LZ - NASDAQ

Giood day. Thank you for standing by. Welcome to Legal

Thank you, operator. Welcome to Legal

Good afternoon everyone and thank you for joining our call. Today, I'll be providing an overview of our third quarter results before diving into detail on the progress we've made in our three key focus areas. During the quarter, we focused on reimagining transactional products towards subscription and enhancing the value of our subscription products. We also began updating our customer education and pricing to better reflect the value we provide. Our efforts were guided by customer learnings and feedback, as we focus on delivering best-in-class expertise and improving the customer experience. If there is a single message we hope to get across during this call is that, we are focused on driving durable results, improving the predictability of our business by reaccelerating subscription revenue growth and leading the business toward increasing profitability. Let's jump in. We achieved third quarter revenue at the high end of our guidance of $169 million. Our subscription revenue grew 5% year-over-year from strength in our compliance related subscriptions. Our transaction revenue declined 7% year-over-year, largely due to softer business formations. Sensus EIN applications declined 9% year-over-year in Q3. And we saw a decline in our market share of business formations, which was expected as we conducted important testing with a goal of narrowing our focus to high value customers. Market share versus quality share will be a key topic I will be discussing today. Overall, we're pleased with our early progress against shifting our business towards recurring revenue to drive long-term durability. We also achieved strong bottom-line performance this quarter. third quarter adjusted EBITDA came in well above forecast at $47 million, which reflected a record 28% margin for us as a public company. While the outperformance included the benefit of certain one-time items, which Noel will discuss, it also reflects success in key tests that we ran in support of our goals to acquire customers more efficiently and shift our business towards high margin subscription offerings. This reinforces our conviction that, we can drive durable margin expansion in 2025. This quarter, we spent considerable time listening to our customers and to our employees, who are closest to our customers, particularly in sales, fulfillment, and service. Two things became abundantly clear. First, our small business customers are meeting us early in the tenure of their company building. They come to Legal

