and 12% in the third. We do have some questions about the extent of the strength in Q2 and Q3 as we are anticipating that some of the issues with the employee retention credit may be inflating EIN data a bit. And that’s something we saw actually back in the COVID days with the PPP loan program. We saw a slight dislocation to our own internal data. And I think that probably is occurring to some extent this year. But that said, that’s around the edges and it still remains quite strong. And what I would also say is that the long term of this macro bends very, very favorably. We continue to see large platforms increase in prominence. In general, they are actually providing strong enterprise capabilities for very small businesses and consumers. And those are gig platforms that allow a consultant to go out and create a business relatively quickly. E-commerce, which allows someone to create a retail presence and fulfillment operations, there’s just so many ways now to play. And that’s on top of other important shifts like work from home. We know most small businesses form their business while they’re working for someone else and now they’re working from home. There’s a strong demographic shift with Gen

Great. Just a quick follow-up, that 30% growth in L

Yes. We definitely wanted to share that one time just so people could get a sense because obviously the partner channel change happened and so it kind of made the share gains look a little bit different. It slightly declined in Q3, but that’s what we would’ve expected because we’re also beginning to lapse some of our freemium testing. And also we’ve talked about this before Q2 of the prior year was when we made a marketing shift from some of our brand spend into performance spend. And so that was a weaker quarter in 2022, so it was a little bit more of a favorable compare. But yes, that if anything should show that there’s still a lot of strength as we talk about our Legal

Great. Thank you. Appreciate it.

Yes. Thanks, Matt.

Thank you. One moment please for our next question. Our next question will come from Andrew Boone of JMP Securities. Your line is open.

Thanks so much for taking my questions. I wanted to go to attach rates. The 1% sequential growth for attach rates was a low and the total number of nominal units. As we think about the 2Q to 3Q number of 15,000 was also a low recently. Can you guys just touch on any additional details you may have in terms of subscription attach rate as we think about freemium rolling through the model or maybe just anything else on retention to unpack that? Thanks so much.

Thanks for the question, Andrew. I'm assuming you're talking about the net subscription ads relative to formation growth?

Correct.

Yes. So there's a couple moving parts when we start to look at those numbers right now. And part of that has to do with us starting to exit the partner channels as well. It has a negative short-term impact on subscription units with a constant on the formation side that's it sort of doesn't overcome. So that's really more anomalous and frankly, you'll probably see that continue for a little bit because we'll start to accelerate on some of the reduction in subscription units. What you'll see offset that is a stronger ARPU, which kind of reflects the fact that they were wholesale units and they weren't all that valuable on a revenue basis. So again, that's part of that deliberate choice that we're making to get out of the partner channel.

Yes, and just to add an additional specific to that, Andrew, as we get into Q4 and we see that the transition on the subscription unit side kind of take larger effect related to the partner transitions, we actually expect subscription units to be down sequentially. But to Dan's point, we see that as a – it will positively impact ARPU given the lower value economics of those units.

Thanks. And then Dan, in your prepared remarks, you talked about tests for pricing. Can you just let us know any details you may have today on how you're thinking about that?

Yes, I mean, we've talked a lot about the premium lineup for the bulk of this year. And one of the things that the initial lineup does is it creates a lower cost transaction associated with the initial purchase. The part that we're now circling back on is, now that we have the bulk of our customers in coming through a free SKU, do we have the right pricing on all of our subscriptions that we add on top of that initial purchase. And so there is a lot of testing going on. I mean, parts of it are on our core compliance subscriptions. Parts are still on some of those additional services that drive higher engagement post purchase as well. And I'd say that we're still not in a heavily optimized lineup. There is – if you think about launching five products over the last couple of years and then changing the core lineup, it requires a lot of testing to get to the optimal pricing across the whole purchase of the customer. And then on top of that, we also now do have this post formation opportunity that's starting to emerge, which also helps us think through what should we include in the formation funnel itself. And so think about all those variables, think about the level of volume that we have of formations that come through and that's going to be a continual journey over the next couple of quarters to make sure that we have the right lineup for all of our customers.

Thank you.

Yes, thanks, Andrew.

Thank you. And one moment please for our next question. Our next question will come from the line of Brent Thill of Jefferies. Your line is open.

