Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.
Thank you, operator. Welcome to LegalZoom's third quarter 2026 earnings conference call. Joining me today is Jeff Stibel, our Chairman and Chief Executive Officer, and Noel Watson, our Chief Operating Officer and Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, and similar expressions, and are not and should not be relied upon as a guarantee of future performance or results. Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements.
These risks and uncertainties are referred to in the press release we issued today and in the risk factor section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. In addition, we will also discuss certain non-GAAP financial measures. We use non-GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in our investor presentation and can be found on the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.
Thank you, Madeleine, and thank you all for joining us. Third quarter revenue was $195 million, up 3% year-over-year. Adjusted EBITDA was $50 million, representing a 26% margin. For the full year, we are reiterating the $800 million midpoint of our revenue outlook, or 6% year-over-year growth, while narrowing the range to $797 million-$803 million. We are lowering our Adjusted EBITDA outlook to $180 million-$185 million, or a margin of approximately 23%, reflecting both a more challenging acquisition environment and targeted investment. Customer acquisition remains under pressure, and we are making strategic investments to protect our position over the long term. We are spending more into partners and affiliates, which diversify how we acquire customers, and investing in our Business Manager product and service line, which helps to increase the value of each customer we win.
We are also encouraged by what Google has most recently done to expand its ads in AI Mode. We have begun spending into those opportunities. Noel will walk through the details. Of note this quarter, we are approaching an important milestone in our transformation toward higher value recurring customer relationships. Company-wide human-in-the-loop subscription services now represent 49% of our total revenue. Revenue from these services increased approximately 17% year-over-year. Our goal is to help owners start, run, and grow their businesses with AI, experts, and partners all working together. Our objective is not to maximize the value of a single formation, but to build a long-term relationship, which is why we are bringing human-in-the-loop services in from the first purchase.
In late Q3, we began testing a new formation lineup organized around how much help an owner wants, getting started on their own, receiving ongoing business support, or working with credentialed experts. The response has been encouraging, with the largest share of customers choosing our top tier, which includes our highest level of expert support. Our goal is to roll this out more broadly, and we are currently adding talent and service capabilities to support this opportunity. That adds to our Q4 costs, but with benefits we expect to build over time that will increase sales, deeper engagement, and stronger retention. Let me discuss what we are seeing in human-in-the-loop in more detail.
As a reminder, the portfolio has two layers: a service layer, products like Registered Agent and Virtual Mail to keep businesses compliant and connected, and an expert layer, attorneys and business managers that help them grow by putting accountable people behind the decisions that matter. This portfolio is built on 25 years of brand trust, a nationwide attorney network, and a compliance infrastructure and customer experience that are increasingly powered by AI. That is what customers value, and it is where we are growing. Business Manager subscriptions grew approximately 25% sequentially in Q3. We believe that growth underscores customers' demand for ongoing support beyond a single transaction and reinforces our decision to make lasting service and expertise a core part of the customer journey from day one.
That is the idea behind the new formation lineup I mentioned earlier, which makes the level of human support the central choice at the first purchase. The tiers of service range from a business advisor who assists with LLC startup and compliance to full-service support from a Business Manager, attorney, and accountant. In the initial rollout, the share of customers selecting our top-tier formation offering increased over 50% as of the end of October. We are also tailoring Business Manager to specific industries, starting with almost 269,000 active real estate businesses that formed with LegalZoom. Many real estate investors manage multiple LLCs, with recurring filings and compliance requirements across their portfolios. Few subscribe to Business Manager today, giving us a specific opportunity to deepen relationships with businesses we already serve. We will build on our compliance services with support, including asset protection, succession, and portfolio expansion.
That means a more relevant, valuable offering for customers and a repeatable model we can take into other industries. Virtual Mail is another human-in-the-loop product with strong subscription unit growth, and AI is changing how our customers use the service. In addition to our app experience, customers can now manage their physical mail through LegalZoom Virtual Mail integrations in Claude and ChatGPT, asking what has arrived, finding tax and financial documents, and identifying deadlines and legal notices. Adoption of our AI integrations among higher-tier Virtual Mail accounts is roughly 10 times that among starter accounts. Put AI and expert service together, and we believe the opportunity is significant. Many small business owners have access to AI tools, but are not sure how to put them to work. We can help.
