Yahoo Finance LegalZoom.com, Inc. (NASDAQ:LZ) Q4 2023 Earnings Call Transcript
LegalZoom.com, Inc. (NASDAQ:LZ) Q4 2023 Earnings Call Transcript February 22, 2024
LegalZoom.com, Inc. beats earnings expectations. Reported EPS is $0.13, expectations were $0.1. LegalZoom.com, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the LegalZoom Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.
Madeleine Crane: Thank you operator. Welcome to LegalZoom's Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining me today is Dan Wernikoff, our Chief Executive Officer; and Noel Watson, our 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 Factors section of our most recent review 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 and 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 the Investor Relations section of our website at investors.legalzoom.com.
I will now turn the call over to Dan.
Daniel Wernikoff: Good afternoon, everyone, and thanks for joining our call. 2023 was a pivotal and productive year at LegalZoom. We deployed a new freemium lineup, built out multiple new subscription offerings and created a unified post formation experience. All of these accomplishments put us a strong position as we enter 2024, and I'm excited to share the progress we continue to make against our strategy. But first, I'd like to recap the financial performance for the year, starting with Q4 results. In Q4, revenue came in at $159 million, up 8% year-over-year. Subscription revenue grew 17% and accounted for over 2/3 of the quarter's revenue. Adjusted EBITDA for the period was $33 million, reaching a 21% margin. Formations, as measured by Census data, grew 9% in Q4.
Largely as a result of terminating multiple partnerships and our decision to restructure our sales organization at the end of Q3, our total formations declined 2% year-over-year. LLC units sold directly where our premium lineup is in market grew slightly faster than the macro. We have now substantially lapped the impact of the new lineup rollout. For the full year 2023, we delivered the following business results. Revenue was $661 million or a 7% increase year-over-year. Subscription revenue grew to $413 million, which represents growth of 15% for the year. Full year adjusted EBITDA increased 86% to $119 million, reaching an 18% margin. The macro remained healthy throughout the year with Census formations up 8% year-over-year. In 2023, our business formations grew 23%, driving 14% share growth for the year.
LegalZoom branded LLC growth was 29% for the year, over 3x faster than the macro. Taking an even longer view of this business from 2019, when I joined at the end of the year, we've seen the formations macro grow at a 12% compounded annual growth rate, while we've had a CAGR for LegalZoom formations of 19%. During this time, the number of businesses that have formed with us annually has doubled to almost 600,000. Equally important, our mix of subscriptions has increased from 51% to 62% of total revenue. Even though we believe very much in the long-term strength of this macro, our goal is to grow independent of it, shifting more revenue to subscriptions is the most critical strategy to achieve this dislocation. As a result of the shift in continued formation growth, we've been able to grow our subscription revenue by 19% CAGR since 2019.
We've been steadily recasting LegalZoom as a more modern software player in the legal, compliance and now financial space. When I joined, we focused on bringing the right team. As we built out the broader organization, we invested heavily in infrastructure to enable more product velocity. Modernizing our infrastructure has allowed us to drive better order efficiency which, in turn, enabled the launch of our freemium lineup. We committed to being more product-led and less dependent on marketing spend, and we clearly delivered against that objective, reducing our sales and marketing costs by 20% last year while still increasing our SMB product sessions by 25%. This focus is what helped us to achieve a dual goal: step function increases in both share and profitability in 2023.
As we delivered this new core lineup and increased efficiencies, we also invested heavily in building out e-signature books and business licenses into a completely redesigned MyLZ experience. We also released our AI-powered legal form summary tool DocAssist. We fully revamped our legal forms library, and we set the foundation for our reimagined legal expert experience. We ended the year by launching a new compliance service, LegalZoom's beneficial ownership information report or BOIR. This product helps customers satisfy the federally mandated reporting rules under the Corporate Transparency Act, which went into effect on January 1 of this year. This is a new federal compliance requirement by the Financial Crimes Enforcement Network, also known as Vincent.
This compliance requirement will impact roughly 90% of all business entities. Failure to comply with this new law can result in civil and criminal penalties. It's another example of how dynamic the compliance environment is in the U.S. We were one of the first to market with the solution with presales of BOIR service launching in early December. To reinforce our position as a customer's trusted partner for legal and compliance matters, we've included the entitlement for our existing total compliance subscribers. We're also marketing this service to our remaining customer base and net new customers engage with LegalZoom for the first time as a result of this compliance requirement. We expect BOIR to be a contributor to our transaction units and revenue in 2024, and that contribution will be somewhat muted as we included for free with our most highly engaged subscribers.