Hi. This is John Byun for Brent Thill. Two questions on the L

Sure, I'll take the first one and then Noel maybe grab the second one. So books, super excited. So we've only been in the market for a couple months here. And we went into market with a great product, but also knowing that we were missing some key features. And you can get a sense of the velocity that we've almost closed the gap on all of those features within those couple months. Just to remind everybody, over 90% of the small businesses that formed through us have no accounting solution. Interestingly, they don't have the highest brand awareness of the category either. I mean, they're really looking for a solution that's custom built for them and they are truly micro businesses. The other thing that's interesting is we've talked about this, books for many people precedes the need for tax. In some cases, our customers come in and they're not really going to be filing a return for the year that they form, but at the same time, they want to get established properly on the right financial management solution. And so that's the point of launching this. We are seeing really strong engagement on things like bank connections and invoices sent and paid. We like the trial to pay conversion. And I'd say that we've been doing this at a smaller scale. So a lot of our focus when we launch a product is to make sure that the customer metrics are great and the experience metrics are great before we start to scale. You're now going to see us probably more actively marketing it to our base going forward because we're seeing that. We're getting the right signals from it.

Yes, and on the sales cost question, the impact on Q4 because the transition is happening during the quarter is not that significant. And just the way we're viewing our sales channel in general is along the same lines as we think about kind of our overall performance marketing spend. So really, as we calibrate on bringing cost back into the organization, it will be on a performance basis. And so we'll provide more detail around our thoughts for 2024 impact on our next call. But the lens that we're taking and the approach that we're taking is looking at it from a performance lens and we'll scale up as long as we're seeing the right ROI on the spend. And that will be determined kind of as we grow into it.

And just adding to that, I think sales for us we touched all of our customers. So that wasn't the right approach as we went to free. And as you think about a sales team, a lot of what you want them to be doing is really focusing on the highest value stuff post formation. And so this is a big change to the sales organization strategy. And I do believe that we'll build it up over time as we continue to prove that we can do a better job of monetizing post formation.

Thank you.

Yes, thanks, John.

Thank you.

Thank you. One moment please for our next question. Our next question will come from the line of Ron Josey of Citi. Your line is open.

Hey guys, this is Jay

Yes. Yes, thanks for the questions, Jay. Maybe I'll hit the second one first because it's kind of a quick one. They look pretty similar to our prior customers, so we haven't really seen any retention dynamic that's different with those customers. And I'd say that the goal would be that over time they become a customer base that is maybe more easily monetizable post formation because they go into operation. So, that would be our hypothesis and that's actually currently looking relatively good. Business Licenses I'm extremely excited about. So one of the biggest problems that small businesses have today is when they go into operations, they start to bump against a lot of regulations and permitting requirements. And in the upfront comments I talked about, an example of, a food service company. If you think about like a complex business like a restaurant or catering that also has a food truck, or maybe they also serve liquor, I mean, if you, if you're doing that in a city, I mean, you could have up to 25 licenses required, and it's a very dynamic environment meaning that the regulations can be changing on a monthly or quarterly basis, and new requirements can be added. And not only that, all those licenses can have an expiration. And there is oftentimes that you need to share those licenses with another party or you are inspected. I mean, a great example is if you ever visit someone who's in, in like a truck driver, moving materials across state line, like they carry a big folder of all their licenses in case they get inspected. So, it's an evergreen problem. It's complex and it hits all different types of agencies that a small business doesn't want to have to communicate with. So our goal is to make that seamless, make it simple, and at the same time, it allows us to also understand more about the business and how they operate. And that data becomes incredibly important. If you think about some of the questions we need to ask to understand the licenses that are required, they are almost identical questions to everything you need to understand to make a recommendation about business insurance as an example. And so we continue to build out this unique profile of all the data of a small business, which makes the next service, they need that much easier for us to anticipate and also that much easier for them to fill in the application. So it's a big opportunity. We know it's important to our customers. We've been in that business through a partnership before and so it's a bit of a known quantity and I'm really, really excited to integrate it into our experience.

Thanks a lot.

Yes, thanks Jay.

Thank you again. [Operator Instructions] The next question will come from Fiona Hynes of Morgan Stanley. Your line is open.

Hi, good afternoon. This is Fiona on for Elizabeth Porter. Thank you for taking the question. I wanted to ask on MyL

Yes. So thanks for the question, Fiona. MyL

Great. Thank you.

Thank you,