LZ - NASDAQ

Thank you, operator. Welcome to Legal

Good afternoon, Madeline, and welcome back. I want to thank you all for joining our third quarter earnings conference call. We are very pleased with our performance and the progress we've made against our key focus areas. Our third quarter results both validate the strategic shift we made to our subscription business and exemplify the outstanding execution by the team. The proof points we're seeing across the business give us confidence that we have transitioned beyond stabilizing the business, having now built a strong foundation for accelerated growth. Turning to highlights of our third quarter financial results. We achieved record third quarter revenue of $190 million, an increase of 13% year-over-year, well exceeding expectations. Subscription revenue also grew 13%, accelerating from the second quarter and marking our third consecutive quarter of sequential growth. Subscription revenue growth was again led by our compliance offerings, demonstrating the strong demand for our expanded compliance concierge product suite. Further, our compliance offerings continue to show encouraging improvement in first year retention rates, demonstrating that more established customers are recognizing the incremental value of our premium products. Profitability remained strong with an adjusted EBITDA margin of 24%, resulting from disciplined execution and continued efficiency gains. This is despite incremental investment in product and AI. We generated solid free cash flow of $47 million in the quarter, further strengthening our balance sheet and financial flexibility. With our strong third quarter performance and the momentum in our business, we are raising our full year revenue growth outlook to 10%, effectively doubling our initial full year guidance. We're maintaining our 23% adjusted EBITDA outlook as well. As we continue to identify cost savings, we plan to redeploy much of these gains into strategic investments that position the business for future growth. Turning now to our 3 strategic focus areas. When we initially laid out these key focus areas last summer, our objective was to attract quality share by strengthening our subscription business and offering greater value to customers. This strategy not only fueled our turnaround, it has allowed us to attract more established businesses, activating a larger portion of our SAM and helping us accelerate growth. Building on this progress, we are now expanding our focus areas beyond business formation to serve existing businesses. We believe we are best positioned to capture this opportunity through our core competencies of technology and AI supported by our vast data set and large network of attorneys and other experts. We believe this positions us to capture a greater share of our serviceable addressable market by broadening our customer base and driving higher wallet share. Our goal is to activate the existing SMBs who today don't act on legal and compliance needs due to cost, access or fear. We expect to achieve this goal through the continued introduction of higher-value products and investments in AI, both in our people and in the tools that enhance productivity and decision-making. This strategy is rooted in integrating human experts into the workflow at critical junctures that AI cannot fully address to ensure accuracy and customer confidence. Importantly, our AI tools will provide a level of customization to help businesses focus on their goals while Legal