During the quarter, we launched a pilot with Perplexity, in which Business Managers get customers started with AI, and early usage is encouraging. We can bring that help alongside our services and partner services, beginning the moment an owner forms a business with LegalZoom. AI, expert support, and the services owners need, all in one place. This brings me to the top of funnel, where we are broadening the ways customers find us. Over the past year, we have been intentional about making our go-to-market more resilient through partners, brand, and AI channels. These channels will not replace traditional search overnight, but together, they are helping to offset its impact. As a result, we will continue to invest foremost in diversification away from search. Partnerships remain the clearest example. Our recent partnership with Chase Bank shows how we can access new channels with stronger engagement and higher purchase propensity.
Chase serves over 7 million small business customers. After launching with Chase Offers in March, sales from the program doubled from Q2 to Q3. Beyond forming an LLC, Chase customers have turned to us for Registered Agent service, annual reports, and state compliance filings, the services that keep a business in good standing. That tells us we are reaching owners with real intent at formation and as they grow and run their business. In Q3, we signed new partnerships with Amex Ads and LivePlan, extending our reach across trusted brands that serve small businesses. In line with our real estate focus, we also added TurboTenant, a property management software provider. Turning next to AI, where the authority of our brand helps us get discovered. AI referral traffic is still small, but growing. Traffic from AI platforms grew almost 50% quarter-over-quarter.
Visitors from organic AI traffic continue to arrive with high intent and convert at meaningfully higher rates than traditional organic search traffic. We are currently participating in beta discovery environments with Google, OpenAI, and other AI partners with some success. For example, earlier customers from ChatGPT are generating higher lifetime value compared with our traditional paid channels. Volumes are small, but we expect ads opportunities in these AI experiences to grow materially over time, alongside improvements in tooling to support enhanced targeting and campaign optimization. In closing, one stat is worth repeating. Our human-in-the-loop subscription services now generate 49% of revenue and grew 17% year-over-year in Q3. Our direction is to help owners start, run, and grow through our platforms, our experts, and our partner services.
We are now bringing that model to customers from the very first purchase, expanding the channels that reach them, and using AI to improve service delivery. Discovery remains challenging, but we have concrete results to build on and a clear focus for our investment. I am confident in the path ahead. I want to thank our team for their tireless work testing, learning, and executing through a demanding period. With that, I will turn the call over to Noel to walk through our financial results and outlook. Noel?
Thank you, Jeff, and good afternoon, everyone. Unless otherwise stated, all comparisons in my remarks today will be on a year-over-year basis. We ended the quarter with a strong balance sheet. We have $182 million in cash, no debt, and strong free cash flow, all of which give us the needed flexibility to help navigate this changing environment. Those advantages shape how we make decisions, and they are the lens I will use as I walk through our third-quarter results and our outlook for the rest of the year. Third-quarter revenue was $195 million, representing 3% growth. Subscription revenue increased 11% to $140 million, exceeding our expectations. Growth came from legal advisory plans, the result of increased adoption through bundling within select formation offerings. Price increases in our compliance offering and continued growth in our Virtual Mail subscription offering.
ARPU rose 9%, benefiting primarily from higher pricing in our Registered Agent and compliance subscriptions, as well as an increase in our higher value service offerings. In the third quarter, total subscription units were approximately 1.9 million, down 5%, driven by a decline in lower value forms and eSignature and bookkeeping subscriptions bundled with certain formation packages. Excluding those, our subscription base grew slightly. Our 12-month small business retention rate held steady at 57%, in line with both the prior quarter and the prior year. While retention has been steady, we are focused on customer experience enhancements that aim to drive engagement and improve retention. For example, we are introducing a redesigned LegalZoom account and mobile app, bringing a business's status, deadlines, and documents into one place, with a personalized action plan that flags compliance gaps and an AI Assistant built around each customer's business. Early engagement is encouraging.
Customers opening or downloading their documents rose 28% versus the prior experience, and mobile app users were nearly twice as active as similar customers who hadn't engaged. Transaction revenue was $55 million, down 14%, below the high single to low double-digit decline built into our outlook, as formations and related small business transactions fell more than expected, with traditional search under pressure. We processed approximately 110,000 business formations during the quarter, a decline of 13%. Importantly, formations from strategic partnerships continued to partially offset the pressure from search. As a result, transaction units declined 4% to approximately 249,000. Transaction AOV of $222 declined 12%, resulting from a decline in higher value business formation and an increase in lower value annual report filings. Finally, deferred revenue declined $1 million sequentially. Turning to profitability, where all metrics are on a non-GAAP basis.