Thanks, Jeff, and good afternoon, everyone. I'll now turn our focus to our third quarter financial performance. Please note all comparisons will be on a year-over-year basis unless otherwise stated. Total revenue was $169 million for the quarter or up 1%. Our results met the high end of our outlook with strength coming from subscription revenue. Looking at our revenue performance in more detail. Transaction revenue was $58 million down 7%. We recorded 255,000 transaction units in the quarter. The 8% increase was primarily due to an increase in non-formation, business related transaction products, such as our new BOIR offering, offset by lower volume of formation units. We've recorded 113,000 business formations in the quarter, an 18% decline year-over-year. The decrease was due to a softer business formations macro with Sensus EIN applications falling 9% year-over-year. In addition, we performed important testing related to our go-to-market strategy, which also pressured our formations as we focused on attracting high value customers. Average order value was $227 for the quarter, down 13% year-over-year due to a higher mix of lower price transactions including BOIR. We expect a similar trend for AOV in the fourth quarter and continue to expect a high single-digits decline in AOV for the full year 2024 versus 2023. Subscription revenue was $111 million up 5% year-over-year from stronger compliance related subscriptions and legal advisory subscription. This growth was partially offset by our tax product due to our decision to pause new customer acquisition as well as the exit of certain channel partners in Q3 of 2023. We ended the quarter with over 1.7 million subscription units, up 10% year-over-year as we saw an increase in forms and e-signature and bookkeeping subscriptions due to the bundling of these products into certain business formation offerings, as well as growth in virtual mail subscriptions. This growth was partially offset by the impact from the exit of legacy partner relationships, which have now largely transitioned from our platform. ARPU came in at $264 for the quarter, down 1%. Looking at our subscription performance on a sequential basis, subscription revenue increased 2%, primarily due to a 7% increase in units from the bundling of forms, e-signature and bookkeeping subscriptions into certain business formation offerings as well as higher compliance related subscriptions. Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Third quarter gross margin was 71% compared to 67% in Q3 2023. The year-over-year improvement was primarily driven by lower filing fees as a percentage of revenue due to the lower information volumes. Margins were also supported by lower headcount expenses associated with our tax product as well as automation and process improvements in our service delivery operations. Sales and marketing costs were $43 million or 26% of revenue, a decline of 10% from last year. Customer acquisition marketing costs declined 4%. During the quarter, we executed several performance marketing spend tests to better understand incremental efficiencies. This helped us to further optimize our marketing spend levels and allows us to reallocate certain investments to longer-term brand initiatives. Non-TAM sales and marketing expense was down $3 million or 25%, due to the impact from our sales reorganization in Q4 of last year. Technology and development costs were $15 million down $1 million or 5%. General and administrative expenses were $14 million a decrease of $1,000,000 or 4%. Our performance drove adjusted EBITDA of $47 million or 28% margin. This represents a 40% year-over-year increase as compared to adjusted EBITDA of $34 million for the same period last year. As a reminder, our adjusted EBITDA margins are seasonally higher in the back half of the year due to lower volume of business formation. Adjusted EBITDA was supported by our revenue performance, which came in at the higher end of our expectations. Additionally, we saw a 300 basis point increase in our subscription revenue mix, which supports our performance given the higher margin nature of these products. These results were also driven by certain one-time factors, including lower TAM spend from the aforementioned testing and better-than-expected savings from our reduction in force last quarter. Excluding these factors, adjusted EBITDA would still have exceeded the high-end of our outlook due to the solid revenue performance, and as we drive ongoing efficiencies in our business. Deferred revenue decreased by $3 million in the quarter, which was in line with our expectations and the typical seasonality of our business. Free cash flow was $22 million, compared to $19 million for the same period in 2023. We ended the quarter with cash and equivalents of $112 million. We remain debt free with no outstanding borrowings under our $150 million revolving credit facility. During the third quarter, we repurchased 3.8 million shares of our common stock for a total of $25 million. This reduced our share count by approximately 2%. Since our first share repurchase program beginning in the first quarter of 2022, we have returned approximately $313 million to shareholders in the form of share repurchases, reducing our share count prior to the program by approximately 17%. Subsequent to the end of the quarter, our Board of Directors approved a $40 million increase in our share repurchase program authorization, bringing the total amount authorized to $215 million. Following the increase, we had approximately $50 million available under the share repurchase authorization as of today. We are continuing to balance our share repurchase program alongside maintaining a flexible cash position to support our capital allocation priorities. Finally, turning to our outlook. We are updating all components of our outlook today to reflect three quarters of actual financial results and our latest expectations regarding macro trends and business initiatives in the fourth quarter. For the fourth quarter, we expect revenue in the range of $158 million to $162 million or 1% year-over-year growth at the midpoint. On a sequential basis, we expect fourth quarter revenue performance to reflect a sequential improvement in transaction revenue growth, driven by an anticipated increase of BOIR filing in advance of the December 31st deadline as well as fulfillment timing, and a sequential deceleration in subscription revenue growth due to headwinds in our tax product, following our decision to pause new customer acquisition. For the full year, we expect revenue in the range of $678 million to $682 million or 3% year-over-year growth at the midpoint. Our revenue outlook continues to reflect the impact from a mid to high single-digits decline in the Sensus EIN information macro for the full year 2024. Turning to adjusted EBITDA, we expect to achieve adjusted EBITDA in the range of $40 million to $44 million in the fourth quarter, which reflects a 26% margin at the midpoint. For the full year, we've raised our adjusted EBITDA expectation to be in the range of $144 million to $148 million or a margin of 21% at the midpoint. Finally, we expect free cash flow to be in the range of $80 million to $85 million. In closing, I'd like to thank the entire Legal

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Boone with JMP Securities. Your line is now open.

