Hi, welcome everyone. This is John [Bjorn]. Two executives from LegalZoom. We have Jeff Stibel, CEO, and Noel Watson, who's CFO and COO. There are two roles, very busy. Jeff has been CEO since July of last year, so almost a year now. Before that, he was on the board for about 10 years. Noel was CFO since before the IPO, right? And took on the role as COO as well. Maybe just to get started, I mean, for those who are maybe a little less familiar with LegalZoom, maybe just touch very briefly on the products, the main products, and the customer segments that you serve.
Sure. We focus on the online legal services sector. We're principally focused in two categories: on the SMB side and consumer side. On SMBs, our top of funnel is small business formation. Business starts and needs to incorporate, they come to us. The longer tail is with us offering compliance services and other various legal products, including a legal service where we offer a legal plan. On the consumer side, we're principally focused on estate planning, so wills and trusts. There too we have a transactional product in the form of getting a will or a trust and then offer various legal services on top of that that are subscription-oriented.
Okay. And then in terms of the revenue mix, I mean, it's primarily more on the non-consumer side. I mean, is there revenue or a way to think about that?
Correct. Our principal focus is on small and medium-sized businesses, and it is largely subscription. We are deeply focused on driving that small business subscription business, which is our core. The rest are ancillary businesses, either to drive people into our funnel or to service those customers once they have already become customers.
Okay, great. As I mentioned earlier, July 2024, you took on as CEO after having watched over the company for a long time. I mean, what were, I guess, some of the major changes that you've made since you took over? Things that you had observed maybe needed to be redirected a little bit. In terms of major changes you've made since.
Sure. I'd say the biggest is in terms of our focus. Said another way, what we are not going to do on a go-forward basis. If you look at the history of this company, we really created this category. In many ways, the LegalZoom name has become synonymous with online legal services. In our preparation towards our IPO, we started to realize that we could sell other value-added services across the SMB ecosystem more broadly. We had done that through partnership. As part of the IPO, we started to build some what I would call non-core products in-house, so tax services, bookkeeping services, etc. That became a primary focus of ours to bring people in through legal services and then cross-sell and upsell them on other value-added SMB services. What that did was twofold. Number one, it diluted our brand.
Number two, it allowed us to think of our legal services as non-core such that we were more willing to bring those customers in as transactional as opposed to subscription. I'd say the singular biggest thing was refocus all of our efforts on what we do best, legal services. We have now divested the vast majority of our product lines that are non-legal focused by partnering with others, with third parties who are best in class at those things. We are redoubling our efforts on our core legal services, in particular revolving around subscription opportunities to bring people in through formation and then move them up the channels into value-added subscriptions.
If I had a second one to add, it would be to move from what we have thought notionally as our market share, which is the amount of formations each quarter that we participate in, to quality share. It is in line with this notion of focusing on legal services for small businesses. It is relevant because what it does is it allows us to go more upmarket to a different addressable market that has principally been served historically by local lawyers and Main Street law firms.
Great, great. I think some of the, you mentioned subscriptions and you made a lot of progress in increasing the mix of that. I mean, that was just below 50% in fiscal 2020 and then went up by 15 points to 64%. I think that's where we're progressing maybe this year. Where do you think this could go, let's say, in the next three to five years? I mean, is the ultimate potential to reach 100%? What are some of the major product drivers that'll help you get to a higher state in subscription?
Sure. I mean, look, if I'm looking back five years from now, aspirationally, it should be 100%. These products and services are recurring. What we have done historically was pick apart the products and sell features. We sold those features in a transactional way. These services lend themselves to a subscription business. Subscription economics are far stronger for our business. Having a recurring relationship with a company that provides legal services is also beneficial to small businesses. As we look ahead, subscription as a function of our overall revenues should be growing at a faster rate than our revenues as a whole. You're seeing that even today. We're saying this year we'll do about 5% growth, but we're also saying that our subscription revenues towards the end of the year should be in the double-digit range.