Gross margin was 73%, up 2 percentage points year over year. In customer care, our AI agent now fully resolves almost half of chat conversations, up from roughly one-third earlier this year. Based on this success, we have expanded the surface of AI agent support to voice, with almost a quarter of customer care calls now fully resolved by AI. At our LegalZoom law firm, AI-powered trademark intake reduced purchase to filing time by approximately 20% in Q3 versus Q1, and contributed to higher product gross margins. These capabilities lower our cost to serve, improve the customer experience, and allow people to focus on more complex customer needs. Sales and marketing expenses increased 15%, driven by a 15% increase in customer acquisition marketing as we expand and invest in channel diversification across partnerships, brand, and AI-driven acquisition.
Non-CAM sales and marketing expenses increased 14%, largely from targeted investments in our sales organization. Technology and development expenses declined 27% as a result of our reorganization, while G&A declined 3%, improving overall operating leverage. As a result, Adjusted EBITDA of $50 million grew 8%, with Adjusted EBITDA margin of 26% expanding approximately 130 basis points. During the quarter, we generated $34 million of free cash flow, reflecting the continued profitability and cash-generating nature of our business. We remain debt-free with $109 million of free cash flow year to date and our $100 million revolving credit facility undrawn. In Q3, we repurchased approximately $15 million of LegalZoom shares at an average price of $5.90. As of September 30th, 2026, we had approximately $66 million remaining under our authorization.
Share repurchases have reduced our weighted average diluted share count by approximately 10% versus the third quarter of 2025. We also continue to evaluate M&A opportunities that would add durable growth, differentiated distribution, or meaningful cross-sell potential. Now turning to our outlook. Our guidance assumes the current search environment remains in place through year-end, and it does not assume a recovery in Google traffic. For the full year, we are reiterating the midpoint of our revenue guidance of $800 million, or approximately 6% growth, and narrowing the range to $797 million-$803 million. For the fourth quarter, this implies revenue of $190 million-$196 million, or growth of 1% year over year at the midpoint. Consistent with the third quarter, we expect transaction revenue to decline at a mid-teens rate year over year, reflecting continued search headwinds.
For Adjusted EBITDA, we now expect $180 million-$185 million for the full year, and approximately 23% margin at the midpoint. For the fourth quarter, we expect Adjusted EBITDA of $48 million-$53 million, or approximately 26% margin at the midpoint. Let me bridge the $10 million reduction to our Adjusted EBITDA midpoint. More than half is investment in channels that reduce our reliance on search, including partnerships, affiliates, and paid AI placements. In some cases, we are deliberately accepting lower near-term marketing efficiency, as these newer channels typically start at lower returns and improve as we optimize them. We are willing to carry that cost while they scale. We continue to hold every channel to return and lifetime value thresholds with a focus on high-quality customers. As these channels mature, we will shift spend towards those with the most attractive economics.
Approximately a quarter reflects weaker acquisition economics as we manage through this environment. With search under pressure, it costs more to win each customer, and we are absorbing that cost to protect our position rather than pulling back. The remainder is deliberate investment in sales and service capacity behind our Business Manager offering and the new formation lineup. The sales portion is temporary, tied to seasonality ahead of peak season. The service capacity is a lasting capability, with benefits we expect to build over time through deeper engagement and stronger retention. Our cash generation allows us to fund these priorities while continuing to evaluate spending against customer quality and returns. In closing, we remain focused on what we can control: growing human-in-the-loop subscriptions, investing into diversified acquisition channels, and using AI to improve operating efficiency.
We are confident these are the right priorities for the business at this time, and we will report our progress against each. Before we open the call for questions, I want to thank the LegalZoom team for their consistent hard work and commitment to our customers. With that, I'll turn the call back to the operator for questions.
Thank you. As mentioned, at this time, we'll now conduct a question-and-answer session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Your first question comes from the line of Ella Smith with JPMorgan. Your line is now open.