Thanks so much for taking my questions. Jeff, I wanted to ask a little bit about the pricing test that you talked about in the quarter. Can you talk about where pricing could go going forward? And then, just related to the larger move across the industry of moving to free that we've seen over the last couple of years. And then, for my second question, can you talk about the broader opportunity with MyL

Sure, Ben. Let me take the first question about pricing first and unpack that a bit. In terms of where we think pricing can go, again, it's not a function of higher or lower necessarily. It's a function of matching pricing to the value that we're offering, and the value and the promise that our brand derives. So we have done a series of price tests, higher and lower. This is not dissimilar to what you see with many different companies. I think that, there is a lot more opportunity for price on the high-end for certain products, particularly we're offering higher value-added services and where we're mapping both our product to the expertise that we deliver. And there are going to be some areas where pricing can be lower. And a good example of that is, with our free product, which we did not shut down. We just started repositioning so that our customers knew exactly what they were getting. With respect to the competitive landscape, just to be clear, some companies offer a free product, but I put quotes around that free product. But some offer a free product, which is really just a 12 month trial, and then you run into a subscription. Some offer a free product so long as you're a member and you have to subscribe to that membership. And then, others offer a free product alongside an attachment to other products and services. So it's a bit of a misnomer to think that the market is going towards free. And customers need to be aware that, you get what you pay for. With respect to free, that's an important thing to understand and we get what we pay for. We've seen some Secretary of States go to free only to find out that they're ending up with a lot of fraud and bad actors and then stopping that. So we're hypersensitive to how we're looking at pricing and making sure that, it matches to what we're trying to deliver strategically. With respect to the second question and MyL

Just to build on that Andrew, one example where we've seen the benefit of MyL

Thank you. Our next question comes from the line of Ron Josey with Citi. Your line is now open.

Great. Thanks for taking the question. Jeff, I wanted to talk a little bit more, understand your comments on market share versus quality share and just understand just how we're going to market overall, how the business is shifting to subscriptions and maybe how this might impact market share going forward in that metric in particular? And then, Noel, on sales and marketing, we heard on the call both you and Jeff talked about more efficiently acquiring customers, executing more tests to get there. Any insights on what's going -- what you're doing here to be more efficiently acquire customers would be helpful. Thank you, guys.

You bet. Thank you. I'll take that first part, which is an important question, because this concept of market share and how we define it is very narrow. It's limited to our share of formations that come in through the United States. The reality is, there is a certain amount of formations that aren't going to generate high value for a group like Legal

Yes. And then Ron, on the sales and marketing side, starting with marketing, I think primarily, just retesting spend levels within -- even at a campaign level to understand and regularly recheck incrementality, so that we're constantly optimizing those campaigns. And then also looking at spending into newer channels to us and testing different formats there, so things like radio and direct mail and spending more on social and in different formats there. So I think the combination of those two things alongside doing some reinvesting in our brand, as well and testing different messages around our brand. And then, also on the sales side, implementing various tests to help us optimize there, I think we're still -- there's still a lot of training that we're investing in there, testing different comp structures, expanding our upsell capabilities. So those are all things that we're regularly advancing and looking to generate more effectiveness and efficiency from.

And, Ron, to add to what Noel was saying, from any good marketers perspective, all marketing is performance marketing if it's done well. So we're looking at ways to complement the marketing we're already doing and then really testing the assumptions on the pure performance marketing in terms of the last dollars. So what you would see from the outside in is, us doing some pretty deep testing on Pulse advertising, Pulse marketing, how we deliver customers to the website and to our sales force, and making sure that we are bringing in the right customers who are going to be able to be up sold and cross sell them to subscriptions over the long-term.

Thank you. Our next question comes from the line of Josh Beck with Raymond James. Your line is now open.