As we look forward to 2024, as we've done each year since going public, we're establishing an additional area of focus for the new year. While we're still laser-focused on gaining share, in 2024, we're putting more emphasis on growing the lifetime value across our base of active customers. We now have all the tools to enable better commercialization of our formation adjacent offerings and to better monetize our existing base post formation. While we do rebuild share as we lap our partner exits in the back half of 2024, our plan is to balance share gains with stronger revenue per customer. Let's now turn to an update on progress against our strategy, beginning with the first strategic pillar, scale the business. At the core of what we do, efficiently processing government filings is our most critical priority.
Our investments in automation allowed us to process a material number of SMB orders in 2023 without any agent interaction. The main beneficiary is our customers as their orders are fulfilled quicker. In parallel, we continue to introduce integrated support through chat. The combination of both of these investments has meant that in 2023, we had a nearly 40% year-over-year decrease in voice contacts per order while increasing our customer care in Net Promoter Score. Put another way, our variable cost per SMB order dropped by over 20% in the year. We're still mid-course in our investment in the fulfillment experience and have expectations for higher efficiencies in 2024. Separately, we continue to actively test our lineup. Over 60% of our base is now choosing the free formation package as part of their initial purchase.
This has led to a 14% share growth in 2023, slightly below our goal for the year, but a significant improvement. While we're pleased with the step function improvement, our share growth was impacted by the previously communicated partnership exits in the back half of 2023, a headwind that will continue in the first half of 2024. As a result, we expect full year market share in 2024 to be slightly lower than full year 2023, with the back half of the year returning to year-over-year growth. We still have opportunities to improve our formations lineup, the adjacent sources we market and the mobile experience for our free customers. You should expect to see the free lineup deviate from our premium SKUs over the next couple of quarters, along with a more significant mobile experience improvement that will benefit all our customers, but disproportionately free traffic is free prospects skew more mobile.
We have one additional priority under the strategy of scaling the core. Since 2021 and post the COVID spike, our estate planning business has declined approximately 20%, which has been a background headwind to our overall growth. The consumer space hasn't been an area of focus given limited resources and significant investment opportunities in small business. But as we continue to build out our team and increase our infrastructure investments, we now have resources to invest in our consumer business. Many of the investments in fulfillment in modernizing our questionnaire technology are directly applicable to reimagining our consumer products. While we haven't talked a lot about it over the past years, we remain a leading player in the consumer legal space with the tip of the spear being a safe landing.
There will be more to talk about here in the coming quarters and also as I unpack our expert strategy in a few minutes. We're excited about the opportunities for growth in both business formations and estate planning with the combination of these markets representing a refreshed serviceable addressable market of approximately $13 billion. Turning to our second key pillar, build the ecosystem, where our serviceable addressable market is approximately $15 million. Today, our registered agent and compliance offerings represent approximately two-thirds of our subscription revenue. Registered agents and compliance are core needs for our customers when they form, and we continue to experience healthy attach and stable retention rates. We're focused on providing superior compliance products and experiences for our customers in order to drive further growth and retention.
Roughly 4 months after including LZ Books and our LLC formations flow, we have over 7,500 paid subscribers. As our channel is proving to be healthy, our team is focusing on driving active use as soon as our customers become operational. Most importantly, we continue to innovate in books. In the quarter, we focused on tools to promote the benefit of combining LZ Books with LZ Tax. In January, we added a tax center in LZ Books to promote our tax expertise. The LZ Books tax center includes estimated tax calculations, and easy-to-digest view of Schedule C deductions and a tax savings widget that allows our customers to see the value of LZ Books has provided. In addition, Books customers who are subscribed to LZ Tax are provided a seamless one-click experience to share their data with their LZ Tax expert.
We've seen overall engagement with books increase following the rollout of our tax prep campaign with active subscriber engagement growing 17% from October to January. And even though we just launched books in our LLC formation flow at the end of 2023 of the tax customers that have begun the filing process this season, over 10% are using our books product. This past year, we launched a lot of new products, and we now have the ability to grow with our customers. We know that many of our customers form before they're operational and their needs continue to evolve with time. Historically, we've had to introduce all of our services in the formation flow because there wasn't a post formation experience. This year, we'll be focusing on post formation engagement, commercialization and monitor opportunities with the goal of expanding the lifetime value of our customers.
Today, an immaterial amount of revenue comes from products that are attached after the formation. We're seeing continued growth in MyLZ engagement as we direct more of our activities to the platform. Since the beginning of 2023, we've seen a 40% increase in returning users with over 75% of active users continuing to visit the site 30 days after their initial formation. Over the past year, we've built the infrastructure that enables business profile. This profile is the foundation of better segmentation, more effective targeting and faster questionnaire completion. It's also a key component of an omnichannel marketing strategy with higher value opportunities address through sales and lower value solutions targeted through self-directed channels like MyLZ.