Thank you, Jeff, and good afternoon, everyone. As Jeff mentioned, we delivered another quarter of strong financial performance and operational execution. We continue to build a solid foundation for sustainable growth and profitability. We once again accelerated growth in our core subscription business while coming in above our expectations across key financial targets. We believe that the work we are doing positions us well to address the needs of existing and established small businesses and will enable us to broaden our customer base and capture greater wallet share. Based on our better-than-expected performance in the third quarter and increased confidence in the remainder of the year, we are raising our 2025 revenue outlook. Before discussing our guidance in more detail, I will review our third quarter financial results. Unless otherwise stated, all comparisons will be on a year-over-year basis. We achieved record third quarter revenue of $190 million, reflecting 13% growth. Subscription revenue also increased 13%, reflecting both accelerating growth and representing the second consecutive quarter of double-digit growth. Subscription revenue benefited from outperformance in our compliance and virtual mail offerings in addition to contribution from our important 1-800 accountant partnership and the addition of Formation Nation. We ended the quarter with approximately 1.96 million subscription units, a 14% increase as compared to the third quarter of last year. This growth was driven by the bundling of our bookkeeping solution and legal advisory subscription into certain business formation offerings, an increase in virtual mail subscriptions as well as the inclusion of subscription units from our Formation Nation acquisition. We expect moderation in unit growth in Q4 from lower renewal rates of these initial bundled cohorts. ARPU was $256 for the quarter, down 3% year-over-year and flat with the second quarter. The year-over-year decrease was driven by a continued mix shift towards lower-priced subscription offerings related to the bundling of Form and eSignature, bookkeeping and legal advisory subscriptions into our higher-end formation SKUs. Of note, we continue to see ARPU gains in our compliance offerings. Transaction revenue increased 12% to $65 million, driven largely by the acquisition of Formation Nation, along with growth in annual report and trademark filings. This was partially offset by the expected decline in BOIR revenue. We expect transaction revenue to grow at a similar rate in the fourth quarter. We recorded a 2% increase in transaction units to 259,000 due to the inclusion of Formation Nation transactions and higher annual report filings, partially offset by a decline in BOIR transactions. We processed 126,000 business formations in the third quarter. The 12% year-over-year increase in business formations was primarily due to our Formation Nation acquisition. Average order value was $251 for the quarter, up 11% versus the same period last year, driven by the elimination of low-value BOIR transactions, coupled with a volume increase in our higher-priced concierge services. Finally, deferred revenue decreased by $0.1 million from Q2, reflective of the typical seasonality in our business. Turning to profitability. All of the following metrics are on a non-GAAP basis. Third quarter gross margin was 71%, flat versus prior year. Sales and marketing costs were $61 million or 32% of revenue, an increase of 40% from prior year. Customer acquisition marketing costs increased $10 million or 30%. You may recall last year, we tested lower performance marketing spend levels to evaluate efficiencies. Non-CAM sales and marketing expenses increased $7 million or 75%, which is primarily a result of the addition of the Formation Nation sales team. Technology and development costs were $15 million, down 2% and general and administrative expenses were $13 million, a decrease of $2 million or 11%. Our strong execution drove adjusted EBITDA of $46 million, representing a margin of 24%. Free cash flow was $47 million in the quarter, up 114% compared to $22 million for the same period in 2024. Our free cash flow improvement was in part due to an improvement in change in deferred revenue, lower capital expenditures, lower severance costs versus the third quarter of 2024, where we executed a restructuring and lower cash taxes from the impact of the One Big Beautiful Bill Act. We ended the quarter with cash and cash equivalents of $237 million. Our cash position increased by $20 million versus Q2 '25, benefiting from strong free cash flow generation, partially offset by share repurchases. During Q3, we repurchased approximately 1.8 million shares at an average price of $9.91 per share for a total of $17.6 million. As of quarter end, we had approximately $112 million remaining under our authorization. Our $100 million revolving credit facility remains undrawn. With our strong cash position and healthy free cash flow generation, we plan to continue investing into our business in areas with strong growth potential while also evaluating strategic M&A opportunities. Now turning to our outlook. We are pleased to have outperformed our third quarter expectations. As a result of our performance over the year and momentum in the business, we are increasing our full year revenue outlook for the second consecutive quarter. For the full year 2025, we now expect revenue between $748 million and $752 million, representing growth of 10% at the midpoint of the range. For the same period, we expect to achieve adjusted EBITDA in the range of $168 million to $170 million, which reflects approximately a 23% margin at the midpoint. For the fourth quarter, we expect revenue between $182 million and $186 million, representing growth of 14% at the midpoint of the range. For the same period, we expect to achieve adjusted EBITDA in the range of $46 million to $48 million, which reflects approximately a 26% margin at the midpoint. In closing, we continue to demonstrate progress against our 3 focus areas as we set the foundation for future growth. We have effectively repositioned our business to drive predictability, sustainability and profitable growth. We continue to be excited by the long-term potential of our business as we now focus our efforts towards serving both new and established small businesses. Thank you for your time today. I will now turn the call over to the operator for Q&A. Operator?[ id="-1" name="Operator" /> [Operator Instructions] Our first question comes from Ella Smith from JPMorgan Chase.

Welcome back, Madeleine. So first, I was hoping to ask about pricing and bundling. To what extent is pricing and bundling contributing to your subscription growth? And how important of a lever is that as you think about your forward growth?