Hi there. This is Kish Patel on for Josh Beck. As you look across SMB, how would you characterize the competitive environment with some others like

Sure. Why don't I take the first part. I think the most important thing to focus on is what is that competitive set. When you look at our addressable market or TAM, it is inclusive of companies like a

Sure. Ass it relates to the macro, obviously the macro is very difficult to predict and project. There's been lots of change and even this morning news of new change and unclear as to exactly how it will impact it. Overall, the macro thus far this year is softer than last year, right? It started off, I think it was down 2% in Q1 and then 6% in Q2 and now 9% in Q3. We're in a generally soft environment relative to prior year, but structurally materially higher than pre-pandemic levels. And so, as we look forward, there are certain tailwinds that are driving, I think, that structural increase, including remote work, the fact that, it's never been easier to get a business operational with very low cost of capital and with enterprise like capabilities. And then at the same time, there's the fact that, the growth rate that we've experienced in formations overall in the last four years has been higher than the historical CAGR. So there's the potential for it to regress towards that mean. All-in-all, to say, it's very hard to project and we're kind of taking a middle of the road view on it right now and wait and see until we have some more data points.

Thank you. Our next question comes from the line of Patrick McIlwee with William Blair. Your line is now open.

Hi, team. Thanks for taking my questions. So further to the changes on pricing for your compliance products, just understanding that, those are a sizable portion of your subscription revenue, how should we think about the timing and potential eventual impact of those changes to your overall subscription revenue?

Sure, Pat. We're still in the process of unpacking this now both with the new pricing out on the website, the pricing that we're testing with the sales force and then potential pricing changes to the existing base. In all cases, we think it will be a net positive to revenue and EBITDA. But this is relatively new. So, we have to make sure that, we're doing it in a way that is accretive to the business and to our customers. So, we're making sure that, we're adding both pricing changes and value changes and that we're accreting again to what we were saying earlier, which is quality share versus market share. And that's a lot to unpack, knowing that, we really just launched this about 45 days ago. So I suspect we'll have more to say, at the next earnings call on this one. And you shouldn't think of this as limited specifically to compliance, because we're looking across our entire base of customers and product offerings to make sure that, we're matching pricing to value and matching our brand and reputation to everything that we're doing.

Okay. Understand that it's early, so that's helpful. Thanks, Jeff. And then, just on rebuilding the consumer channel, the strategy makes total sense given what you've all talked through today. But just in contrast to what we saw this quarter, I mean, should we expect a re-ramp in the CAM spend as you pursue that initiative, or how should we think about the implications of that push?

I don't think the implications are going to be spending money on marketing. To the extent that we do, again, that that marketing budget is largely fungible, because when you're spending on consumer, you're effectively spending on brand and it should in there to the SMB side as well. And as we've said repeatedly and believe deeply, it's a fact, of course, we believe it deeply. All small businesses have an owner behind them and those owners need wills and trusts and very small percentage of consumers actually have a will or trust. So, I think we have everything that we need to go to market from a marketing perspective. However, what we do need to do is refresh the products that we offer in two respects. Number one, they need to be best-in-class. And then number two, they need to be recurring in nature and are not just specifically speaking to the business model. I mean, we can't leave customers stranded. And a will cannot be done in a vacuum and then left alone. That's the real focus. And the way in which that we're going to drive that home is, with, what we were saying on the call, which is through real expertise. That's the clear focus and the number one thing that was lacking before. We were over automating to a fault. And, we, in some cases, will need to slow down the process so that our consumers can get a better understanding and knowledge and education of what it is they need to be buying. And then once they buy, what it is they need to do to ultimately be successful with these products.

Thank you. [Operator Instructions] Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.

Thanks. This is Katie Kuser for Elizabeth tonight. I wanted to double click on the customer education piece. What are some of the initiatives that have been most impactful to broadening out the scope of the portfolio to the broader customer base? Is there a specific point in the formations flow where education has been most successful? And kind of looking ahead, when customers are more engaged and have been practiced, what's that first tangible step in moving from discovery to monetization? Thanks a lot.

