Andrew Boone, I cover internet for Citizens JMP. I'm very pleased to have Noel and Dan from LegalZoom here. Thanks so much for participating. We appreciate you guys' support in the conference. Let's just kick it off with a macro question.
Mm-hmm.
Right? Business formation was very healthy last year. January had a probably too good of a number to actually be true, right? Talk to me about macro overall, especially in the context of business formations being 40% higher than 2019. Is that sustainable? How do you guys view that? What does, what does that look like for LegalZoom as you guys are planning out?
Yeah. So, the macro for us is, as measured by the census data, as you mentioned, there was a very, almost like a step function reaction during COVID with seeing business formations increase. You know, it's been wobbly since COVID, then it went down, then it's—sort of last year it went back up, and we saw it up 8%. We do think in the back half of the year, there might have been a little inflation in that data. But generally speaking, it's a pretty healthy macro, and as we enter this year, we're seeing slight growth year-over-year.
If you look at—by the way, if you look at a month-over-month basis, you will see some months there's a calendar that they have five weeks versus four weeks, and that's what you saw in January. And so it's a little bit inflated. Year to date, if you look at weeklies, it's up about 1% year-over-year. So, generally speaking, we're pretty comfortable with the macro that we work in. If you think about a long period of time over the last, you know, 20-ish years, the macro has sort of performed at a pretty stable 4% growth CAGR. And then, you know, obviously it got super wobbly during COVID.
If you think about some of the, the declines that we saw over the last, the year prior to this one, and if you think about, even just reverting back to the mean, it wouldn't step back down to 2019 anyway. But generally speaking, we think it's accelerated, and for good reasons. It's, it's never been easier to start a business than it is now. There's all types of enterprise-type quality tools that are available for small businesses. The cost of capital required to start a business is, is near zero. In fact, one of the trends that we see is more business starts, and we see more dissolutions, in general.
And that means that that's a good thing, that's a very healthy thing, that you can start businesses, you can fail, and you can start another business. And I think that's kind of indicative of what we see longer term, with one addition. As people have started to work remote, we actually believe that that's kind of a bit of a tailwind as well, 'cause most people who form a business actually form it while they're working. And now that people are working from home, it gives them that extra time to actually focus on the side business that they want to start aspirationally. So, strong macro, you know, we're you know, how we plan for the macro maybe is, it's interesting to talk about that because we don't rely on it, and so-
Yeah, you know, obviously, it's always hard to project exactly where the macro is gonna go, but we spend a lot of time kind of triangulating data, looking at how it's performing relative to a basket of years prior to COVID, and looking at that historical CAGR and how that's trended over time. We generally like to take a conservative view in our planning in terms of how we project the macro, and so this year, we're expecting it to be flat to slightly up. A little more weighted in the front half, just given we're lapping 2023, where we saw the macro strengthen in the back half of the year relative to the front half. And so that's the approach that we're taking. That's what's incorporated into our current guidance.
What we do is, one thing to add is just, you know, with the current quarter in focus, we always true that up to what we're seeing, and we try to keep the outer quarters a little more conservative and then bring that in as we see real data.
I want to go backwards, staying on just macro. But if I go back to kind of some of the, the past disclosures you guys have had during COVID, there were some that were COVID-related businesses that then dissolved kind of in that, in the 2021, 2022 period. Right? Is it a different type of business formation that you're seeing today, especially with freemium, versus what it was maybe 18 months to three years ago?
Yeah, maybe less related to freemium, but we saw a lot of ephemeral businesses during COVID. People who either spun up a business as a result of responding to the environment externally, and we actually saw many more first-time business starts, which actually have a higher failure rate as well. And so that was the trend that we saw. I also feel like there was many businesses that maybe weren't in operations that came back into operations to take advantage of PPP. And so we, like, that led to a little bit of an inflation in the business formations number itself. All of that has pretty much worked its way through. What we're seeing now is a profile of businesses that looks very similar to what we saw pre-COVID.