I'll take that, Ella. It is an important lever. It is by no means the only lever, but it's a contributor. And it's something that we're pleased with because it is in our control. And candidly, we have started to act like market leaders again. And as we look at even what's happening in the competitive landscape, we're seeing pricing going up with our competitors now as well. So they're following our footsteps. So we feel like we are doing our job as leaders in this space and continue to drive both price and value in the right place.

Got it. That's very helpful. And maybe we're throwing in a question about the -- sorry, did I cut you off?

No, I said thank you.

Okay. Great. For my second question, I was hoping to ask about the white glove concierge offering since it's newer. You employ and have a network of combination of attorneys, accountants and lawyers. Can you tell us how all these different players factor into the offering?

Yes. It's a great question and a broad one that starts with us really coming into our SAM and TAM. The idea here is we've got this massive addressable market, and we have been so myopically focused on a small piece of it. Those customers who are new formers who want to do everything themselves. So what we've done with these concierge-like products and our do-it-for-me offerings is we started to reorient the conversation around how do we solve the last mile for technology in a cost-effective way. So whether you're coming in through traditional means, through search, through our brand advertising organically or now through artificial intelligence, as you gain increasing sophistication in terms of what you need done, at the end, you're going to want some type of expertise. And it's that combination of human and artificial intelligence that is going to be driving our products forward faster. Artificial intelligence, giving us leverage and scale and human intelligence giving us the difference maker that allows us to satisfy our customers over and over and over again in a recurring revenue model. So where we're seeing strength back to the specifics of your question isn't just with concierge, but a concierge suite of products, finding those areas where things either are too expensive for a small business to use a lawyer or too difficult to do with technology alone. So we launched our first product which was concierge revolving around compliance, compliance concierge, had great success over the last couple of quarters and have now launched a series of others in that same category, nonprofit concierge, reinstatement, dissolution, entity conversion, and we're in the process of doing one with tax in partnership with 1-800 Accountant as well, which will launch likely next year so that we can embed their experts into our product line. The idea here is to give customers excess value at a reasonable but higher price than our typical ARPU. [ id="-1" name="Operator" /> Our next question comes from Pat McIlwee from William Blair.

Great results this quarter. Jeff, I believe your prior connection with OpenAI was deemed a collaboration. But this quarter, you mentioned that you signed an enterprise deal with the company. I know you said more details to come on that, but would you be willing to elaborate at all on how that partnership has developed or any indications of what that deal entails?

Sure. And good question, and thank you for the kudos on the quarter. We're pleased as well. Appreciate it. I'll break it up into 2 areas in terms of where we think this can head and why we're so excited. I will caveat it by saying we signed that this week. So it's new, and we're going to build off of it. And it is an archetype for how we're thinking about these partnerships go forward. So the general idea is really twofold. First and foremost, we want artificial intelligence to be ingrained in everything we do at this company. And we are making a statement and mandating that all of our employees are using AI deeply. But at the same time, we want to be tracking tangible returns and results. So importantly, some of the things that we plan on doing with OpenAI and with others is doing integrated product launches. And that was what I was referring to with respect to more to come. We need to deliver results both on cost efficiency internally as we hand over some of that AI throughput to our experts to Ella's point, as well as be able to drive products that actually allow us to expand our go-to-market and expand TAM by embedding into some of these engines of growth and generalized TAM expanders as more and more small businesses grow more sophisticated about what it means to run and build a business. So it is those 2 areas that we're really excited about. Again, we're in the early innings, but we're now partnering with some of the best and brightest and becoming more integrated. I've spent time over at OpenAI. We've had people come and sit down and work with us, and we've got our teams working together more and more closely. And I expect to see more things to come.