We say that deliberately because we think that we have a sustainable model for driving accelerated subscription growth.
I mean, in terms of reaching that, I guess that was kind of a tail end. I asked a multi-part question. In terms of the drivers, both on the product side and maybe on the go-to-market side that will help shift that subscription mix higher, I mean, what are some of the things that you're working on?
It's aligned with the first question they asked me, or at least how I answered it with respect to focus. It is finding areas of opportunity where we can solve problems for our customers. We think of the average small business and assume that that actually exists. That pushes a pizza shop owner into the same category as a chiropractor. These are very different customers with very different needs. The average and the modality is orders of magnitude apart from one another. What we need to do is figure out the things in those businesses that overlap where we can solve problems and give those individuals back their time, those business owners back their time. That's ultimately what's going to drive our subscription business and lead to higher RPU, average revenue per user, and lower churn.
Examples of that that we've already done, which has helped to shift that share already, and why you've seen accelerated growth in the subscription line for the first time in, I think, four or five quarters, are things that we're doing around moving from do-it-yourself to do-it-for-me. We are taking more of a concierge-like approach to more sophisticated customers. We're also leaning in on products and services that help customers remain compliant and not just calendaring for them, but actually helping them do these things that need to be done, but are woefully ignored typically by the average small business.
Yeah, I think that concierge extension or enhancement to an existing product, especially on compliance, seems very promising. I mean, it looks like the RPU could be much higher. I don't know if you could maybe touch on the potential of from the early tests that you've done in the concierge product. I mean, it looks like it could be a sign of things that could be repeated to other products in terms of a higher RPU, better retention.
Yeah, I think it's a great point and call out. We sort of teased this in our last quarterly announcement because these products are quite new. I've been CEO for nine months. We had some cleanup to do and some stabilization to do. Really, we didn't start on some of these product features and enhancements until this year. Think of these as MVPs, but the demand is actually quite high because once you have a business who's past the hard period of staying in business and then scaling their business, it usually takes about a year, all of a sudden the elasticity curve flips from being quite price-sensitive to being time-sensitive.
These business owners are all of a sudden willing to spend their money to get back time on things that they're either not good at, they don't want to do, they don't care about, but they know needs to be done for your business. It's one of the points that I think we made very early on, which is we're doing a disservice forming someone's business and then leaving them because there is a lot that you have to do after you form. It is not just a function of a filing with the Secretary of State.
When you look at these concierge products, and I'll give you two examples, our Compliance Concierge product that we are test marketing right now, what it effectively does is it gives someone a service agent, some technology in the form of AI and traditional technology, and the ability to offload a lot of the regulatory issues that are facing an individual small business on the state, local, and federal side to someone who's looking over their business and proactively making sure that they stay in compliance before they get hit with fines. The cost of that is significantly greater than our do-it-yourself calendaring or any other technology provider, but significantly lower than what you would get at a traditional Main Street law firm or with a lawyer.
It fits in that Goldilocks scenario where it is high enough quality and low enough price that a real going concern business is going to gravitate to a product like that. The other example I'll use, which I sometimes hesitate to use, but it's an important reminder. I hesitate to use it because it's transactional, not subscription, but the demand was there. We were asked to do this. Is a compliance dissolution service. The number one cause of churn with small businesses is usually them going out of business. They usually don't have the time inclination, and it's depressing because you're effectively putting your business in a box and burying it. We have a now compliance product that does this for our customers.
It is very expensive relative to doing nothing or even using our do-it-yourself product, but it is far cheaper than a lawyer or doing it the wrong way and finding out that you're still being taxed and you still have fines. One of the things that we know, it's obvious, but that we know is that most entrepreneurs and small business owners are serial small business owners. They start a business, it fails, they learn, they get the itch again. If we serve that need at an attractive enough price, even though it is higher than what we would have done otherwise, ultimately they come back to us. Those are two good examples.