It just really speaks to the healthy environment that there is currently of last year.
With one caveat, again, I still feel like we see a lot more business formations. We also see a higher dissolution rate, which, you know, our hypothesis is that that's a healthy thing. Again, it's sort of like it's taken the risk out of starting a business, and you can dissolve it relatively quickly. But we keep our eyes on that as well because dissolution rate can impact us negatively as it relates to some of the retention dynamics of our base.
Product question on mobile, right? So with freemium, traffic shifted to mobile. Right, talk about the opportunity to just improve the mobile UX or however-
Yep.
Kind of what, what's on the roadmap for mobile?
Yeah. So, when we went to freemium messaging, we definitely saw increased traffic on mobile, and that was expected. And that's typical. One of the interesting dynamics of our business, and it can be omni-channel, so customers can start one way and finish another. But generally speaking, the mobile conversion rates are significantly lower than our desktop rates. They're about a third. And it is close to half of our traffic, and we do have the type of product that could be completed entirely in mobile. And so that's an area where we have a much heavier investment.
You'll start to see some of that deploying in the first half of this year, where we want to really almost bifurcate the experience and start thinking of free customers and mobile customers is very unique from an experience standpoint. You know, in a past life, I've worked on really complex applications that you'd be surprised how they can be completed, end-to-end mobile. And so our expectation is that, you know, we have that exact same type of experience.
Switching a little bit, right? You guys have done a great job of extending the product, right? eSignature, LZ Books, LZ Tax-
Mm-hmm.
More stuff to add on there. How has this changed attach and customer LTVs? How, how has it related and flowed through to financials?
Yeah, so, this is probably where I get the most excited. I mean, if you think about LegalZoom before I joined, at the end of 2019, really only offered entity compliance solutions along with entity formation. And one of the things, you know, I quickly realized as I joined is that as soon as customers join with us, they have lots of questions about other parts of their business. In fact, the very first thing they started asking is: "What's the tax implication of being an entity, and how do I pay myself?" And they ask lots of questions that are around the operations of their business. And so we quickly set out to start building an ecosystem around the formations experience.
If you think about the types of subscriptions we have, the entity compliance subscriptions, which are registered agents and compliance, are still the majority. It's the bulk, and we get very high attach rates there. And as we deployed free, that remains still extremely healthy because it's entirely relevant to the formation to keep your entity compliant. LZ Tax and a virtual mail product that we launched are the next two in terms of their aging. They're almost three years old. And we see those also with very healthy attach rates, not as high as the other ones. And those ones are really, you know, ongoing usage and consumption that drives people back to our post-formation experience. And then we launched a whole bunch of new applications at the end of the year.
So things like, LZ Books, which is an accounting solution, you know, eSignature, you know, business licenses, which is launched right now as a transactional service, but has the potential to be a subscription service. And so all of those are now being tested and commercialized in different ways. I mentioned our free customers are totally different than our paid customers. And in some cases, we bundle a subscription with the paid customers, like eSignature is actually included in our premium SKUs. And then in other cases, we're doing lots of testing to understand the impact that these subscriptions have on conversion. Overall, we always drive towards a neutral first-year net bookings, leaning towards subscriptions.
And so we're always trying to move more of our revenue into the subscription line of the business and take it out of the transaction line, 'cause it has the effect of increasing conversion and driving higher LTV. And so the net effect has been relatively neutral LTV. We were able to really reduce the cost to acquire customers, and move people more into subscriptions. So it gives us a better, you know, year two, year three, but right now we're seeing it relatively neutral.
What's the opportunity if I think about some of the partner channels that you guys have historically had, in terms of moving that into an additional product that may be brand LZ, right?
Mm-hmm.
Like financial services, insurance-
Mm-hmm.
You mentioned pay yourself, right, so payroll.
Mm-hmm.
What are your thoughts in terms of additional adjacencies?