Okay. Great. That's very helpful. And while we're on the topic, just can you share how the early indicators of traffic and/or volume coming through those partnerships with Perplexity and GPT been? And I think for Perplexity, their Pro users are actually being offered discounted access to Legal

Sure. And what I'll do is rather than speaking to any one partnership, I'm going to speak to the strategy and impetus, and then I'll provide some bread crumbs in terms of the success that we're having. Effectively, what we're doing is we're looking at the trends and seeing a massive shift, a, in traffic; and then b, in terms of quality of traffic coming from traditional means such as search to these more generative and agentic technologies. And what it is doing, and this is very much in line with what we are trying to do with our service and sales folks is it's moving from a search and answer to an education model. So what we're doing with these partnerships is we're trying to get deeper and deeper embedded and build relationships with the variety of groups that we know we can drive real traffic that is qualified and that can turn into both sales and then ultimately higher quality customers that are staying with us longer. And what I will say is we have seen a significant shift in terms of our growth of traffic from these AI engines as well as conversion rate. And the customers that are coming to us are in our parlance, better customers than we see that are coming from traditional sources. They have a higher propensity to pay. We believe that they have a higher propensity to stay longer. They are better educated so that when they get to us, they need us to complete the last mile, not the first mile. And we are starting to see customers come who have already formed, who have existing businesses but are looking for us to solve problems. So across the board, in effect, what we do as we sprinkle our opportunities across that broad mandate, we're actually able to push to a broad number of sources, which allows us to diversify our go-to-market. [ id="-1" name="Operator" /> Our next question goes -- comes from Trevor Young from Barclays.

Great. First one for Noel. Can you share the Formation Nation contribution to revenues in both subscription and transaction revenues, respectively?

Yes, absolutely. So Formation Nation, first, I should say, we're really happy with the results that Formation Nation is helping to drive in our overall equation. And we've made a lot of effort to integrate them quickly and really think about it as part of the Legal

And the nice thing, just to add one important piece as we get back to diversification, which helps to insulate us from risks, you see that strategy working well, which is our value-oriented program now. But outside of that, we're also seeing strong organic growth. So we're seeing wins come from both channels now.

I appreciate all that color. And then, Jeff, one for you. On the deeper integration with 1-800, that partnership and the bundling that you alluded to next year, how do you envision the economics to work there? And how do you think about kind of the shared burden of cost to serve as well as customer acquisition costs, for example?

It's a good question that is more complicated to answer than just give you a direct one because I think it depends on the product offering and the launch and the way that we're going about it. But the core business, we've thought about it as a minimum so that we know that we have a certain threshold of revenues and profitability coming in and then a rev share on top. And then some of these ancillary products, we're looking at on a case-by-case basis. Most of these tend to be highly accretive to the bottom line. So it's really a function of making sure that we participate on the accelerated growth where we have these deeper integrations. Not lost on you, I'm sure. This is part and parcel to the knowledge we gained when we launched our own tax products, both the success and the challenges that we had. And I think we're taking the best of both worlds as we integrate these new products. So I suspect we will see us getting closer and closer to 1-800 and any other partner, frankly, where we have the kind of success that tells us this is what our customers are looking for. [ id="-1" name="Operator" /> Our next question comes from Michael McGovern from Bank of America.

Congrats on a great quarter. There have been some headlines this week even about to the extent that LLMs will provide legal advice or services based on their current terms of service. Do you have any insight into the future of that and how your products can help balance meeting customers where they're at versus potentially needing some level of additional certification or credential when customers receive legal advice produced generatively?

Thank you for that because it's probably the most strategic important question for us and one we have thought about deeply, one that has driven some of our organizational changes and one that's been informed by talking to and working with some of the partners that we have as well as some really bright minds in the space. The short answer is we also believe that will happen. We expect it to happen, and we're embracing that happening. And it is part and parcel to our go-to-market and go-forward strategy. The idea here is just like why we thought in the beginning, we needed to have our salespeople owned and operated and why we need a broader base of experts. The most important thing we can do as a community is to educate these customers. These small- and medium-sized businesses need to be educated about their legal needs. So as LLMs make these potential customers more sophisticated, it effectively massively expands the market because what ends up happening when you look at the questions that are coming into LLMs is people are coming in thinking that they are asking a nonlegal question and leaving and going, I have a legal problem. I have a legal matter. Some of that can be solved through Q&A with technology if people are patient and willing to do it and know whether they have something that is an aberration or phantom or whether it is actual real strong advice. But most of it needs some type of validation, and that's where we come in. So when we talk about solving the last mile problem, what we mean is the connected tissue between the Q&A and the intelligence that is needed to solve a legal problem is narrowing with technology. But that gap will not close. You will still have some need for service, whether that's an expert, a paralegal, a lawyer or some type of integrated LLM product that can be backstopped by those experts so that there is oversight. That's where we come in. And that's why most of the AI and LLM community is embracing us because whether it's agentic or generative, there still needs to be some sort of feedback loop that has human intervention. And that's where Legal