Yeah, and I would just add one of the areas that we're seeing kind of early success is with customers that maybe formed with us, but didn't leverage some of our compliance products and have fallen out of compliance, right? We're able to tell through the Secretary of State that they're out of compliance and we reach out. There's a reinstatement process that they need to go through. As you can imagine, it can be intimidating and complex. That's an area where they're already in a bit of trouble. There's risk around that. There's business disruption risk. There's fines. You could lose your liability protection. It's really important that people get back into compliance. That's where they're at the stage where, hey, I've kind of failed with the responsibility on my own.
Can you guys take it over and sort of hold my hand through this?
Yeah. I mean, that does sound like another source of potential that you could mine at some point more aggressively. Maybe just a quick follow-up on the concierge product. I mean, in terms of the potential average uplift, in software, we like to think, okay, when you upsell, how much more are they going to spend? Is it 20%, 30%, or could it be multiples of that? Obviously, still being very disruptive to the pricing of going to an attorney, but I don't know if you can.
I'll caveat by saying we are in the very early innings. But all of our testing shows that it is orders of magnitude greater than our core DIY products. When we talk about price and elasticity, we're talking about our core existing products. There's probably 20%-30% of a degree of freedom for us to do pricing changes when we offer greater value. When we're talking about concierge, you're talking about 2x, 3x, 4x the pricing opportunity because we're delivering so much value and giving back so much time.
Great. Maybe very interesting to watch how that progresses, especially into next year when you have more running smoothly. Maybe some questions for Noel. So EBITDA margin, obviously made some great progress. It was as low as 8% in 2021, 22% last year, guided for 23% this year. That would almost take you back to where it was pre-COVID in 2019. What are some of the key sources of operating leverage, especially in the current environment where you're still kind of fairly low growth, mid-single- digits? Where could this go in the long term or medium term? What's the potential in terms of EBITDA margin?
You want me to answer all six of those questions?
Take the best two.
I think first and foremost, we're really pleased with the success we've had with the margin expansion, as you mentioned, from 8% - 18% to 22% and now projecting 23% for this year. A lot of that has to do with the mix shift that you talked about earlier towards subscription. Our subscription products are generally much higher margin than they're servicing that initial transaction. As we've shifted that mix, that's created some upward pressure. We've also made a lot of investment from an infrastructure standpoint over the last five years that is bearing fruit and allowing our back office to be much more effective and efficient in how we fulfill and service our orders and our customers. We still think that there's more opportunity there, especially as we start to leverage AI more in how we deliver those services.
We think that's going to produce some leverage. We added a lot of resource as we built out the teams over the last handful of years as well. We feel like we are kind of where we need to be from a staffing standpoint and would expect to gain leverage from here. We feel pretty confident. We've said this year, we guided to the expanded margin and basically doubled down on that and said, hey, we're going to hit our absolute EBITDA target for this year regardless of the macro outcome or the revenue outcome, and we'll steward the business in a way to make sure we deliver that. We feel pretty confident in our line of sight or visibility into improving margins in that medium to long term. Non-committal right now in terms of what exactly the ultimate goal or target is.
We'll come back to the market at some point with that, but we feel confident that there's a steady path of improvement.
Great. No, it's definitely great to see that combination of stabilizing business and improving margin. I mean, one factor, I guess, was your headcount levels have decreased quite a bit, right, in the last couple of years. I mean, it was almost 1,400 in 2022, down to 1,200 the year after that, and then just under 1,000 last year, not including some contractors. I mean, I think you just mentioned that you might be settling there. I mean, but you think that's the right level? Do you see net hiring resuming at some point? How do you think about that?