Yeah, so we've been a lot of the services that we've launched have actually been born out of testing and partnerships that we've had. We felt like we have to own anything that has to do with compliance, because part of the benefit of what we're creating is, if you step all the way back, is we're creating an application that essentially does all of your compliance needs, you know, digitally. Today, if you go visit a small business, they have file cabinets that keep all their insurance policies, they have their notices from government agencies, they have, you know, tax bills. They have all these different things, and we're really putting that into one property, and so we feel like we have to own that.
When it's adjacent, we typically like to partner with best-of-breed providers, and so an example there is, you know, we use Wix as our partner for sites, as an example, or banking, you know, we have a partnership with Bank of America and Novo as well, as a challenger bank. And I think those are areas where we just know that that's not a business that we're necessarily going to want to own operationally at this point. As we start to enter the books space, it's interesting, that's a whole different ecosystem as well. And so I would anticipate in the near to long term, we're really focused on also building out that ecosystem where, you know, you generally do payments, you do payroll, you can get into capital as well. That's a pretty much wide-open space for us as well.
Yeah. MyLZ has been kind of on the table. You guys have been tweaking that now for a couple years. Is that fair? A year and a half?
... we really relaunched it six months ago. There was, you know, when I joined, there was no post-formation experience. And so we did some light improvements. So you're right, it was probably two years ago where we started to really begin the investment, but six months ago, we've completely rebuilt it.
What's the opportunity today, post-formation, in terms of adding on additional stuff?
Yeah. So this is, this is also a pretty exciting, you know, de novo opportunity for us in that if you, if you think about our heritage, we've engaged with our customers just purely at the formation, the moment of formation, because that was the only time we had their attention. And, you know, if we're being intellectually honest, we were overselling our customers because we had that moment. And, you know, we were good at attaching products there, but then you'd see oftentimes more churn happening post-formation because the customer did it just in case, and then they realized, "I don't really need it." So with, with MyLZ, we now have a place where our customers, post-formation, start to engage with us, and we're deploying lots of new releases.
In fact, we just did one this last week, where after you form, we're really providing you a checklist of all the things that you need to do at the right time to help you understand, okay, now that you've formed, maybe you need to think of in the next 90 days, we know, for instance, you have to do a new filing underneath the Corporate Transparency Act. Once you're operational, it's the right time to go get business licenses. You don't need them before then. Once you have a partner that says, "I need you to carry this insurance in order to work with me," then we have the ability to sell you insurance in the product experience. We also now have a customer data platform.
We have the ability to segment our customer base, and so we're getting much more scientific around, like, when do we reach out to customers, and through which channel? So we have sales teams that are now focused on high-value customers. We have MyLZ, and we have email, where we're focused on maybe the—not, I don't want to call it lower-value customers, but the, the less efficient customers. And so all of that really didn't exist six months ago, and this is the year where we prove out that model. We have to rebuild our sales team a bit, so we, we know in the first half of the year it's gonna be a challenge. But as we get in the back half of the year, I fully expect we have a completely different marketing and sales model in motion.
You talked about basically more timely, more relevant sales there. Does that have implications on churn as we think about kind of cohorts over the next couple of years?
It should.
To improve that?
It should. I mean, One of the things that was a big disappointment for me is when we deployed LZ Tax, we had a very high attach rate, because, as I mentioned, customers all know they have a tax problem, and they want to talk to a tax expert. And so our customers attached, but they were attaching to a solution that entitled them to a filing, and the reality is, many of these customers formed at the end of the year, had no income, and didn't really understand the benefit of filing if they had expenses, and so they would just churn straight out. They might have talked to us, and they got some value from it, but they would churn straight out.
As we think now about how we can identify customers at the right moment, we fully expect that, you know, we will defer on customers who don't require a filing and start to talk to them seasonally. Or we also have the ability now to see them engage with LZ Books and identify exactly who has income and has enough expenses that it makes sense for them to file, and then we can target them very specifically. So none of this existed before. It actually created, in this case, a headwind this year because we were so effective at attaching. Like, we're incredibly effective at attaching in our formation flow, that you actually saw too many people attriting out of it.