Hi there. Thank you so much for taking my questions. Maybe for you first, Jeff. You've introduced quite a few new avenues for growth as CEO, from more partnerships, new premium products, and advertisements with the major LLM partners. What are you most optimistic for about contributing to growth, and do you think we would still primarily see this show up as growth on the subscription ARPU side?
Sure. Thanks, Ella. For me, what I'm most excited about is the success we've had in human-in-the-loop. When you look at the strength we've seen in the core new offerings, such as Business Manager, which had 25% quarter-over-quarter growth, as well as what we're doing with this new service lineup that we've been testing in-quarter and are beginning to accelerate, where we're really leaning in on service offerings and expert offerings. I think that this is the truly defensible position that we can take as more and more of those DIY solutions become adaptable in this new AI environment. From my standpoint, that's the real durable growth opportunity we have. Now that that's approaching 50%, you can start to see where that will overcome some of the shortfall that we see on top of funnel.
Of course, all the other things that we've done with respect to diversification is good, it is strong, we need to do more of it. I think long term, it's that human-in-the-loop offering that's going to define us in the future.
Very clear. Thank you. Maybe for Noel, I was hoping to hear more about your philosophy surrounding ramping up or down customer acquisition marketing. What would you need to see in the next few months, quarters, to lead you to spend more or less on CAM?
Yeah. Thanks for the question, Ella. Certainly, we talked and outlined some of the investments that we're making this quarter. It's in reaction to some of the challenges that we've seen in traditional search with Google, with rising costs and pressure on efficiencies. From our perspective, it's more important than ever that we diversify from a channel standpoint and reduce our reliance on traditional search. We've been leaning into spend around brand, partnerships, affiliates, et cetera, just to broaden that aperture. These investments for us, they have important strategic benefit, because they benefit our brand, they can help with AEO. A lot of times these relationships are bilateral, and we can more easily optimize them over time. For us, there's a halo effect to this as well.
At the same time, we are a return-oriented performance marketing group, and so there's certain return profiles that we will set for these channels. We want to give them time, because some of these take time to mature and to optimize, but we'll set various return hurdles for them, and monitor those and make adjustments, as we outlined in our remarks, over time to where we see the most economic benefit.
Very clear. Thanks so much.
Thank you.
Thank you.
Thank you. Your next question comes from the line of John Byun with Jefferies. Your line is now open.
Great. Thank you. This is John Byun on behalf of Brent Thill. Had two questions. One, if you could talk a bit more about the developments around AI Mode and ads there, and how you're approaching that, and what's interesting in that new avenue. Then second, wondering if you can talk about the plans for the upcoming tax seasons and the partnership that you're planning to work with, or anything organic. Thank you.
Sure. I'll take the first one, John. On AI Mode, specifically with respect to Google, which is what I assume you're speaking towards, we talked about the acquisition pressure that we were seeing last quarter. We have been working very hard to do two things. First, diversify away from what Google is trying to do, not necessarily because we're averse to working with Google, because we knew it was going to take time for them to work through what they needed to do to actually leverage advertising and their partner channel. The good news is, as I think we've all seen and heard with Google's announcement, they are starting to lean in more on advertising within AI Mode. We are early adopters. We are testing into that. It is one of the reasons why we're increasing our spend into that channel.
That said, we are not going to do it inefficiently, so we will stop it if it is not profitable. We are encouraged, we are excited by the conversations that we are having with Google. On top of that, we are also diversified.
Yeah, on the partnership side, as it relates to tax, this is one of the areas where this partnership is maturing. We have made a number of experience changes, both through our sales team and our care team, as well as in our site experience, that is optimized how we bring customers to the opportunity that we provide around bookkeeping and taxes. We are scheduling more leads, we are seeing really strong conversion rates, and this is heading into an all-important tax season, so we really feel like this one is teed up, and the partnership is strong, and the groups are working very closely together to make sure we are ready to go.
One of the things that you will see with this new service lineup that we are so excited about, as I have brought up with Ella's question, our expert layer will now include accounting advice as well, which is a natural cross-sell and upsell into full accounting.
Great. Thank you.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Matt Condon with Citizens Bank. Your line is now open.
Hey, guys. This is Carter Parlette on for Matt Condon. Thanks for taking my questions. First one here on partnerships. Partnerships have just grown pretty substantially to over 10% of the business. How much further do you think that channel can scale, and what are the biggest factors determining growth from here? Thank you.