You bet. Thank you, Katie. I'll give you three high level pieces, and then Noel, if you want to jump in more specifically, especially from a historical perspective. But the three areas where we've had the most success is, first, during the initial sign up. So in the formation process that's in our questionnaire. And we introduce other products and services through education in that flow. The probably archetype case studies would be compliance, which is in our first questionnaire and we introduced that as part of something that is necessary, when you form a company. The second is registered is a registered agent service, and we put that in the second questionnaire at least for now. And, that is required whether you are doing it or whether we do it on your behalf as well. So we educate about what that is and why you need it and what the value is, and we'll continue to do more. The second is through something we talked about earlier, which is MyL

Yes. The only thing I'd build on there is to add personalization, which is an area we're investing in and doing some testing around now to early kind of success, which is, between identifying by industry or by the questions that are answered, by the entrepreneur on the site, we then provide them more specific copy related to, educating them in areas that are meaningful, and/or showing them products that are more appropriate, for them that we think they would need to remain compliant. So really getting specific throughout that questionnaire flow, depending on what the customer is telling us and being smart about what we're showing them from an education standpoint in terms of the material and from a product standpoint.

And that's a great case study and example, Noel, because this is something new that we have recently introduced and you can see it if you go through our formation flow right now. There are certain categories where we have them highly targeted and highly personalized so that, they're actually getting a different set of questions, a different set of educational tools. And that's yielding success again early innings in testing, but success with upsell, cross sell and conversion.

Thank you. Our next question comes from the line of Ella Smith with JPMC. Your line is now open.

Good evening. Thank you for taking my question. Jeff, first for you. You continue to see strength in your compliance subscription, but of course, the overall business formation environment right now is challenged. I would think the compliance subscriptions are generally cross attached to formation. Can you please help me unpack the strength and compliance subscriptions in the current environment?

Sure. I think it's really just a function of the calculus of our business. You have a very large addressable market that we have not captured fully. We don't dominate this market, no one does, which means, even when you have an environment of falling TAM, in this case, falling formations, you can still increase your business and you can do it one of two ways. You go after market share or you can go after quality share. In this case, that was a leading question. I appreciate it, Ella. In this case, what we have done is, we have pivoted from trying to bring in free customers just to increase share at the expense of other things to trying to educate customers right out of the gate and saying, if you're coming to us, our expectations of you as a customer is that, you're trying to, again, in this case, build a viable going concern in business. And if you do, you need to be compliant and that is difficult and challenging, so that if you don't have your own general counsel, if you don't have an outside law firm, you should leverage our products and services because they are going to be far more cost effective than ending up being fined down the road or worse being shut down temporarily or permanently. We've had early success in that respect, pivoting some of these customers both to our higher value formation products and upselling and moving them into compliance at higher prices.

Yes. Just to build on that, one of the ways that we've done that is leveraging BOIR for example. So BOIR is an example of how remaining compliance for a business owner is becoming increasingly complex. And so, the fact that they're paying attention to this new requirement that's come up has allowed us to also provide additional education on the other compliance-related products that we offer and be able to shift some of those customers into those subscriptions.

That's really helpful. Thank you so much, Noelle and Jeff. And, as a quick follow-up, I know you talked about testing higher price points with a few products, one of which was registered agent service. Are there any other products and services that you call out that you think, there might be some pricing power in?

All of that. If I can be blunt, it's not just about the elasticity curve in this business, it's about the value that we're driving and the way we want our business to be considered by our customers. It's what our customers are telling us as well. What we deliver is peace of mind. There is huge value in going with the industry leader to get that peace of mind. We are way cheaper, and probably always will be than going to a law firm. We have been in a race to the bottom for far too long and we don't think it's doing our company a service. It is cheapening our brand. I think we are looking at this in almost all cases. That doesn't mean that, there aren't going to be certain areas where we want lower pricing, whether that's from a marketing perspective or because we think that, that's the right value to price equation. But for the most part, we're more inclined to be the value priced provider, not the low cost provider.