Yeah, I mean, there's always going to be puts and takes on hiring. I think the important piece is what you mentioned towards the end there where the sort of there's a badge headcount number versus outsourced headcount. We've shifted that mix over time to have much more of a blended mix, which is great for us because it gives us an additional level of flexibility to scale up and scale down as the business needs. There's some cost benefit as some of the resources are from offshore locations. It has helped to kind of blend down our overall average cost per head. As I said earlier, I think from a general headcount level, we're where we need to be right now. There's areas where we'll make some investment. There's areas where we'll get more efficient over time, and those things will largely net out.
That's right. Obviously, that didn't include the Formation Nation acquisition, the headcount increase on that. Maybe one more on the financial side. I mean, deferred revenue Q1 had a, I mean, initially said a nice acceleration, actually a very sizable acceleration to 12% growth year- over- year. You had been running about 2%-5% growth in the prior six quarters. Just curious if you could kind of delve into what were some of the main drivers for that acceleration in deferred revenue growth, and is that sustainable?
Yeah, and I think you saw the deferred revenue improvement flow through to free cash flow, right? That was one of the drivers of the really strong free cash flow we saw in the quarter. There are a few drivers, I would say. One is if you're looking at it sequentially, there's some seasonality in our business, and Q1 is our strongest quarter in terms of the bookings that we generate, which tie to deferred revenue. We acquired Formation Nation during the quarter, so bringing on their opening balance sheet obviously helped our deferred revenue balance. I think most meaningfully, some of the early price testing that we've been doing both on the upfront acquisition side of the transaction with some of our subscription services, as well as starting to roll out price increases on renewals, you're seeing that in the deferred revenue.
That is partly what gives us the confidence in holding our guidance for the full year, given that that creates a level of visibility and certainty that gives us that reassurance that what we're seeing is working. I will say that the price testing that we've been doing is on a cohort basis, right? As we gain the confidence in the results we're seeing from that test, we know that as we roll that out through the year, we'll see some benefit.
Pricing and bundling, something that we've touched on several times here. I mean, how big is that opportunity from better pricing and bundling? I mean, how early are you in that process? It seems still very early.
Yeah, I think we are early. I mean, we've at this point tested rolling back to pre-COVID pricing on some of our current products. We've tested now with at least registered agent increasing pricing on renewals. Both of those have been net positive. We feel that that gives us a lot of leverage within the business to do that on an ongoing basis across the entire suite of products. I mean, what it shows is once a customer gets through that early life cycle of getting in business, staying in business, the profile of the customer is pretty sticky, and there's a relatively high propensity to pay.
Quite a few things to watch out in terms of pricing and bundling, concierge upselling, and good momentum on the deferred and subscription. I guess another new vector this year is a Formation Nation acquisition. They added some staffing as well, 140+ selling experts. I'm wondering if you could talk about how you're leveraging the new headcount, the new sales force that's been added. Where do you think you're going to optimize their usage as you kind of integrate through the rest of LegalZoom?
Sure. So look, apart from that acquisition being accretive, which makes for a good purchase generally, there were a couple of key reasons we did that purchase strategically. The first was it actually gave us another brand that we could leverage for the lower-priced product suite that we were already in market with and have been trying to deprioritize because it was hurting our brand reputation. We want to make sure that LegalZoom is always referenced and known as the premium brand. By buying Formation Nation, it gave us another brand, Inc Authority, that has a free formation product. We can now start pushing more and more customers over to the free side. The second thing is we are a technology powerhouse in the legal services space, but we do not have strong internal service.
As Noel was saying, most of our service team is outsourced, which is great from an efficiency standpoint. However, as we move up market to attack that quality share proposition, we needed to have real expertise. Formation Nation is largely oriented towards service. We gained 120 effectively experts in formation and compliance and other areas that we can then leverage with our technology and with AI to scale them even further. Those were the two key pieces. The added benefit that we got was this business is largely transactional, whereas we're more subscription. If we can apply the lessons that we've learned transforming our transactional business to subscription, we get the benefit of shifting that business to subscription effectively for free.
Great. I think we're out of time. Thanks, Jeff and Noel.
Yeah, thank you.
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