This year, we have a bit of a headwind that we mentioned on the earnings call of those customers churning out. Going forward, we feel like it's an incredibly healthy business. We have an entirely novel solution that's custom-built for very simple businesses to go all the way from books to tax, and now we have the data to support it.
One of the important tenets of the post-formation opportunity as well, if we can prove out that upsell and cross-sell, is that it allows us to think differently about that initial funnel. Dan, say we try to attach everything at the point of formation. We can be much more streamlined in that experience, start to pull things out, move it into our MyLZ experience, and therefore improve conversion in that funnel, grow our customer base. That's part of the rationale for us to move to the freemium SKU, was to drive more customer volume so that we can then monetize it through this post-formation opportunity.
Yeah. Our biggest opportunity for share is to reduce the upfront purchase, and again, we never had the post-formation experience before, so Noel is absolutely right. This is the lever to go get as many customers to form with us as possible and still be able to monetize.
I wanna ask this question just for curiosity's sake.
Mm-hmm.
But, how many, how many clicks do you think you can remove from that process to be able to get it done? Is that the right way to think about it, or because this is a-
I think it's less clicks. I think it's less about clicks. It's more about removing cross-sell that creates a little bit of, you know, fear, uncertainty, and doubt. As a small business is going through the workflow, and we start to offer too much, and they look at it and say, "I think I might do this. I don't know. I've got to come back and think about it later." In some cases, we've actually tested adding more clicks to get to know the customer, and there's almost no drop off when we ask them questions about their business, which means, like, that is the valuable data that-
Yeah
... you should be getting. So it's which clicks are the most impactful to drop off is definitely the cross-sell.
... you guys talked about estate planning on the last call-
Mm-hmm.
In terms of really the non-formation business. Talk to us about the potential outside of business formation for LegalZoom broadly.
Yeah. So estate planning, I mean, most people who actually think of LegalZoom recognize us as a consumer application, and that's good because that opens up the top of the funnel, and every small business that forms with us is a consumer. And any business that forms actually has a life event that requires an estate plan. And over the last couple of years, actually the last 10 years, there's been no investment in it, and so the experience there is not strong, and I don't think it's competitive. But that business has still sustained. While it's been a headwind, it's still out there, and we're probably still the market leader in the space. The opportunity is here to leverage all the investments we've made in the formations process and just apply them directly to estate planning.
So, you know, that's gonna allow us to rebuild the application. But one of the unique differences this time in how we're rebuilding it is we're starting to think much more about our role in providing true expert services, meaning like getting the attorney to actually engage on our platform with our customers. Historically, we've had attorneys involved in our offering only for general advice, and we have a $40 a month subscription for that advice, which isn't consumed all the time because you don't need an attorney every single month. Now we're starting to put the pieces together to actually build a platform where we can participate in the matter itself, which means, you know, generally moving towards more of a co-counsel model, where we have our own attorneys in-house underneath what's called an Alternative Business Structure.
It allows those attorneys to actually partner with other attorneys to complete a matter. We have a practice management solution that we've built for our tax business that allows us to monitor where those matters are. And then we also are building collaboration on legal documents so that all of the collaboration can happen on our platform. And you're gonna start to see pieces of this roll out, hopefully in the first half of this year, but you'll start to see probably that expansion in the back half of the year, so trying this in different matters as well. And this is one of the reasons I came to LegalZoom, to be honest. It felt like there's no standardization of a legal experience for small businesses and consumers.
And to do that, you have to keep it on a platform, which is many of the investments we've been making that have been under the surface over the last couple of years.
Expertise has been a priority for you, right?
Yeah.
You just talked about this. You guys have experimented with it, though, in terms of the formation process.
Yeah.
There's been various aspects of experts incorporated. Like, big picture, 10,000 ft, what have the learnings been of when is the right time to incorporate an expert and when it isn't?