My first one, just obviously, over the past several months, the business formation environment in general has been a very healthy environment. Just, Jeff, you've obviously been driving on subscriptions and trying to decouple from the macro environment. But just can you help us understand how much of the outperformance over the past couple of quarters has been just macro driven versus the things that you guys are doing internally to really drive performance?

So on small business starts, you've heard this repeatedly from us. We are weaning our way off of that as the dominant form of how we take in, in particular, new businesses. And this is all focused on our ability to not just grow our business, but to grow in a diversified and insulated way. That doesn't mean we're not still highly dependent on small business formations. We will be for some time, if not for a very long time. It will be a key component of our strategy. And to the extent that the macro is up significantly or down significantly, right now, of course, we don't know. But where we have tailwind, we're going to use it to our advantage. Where we have headwind, we're going to start diversifying. But the key thing here is we're working on more of the TAM than we ever have before. And this is how we drive into our serviceable market. So when you think about what we're doing on diversification, we're now starting to do brand marketing, not just performance marketing. We're now leveraging partnerships to drive subscribers, not just revenues. We're now leaning in on existing businesses, not just new businesses. We're leveraging AI in a way that we weren't a year ago, not just search to deliver new business. And we're building out product suites on the DIFM side, not just DIY. So I think that this is really critical to understand. We're not ignoring the macro. What we're saying is it will no longer be an excuse for us. We will have enough levers and leverage in the business so that we can manage through macro uncertainty as we're in right now or negative macro situations, whether it's the small business formations one that plagued us previously or the next one that comes up as we diversify and become more dependent on AI or something else for growth. We're managing our business as a diversified insulated growth-oriented business now that we have stabilized it.

Maybe just double clicking on one thing you said there, just going after the existing businesses. Just are there any things that you could call out today that you see that are working? And just maybe just talk about the strategy more broadly and how do you bring those businesses onto Legal

Sure. I actually think using our concierge products, in particular, compliance concierge is probably the perfect case study. We launched this as an MVP. We started going after existing businesses that were in our ecosystem. We started to listen to our service folks, and they told us which products were of need for our customers. We effectively built a broad matrix that we looked at for determining what next products that we would launch. We went from compliance to nonprofit, reinstatement, dissolution, entity conversion. We're now launching something in tax, all because the demand was there on the high end and for the most part, because these were subscription. We're now pushing this over to Kathy and her team on the biz dev side to say, go to existing partners and figure out where we can solve and satisfy their needs. Let's listen, let's learn from their customers and start going into those channels. And then Daniel and our marketing team and saying, where can we go to market directly and start marketing to existing businesses, whether that's through AI, through some of our brand campaign, which we're going to be shifting towards the latter part of this year to speak to existing businesses. And ultimately, you can imagine we're going to go further and further down that path because these are businesses that are more stable, that are more insulated from risks of recession and ultimately have and are willing to give us a higher share of wallet. [ id="-1" name="Operator" /> Our next question comes from Ron Josey from Citi.

This is [ Jake ]. I'll try. So just the questions. First was really just on the partner channel. The 25% growth seems like a strong acceleration. How much of that was driven by the new embedded flow versus the traditional affiliate platform? And maybe just spend a moment on that flow. I mean it was pretty recent launch. Could you elaborate on what the economic model looks like? Is that kind of part of your strategy to target existing established businesses?