Short answer, significantly. I think we've had some great success this year, but not enough, and certainly not fast enough, especially as that acquisition channel moves. What we've seen with working with partners, we get customers who are later in their stage, so they're less likely to go out of business, they have a higher propensity to buy, and tend to be better customers of ours. What do we need to do? We need to establish more partnerships, we need to build richer products, and we need to make sure that those products are differentiated in such a way that our service and expert layer, that human-in-the-loop, adds real value to the partner in a less tangible way than just paying a rev share or bounty, because we're driving better customer experience. That's what we're primarily focused on.
Yeah, and one add there is we continue to add new partners, and really marquee brand name partners, Chase Bank being one that we just mentioned on this call. What that means for us is we are the brand within our industry, within our space, that these providers, that leaders in each of their own industry and spaces want to work with. Again, there's a halo effect in terms of brand equity, but also reinforcing of our positioning in our space.
Understood. That's very helpful. Moving to the subscription revenue, it continues to grow at a double-digit rate, even as subscription units have declined. Can you just help us better understand how that growth is being driven? Is it more on the pricing side, or is it more of consumers shifting towards the higher value products? Thank you.
Yeah, there's a combination of drivers there. I think most importantly, we're seeing strong performance out of our human-in-the-loop services, particularly Business Manager, where we continue to invest in terms of the size of that team and also the service offerings that we provide. There's also some pricing in there. We've shown that we've had pricing power, and so we've looked at different products and where we can take pricing. Then there's a little bit of subscription tends to lag behind transactions, so some of the headwinds we've seen on the transaction side take a little bit longer to show up into subscription. So, we'll see some drag here on the subscription line as we look forward, and you see that implied in our Q4 guidance.
Thank you. Your last question comes from the line of Pat McIlwee with William Blair. Your line is now open.
Hi, Jeff, Noel. Thanks for taking the questions. First, on the transactional side. Despite some pretty healthy macro level trends in business formations, your formations obviously took a decent step down sequentially, and you are now expecting mid-teens declines for the year. I just wanted to kind of double-click on that and ask how much of that you feel reflects the challenges around search versus weaker conversion or weaker customer demand at large, and also any color on if trends have stabilized at all through October would be helpful.
You bet. I will take at least the first part of that. This largely is an impact from the change that we have seen with search and Google, and we saw a material shift when that happened. The reality is we have been positioning the company for quality share for quite some time, and I think we have been pretty successful in that respect. What that means is we are looking for higher propensity customers. If you look at that macro, the EIN macro, it is split between high and low propensity. On the high propensity side, we feel like we were actually driving good, strong success relative to the macro.
We were shedding off some of the low propensity customers that we had in prior years, and some of the growth that was coming there that was not really driving the core underlying business or yielding long-term good customers for us from an LTV standpoint.
Yeah, as Jeff mentioned earlier, and we also mentioned in our remarks, a factor in all of this is the transition that's happening between traditional search and AI Mode. We're encouraged by the expansion of ad opportunities that we're seeing in AI Mode that have started to take shape. Our expectation is that it's going to further expand, and we'll lean into that, and we're leaning into chat ads as well, and excited about some of the tooling that is to come that'll allow us to do better targeting and campaign optimization as those grow as channels for us.
Okay, great. If I could sneak one more in. On the RIF, can you just help us distinguish how much of that reduction reflected AI-driven productivity improvements versus recalibration of your cost structure in response to some of the volatility around customer acquisition this year? With that, just any update on if you've experienced any disruption in the product development function from some of those changes, or if you still feel like you're full steam ahead there?
Yeah, I would say it was largely to almost entirely tied to efficiencies that we've gained through AI automation. It's something we've been focused on for a while. You see it in our service line, in our gross margins, and now through our functional OpEx. As with any significant reorganization like that, there's always a transition period, and I think we have gone through some of that. But really, the team has reacted very positively, and it feels like we are operating at an increased and faster pace, with decisioning more decentralized and people able to move very quickly. So, it feels like it's been a really healthy decision for the organization overall.
Okay. Thank you both for the thoughts.
Thank you.
Thank you.
Thank you. I am showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program, and you may now disconnect.