Yeah. Well, people, one of the SKUs that we have in the formation flow includes access to an attorney for 30 days, right at formation, and we have a series for those customers of multiple sessions with the attorney to go through a checklist of all the things that you need to think about. That's been super successful, and introduces them to our experts, which has a very high transactional net promoter score. But it's a limited business opportunity because, as I mentioned, it's, you know, you, you see $40 a month, unlimited access and 30-minute sessions with attorneys, but then episodic usage, so people drop out of that solution.
At the same time, someone might start with us and say: "You know, I have—I'm hiring employees," or, "I'm getting business licenses, and I'm in food and beverage, and I have—and I sell liquor." They—and the attorney on our platform will say: "You need to talk to an attorney. These are actual legal matters." And they may pay $10,000-$20,000 for that legal matter that's happening off our platform. And so the big business opportunity here is to participate in the matter itself, not to provide generalized advice, and that's all the foundational investments that we've been making. So we've been super successful in introducing them to an expert, but we haven't been able to keep them on our platform.
The Beneficial Ownership Information report is a big change for 2024, right? What... Noel, what's in the guide for the report? And then, Dan, like, bigger picture opportunity, it covers everyone.
Mm-hmm.
What's the bigger opportunity to bring them back to LegalZoom for a service?
Yeah. You want to hit the opportunity, and I'll hit the-
Yeah, the opportunity here is Corporate Transparency Act you know, being executed by FinCEN. The goal here is to understand ownership of entities. There's a lot of fraud that can happen, and this gives some teeth into, actually, enforcing, some of the concerns that the FinCEN has. It's a requirement for about 90% of our customers. There's, as most people will know, that many of these have been implemented for financial service providers, historically. So there's a pretty decent opportunity here to sort of help our customers with a whole new compliance requirement that shows what our platform can do. So, we have some of our customers who've subscribed to our compliance bundle because they just don't want to even be concerned with any compliance requirement from anybody.
You know, that's essentially what this is. If you think about LegalZoom, we have the small business profile. As we progressively get more information about a business, we have more and more to actually pre-fill all of the compliance requirements at a state, at a local level, at a city level, and then ultimately, at a federal level. And so the goal here is, for our customers, it's as simple as, you know, one click to review all of your information, add maybe a couple incremental fields, and then hit Submit, and you have nothing to worry about with this new requirement.
Yeah, in terms of the guide, obviously, it's a new product altogether, and you know, we're sort of thumb in the air a bit in terms of exactly what type of uptake we'll see. We're including it for our Total Compliance subscribers, so that's a chunk of our subscriber base that's going to get it included as part of their subscription. We think it's going to be much more Q4-centric, just given the deadline that business owners have to file it. And so I would say right now what we have in our plan, it's pretty modest expectation, and it's very Q4-centric.
Let's take one more in. Marketing is finally gonna step back up in 2024. You guys have brought it down over the last couple of years. All right, so talk about the lessons of bringing down marketing, and then what's the expectation now that you guys are more efficient for 2024 and for you guys to now spend back in?
Yeah, I think premium played out exactly how we thought it would, in that it required less marketing spend to bring in more traffic. If you step back, the biggest opportunity for us is still going to be introducing LegalZoom to a broader audience. So the incremental spend that we have in our plan this year is to test a little bit more top of the funnel marketing spend, and make sure that, you know, rather than like 2020 and 2021, where there was a heavy brand investment that was somewhat disconnected from the lower end of our funnel, that we're really trying to drive efficiency in the rest of our funnel.
We are the only brand that, in our category, that's, you know, truly recognized, and we feel like that's a bit of our secret sauce, is that we're established relative to our competition. But we also know that we have to make sure people understand that we stand for small businesses, and that we're here for formations. So that's the focus as we go forward. It's. I wouldn't say it's a heavy incremental investment for the year, and really, we're still ROI-driven on our marketing spend. So if we find that it's not working, we'll probably dial back, and we'll try something different, very similar to how we approach our product investments. So we experiment, learn, and then, you know, go from there.
Great, guys. Thank you so much.
Awesome.
Thank you.
Thank you, guys.