Finally, a key focus for us in the coming year will be setting the foundation for the cross-sell of our expert services. While it's still very early, we believe many of our existing products, like LZ Books, Doc Assist and our legal forms library or natural entry points to discover our higher-value tax and expert services, which brings us to our final strategic pillar, integrate experts. Today, we are well into the third season of our LZ Tax offering. And while we are midcourse in adjusting our go-to-market strategy, we're excited about where this product and business is headed. As a reminder, late last summer, we announced the reset of our LZ Tax strategy in order to better target and retain tax customers. While we expect these changes will result in a 4-point headwind to subscription revenue growth in fiscal year 2024, we believe it was the best course of action for the long-term trajectory of this business.
We expect tax to be accretive to our overall subscription growth in 2025. Since adjusting our attached strategy and tax, we've realigned our sales effort and made significant product and service enhancements based on our learnings from prior seasons. Our new tax experience includes a simplified tax prep process, clear progress tracking matching to a dedicated tax preparer and reviewer and the ability to communicate with these experts quickly and directly via chat within MyLZ. While we plan to provide more details on our LZ Tax season during our Q1 earnings call, initial feedback from our customers has been very positive. Our CPGs are also very happy with the changes as we now have the complete process from onboarding up to filing on our own platform.
While this practice management platform is currently being used by our tax experts, it is also designed to build with our legal experts in mind. Over time, this platform will be used by our attorney network to efficiently and seamlessly collaborate with our legal plan customers. Importantly, we believe this can also help us extend beyond the existing services we offer today. We continue to build a strong network of attorneys, invest in our own law firm in Arizona, build and evolve our AI tools and make critical platform infrastructure improvements. The combination will enable us to service important legal insights and link our customers to experts. Through this new platform, attorneys will become increasingly efficient in performing the work with the goal being to bring down the expert costs and begin to standardize the experience of working with an attorney.
Equally important, all the capabilities we built will also allow us to expand into other legal matters. The export opportunity is our largest, representing a $23 billion serviceable addressable market, and we look to make meaningful progress against it in 2024. Democratizing law is a cornerstone of LegalZoom's foundation in history, and we look forward to continuing to innovate on affordable tech-enabled legal services. I'm excited about the progress we continue to make across each of our strategic pillars and the opportunities ahead of us that will drive growth in every area of our business. The great strides we are taking in our business are powered by the hard work, creativity and innovation throughout our entire organization. I'd like to thank all of our LegalZoom employees for our successful 2023.
I'd also like to specifically thank Rich Priest, our Chief Operating Officer; for his leadership and significant contributions to LegalZoom since joining the company with me in 2019. As you may have seen in the 8-K filed earlier this afternoon, Rich is transitioning from LegalZoom at the end of March. We wish Rich the best in his future pursuits. And with that, let me turn the call over to Noel.
Noel Watson: Thanks, Dan, and good afternoon, everyone. We had a strong fourth quarter with both revenue and adjusted EBITDA exceeding our expectations. Before I share details on the quarter as well as guidance for Q1 in the full year 2024, I'd like to reflect on the strong execution of our team. The investments in our infrastructure are paying off. As we experience ongoing efficiency improvements in many areas of our business. Today, we are only halfway through our road map of investments in technology and automation, which we expect will support continued margin enhancement in the years ahead. Next, our product delivery. We rolled out a record number of products and services in 2023, providing many new opportunities for commercialization.
Finally, we successfully executed a new business strategy and have experienced stable customer retention during this transition. The results of these efforts are evident in our latest financial performance and support our expectations to deliver both revenue growth and increased profitability in 2024. I'll now shift to provide additional details on our results for the quarter. Please note all comparisons will be on a year-over-year basis unless otherwise stated. As announced last quarter, we are no longer reporting partnership revenue as a stand-alone item. Beginning this quarter, partnership revenue has been incorporated into our transaction and subscription revenue line items. All prior period comparisons in my remarks today also reflect this change.
Please refer to the supplemental presentation posted on our Investor Relations website for more details. Total revenue was $159 million for the quarter or up 8%. We completed 113,000 business formations in Q4, down 2%. Our market share of business formations was 9.7%, down sequentially and year-over-year. While we continue to see growth in our LLC formation product, headwinds from exiting certain partner channel relationships and the impact from our sales reorganization drove the formation and market share declines. Transaction revenue was $52 million, down 6%, driven by an 8% decline in average order value, partially offset by a 2% increase in transaction units. We recorded 215,000 transaction units in the quarter. The 2% increase was a result of strength in LLC formations and other SMB products such as annual reports, offset by lower consumer transactions and the impact from partnership exits.
Average order value was $242 for the quarter, down 8% due to our lower price lineup and an increasing mix of our lower price formation and non-formation business transaction products. We expect AOV to decline in the mid-single digits in Q1 2024 with some choppy AOV trends in the following quarters as we lap the impact of partnership exits and BOIR timing where we expect to see higher order volumes in Q1 and even more so in Q4. For the full year, we expect this will translate into a low single-digit decline in AOV compared to the full year 2023. Subscription revenue was $107 million in the fourth quarter, up 17% due to continued growth in our subscription unit base and ARPU expansion. Subscription revenue outperformed our expectations, driven primarily by retention improvements in our compliance subscriptions.