Sure. Happy to take that, Jake, and thanks for the kudos on the quarter. I'm going to start to sound like a broken record. This strategy is about diversification across the board. We want to make sure that we're insulated. So first off, that 25% year-over-year growth, we put that number out there because we think that, that is a new baseline and that we can continue to grow it. We're very pleased about what our partnership team and business development team have done to date. But it is underwhelming, in my opinion, compared to what they're going to deliver in the future. And the reason is because we are now launching products for products -- sorry, for partners, and we're listening to what their needs are. Embedded is a key need. And yes, that drove a portion of that growth. Leaning in on our affiliate channels and treating these partners, not just as low-level affiliates, but as true partners and building out solutions for them was another key thing. The deeper integrations that we've done with companies like Design.com is another good example of a success point that we will continue to lean in on as well as working with some of our existing longer-term partners who we continue to think highly of, and they've been moving mountains to help us such as Wix as an example. And then, of course, what we've done in our AI ecosystem. So when you look at this, the percentage increase is coming from a myriad of sources. And each one of these is working to a varying degree. Not everyone will ultimately be successful. But the idea here is we're trying to put out multiple singles and doubles and triples. We're not looking for grand slam home runs. If we get one, we'll take it. I'm not adverse to getting a little bit lucky, but we will acknowledge when we're lucky and get back to work. [ id="-1" name="Operator" /> Our next question comes from Elizabeth Porter from Morgan Stanley.

This is Lucas Cerisola Morgan Stanley on for Elizabeth Porter. You spoke to the success of the new brand campaign earlier this year and the double-digit ROAS. What other impacts have you seen so far, both in terms of awareness and conversion metrics? And what learnings are you carrying into early next year when new business formation activity typically picks up seasonally?

So really across the board, we've seen success in this brand campaign. So both aided and unaided awareness and ROAS. I mean, you can run the metrics down from there because that means it's going to be helping with conversion. It's going to be helping with traffic. It is going to help our performance campaigns to perform better. And then ultimately, it helps us garner more partners because it reminds the world that we live in and that we work in that Legal

Got it. And then just one more on subscription growth. It's been really solid last couple of quarters.

Thank you for that.

Yes, of course. Comps get pretty tough into next year. I was hoping if you could touch on what other key factors we should keep in mind for modeling subscription growth from here, in particular, how you're balancing volume growth versus ARPU and whether there's going to be any near-term headwinds from lapping M&A, prior price actions or product launches?

So you're wondering if we'll become the victims of our own success. I mean, look, I'm glad that the comps get harder next year. It means we performed this year, and that means we performed worse last year. Our expectation is we're going to continue to perform, and we're going to continue to accelerate. We are, at our heart, a growth-oriented business, and we believe that we can deliver results. And on the subscription revenue side, we've continued to see progress both year-over-year and quarter-over-quarter. And that is a key focus area for us on a go-forward basis. On the unit side, it's a bit of a different story. We've communicated that on the unit side, we are using unit growth through bundling to drive tests. So that will jump around. But when you look at our core products, and I think Noel can speak to this more, we're seeing the right things and the right signs. With our core compliance products, we're seeing subscription growth. We're seeing churn reduction, and we're seeing ARPU head in the right direction. And those are all trends that speak to a really solid roll forward as we head into next year.

Yes, that's right. Just to build on that. I mean, these are the trends that Jeff was just speaking to and the initiatives that are driving our current growth. We like what we're seeing. We have high confidence in them, and they represent durable growth opportunities for us. So that, to Jeff's point, is driving performance today, but will carry forward into the next year. [ id="-1" name="Operator" /> Our next question comes from Brent Thill from Jefferies.

This is [ John Bien ] for Brent Thill. Question is around the sales side. So I think last quarter, you mentioned you had some reps from Formation Nation moving over and selling some of the core L

Sure. I'll take those in order, and then Noel, feel free to add anything when I miss it. On our sales throughput and velocity as a company, we've seen steady progress, and we're actually pretty pleased. We have now taken an entire sales center from Formation Nation and shifted it over to Legal