We ended the quarter with over 1.5 million subscription units, up 7% and our continued strength in core compliance, where growth was partially offset by the impact from the exit of legacy partner relationships. We also saw strength in our Virtual Mail and Forms and e-Signature subscriptions. Excluding the contribution from partner channel units, our subscription units increased 14% year-over-year in Q4. Our 2024 subscription units will be impacted by the continued roll-off of approximately 100,000 units from our partner channel exits, which will result in low single-digit year-over-year growth in subscription units in the first half of the year. We expect sequential improvement in subscription unit growth in the back half of the year. ARPU came in at $277 for the quarter, up 7%, driven by the transition of lower-priced department channel subscriptions.
Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Fourth quarter gross margin was 68% compared to 70% in Q4 2022. The year-over-year decrease was driven by higher filing fees as a percentage of revenue as California reinstated filing fees in the third quarter of last year following a 12-month pause. Looking ahead, in Q1 2024, we expect to see a similar year-over-year decline in gross margins due to the aforementioned impact of reinstated California filing fees. For the full year, we expect our gross margin to be relatively stable versus 2023 with margin improvements in our core business continuing to be offset by lower gross margin services such as Virtual Mail and LZ Tax. Sales and marketing costs were $43 million in the quarter or 27% of revenue, down 4 percentage points from last year.
Customer acquisition marketing costs were down sequentially due to seasonality but up by $1 million or 4% from the same time last year. Non-CAM sales and marketing expense was down $4 million or 27% as a result of ongoing efficiencies we have implemented in our marketing strategy as well as impact from the reorganization of our sales team. We expect total sales and marketing costs to remain relatively flat in 2024 as we fully realize the benefits from the sales reorganization which translates to approximately $8 million of savings for the year. These savings will be more than offset by an increase in CAM, including higher levels of brand spend as we look to optimize our mix of brand and performance spend. Technology and development costs were $16 million, up $2 million or 14% as we invest in product and engineering talent.
Looking ahead, we expect full year technology and development expenses to grow at a slightly accelerated rate versus 2023 as we shift further into a product-led growth organization. General and administrative expenses were $15 million or down 5%. We expect a modest increase in G&A expenses in 2024 as we remain committed to expense discipline. Our strong performance in the fourth quarter resulted in $33 million of adjusted EBITDA or 21% margin compared to $27 million of adjusted EBITDA and margin of 18% at the same time last year. Deferred revenue decreased by $9 million in the quarter. As of December 31, 2023, our cash and cash equivalents were $226 million. We had no debt outstanding and no outstanding borrowings under our $150 million revolving credit facility.
We did not repurchase any shares in the fourth quarter under our existing $100 million share repurchase program. For the full year 2023, we repurchased approximately 5.9 million shares for a total of $55 million or an average cost of $9.35 per share which represents a reduction of approximately 3% of our prior year fully diluted share count. Subsequent to year-end, we have been active in our share repurchase program, and we plan to continue to opportunistically repurchase shares of our common stock as part of our balanced approach to capital allocation. Our 2024 capital allocation priorities remain consistent. We will first prioritize organic investments in the business, followed by strategic acquisitions, and lastly, stockholder returns via repurchases of our common stock.
Our strong cash position enables us flexibility to execute against all three of these priorities simultaneously. I will now provide guidance for the first quarter and full year 2024. For the first quarter of 2024, we expect total revenue of $172 million to $176 million or 5% year-over-year growth at the midpoint. We expect first quarter adjusted EBITDA of $25 million to $27 million or 15% margin at the midpoint. For the full year 2024, we expect total revenue of $700 million to $720 million or 7% year-over-year growth at the midpoint. This includes the following drivers: a 4-point headwind to subscription revenue growth from the shift in our LZ Tax strategy, which is more pronounced than the first half of the year. The roll off of approximately 100,000 subscription units from the wind down of certain partner channel relationships, which will also be more pronounced in the first half of the year.
We expect the roll-off to be fully completed by the end of 2024. We are also projecting a slower macro Census EIN growth relative to the 8% growth we experienced in 2023. Our guidance philosophy continues to incorporate current quarter trends and conservatism in the following quarters. Based on the trends we are seeing today, we expect low single-digit growth in formations macro in Q1. For the full year, we currently expect flat to low single-digit growth in the formations macro, which translates into some deterioration versus Q1 levels for the remainder of the year. As a reminder, the macro showed strong acceleration in the back half of 2023, creating a more challenging comparison. We expect full year adjusted EBITDA of $135 million to $145 million or 20% margin at the midpoint.
And with that, let's please open up the call for questions.
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