Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- LegalZoom.com Inc (LZ, Financial) reported a 5% year-over-year increase in total revenue, reaching $177 million for the quarter.
- Subscription revenue grew by 6%, driven by an increase in both subscription units and average revenue per user (ARPU).
- The company has over 1.6 million active legal and compliance subscriptions, showcasing a strong recurring revenue base.
- LegalZoom.com Inc (LZ) has a robust technology infrastructure and is actively integrating AI to enhance customer experience and operational efficiency.
- The company announced a restructuring plan expected to generate approximately $25 million in annualized savings, reflecting a commitment to operational efficiency and margin improvement.
Negative Points
- Business formations were down 17% year-over-year, indicating a softer macro environment impacting new business starts.
- The last two quarters showed a deceleration in subscription revenue growth, with softer retention rates in compliance subscriptions, particularly in the freemium cohort.
- The company is over-reliant on transactional revenue tied to macroeconomic activity for small business formations, which poses a risk in a declining macro environment.
- LegalZoom.com Inc (LZ) had to reduce its global workforce by 15%, indicating challenges in aligning the business with its execution needs.
- Free cash flow decreased to $17 million from $37 million in the same period last year, reflecting higher cash tax payments and timing of working capital changes.
Q & A Highlights
Q: Jeff, as you look across the business formation and Ancillary Services segment, what do you think becomes the defensible strategy that you guys are going to focus on? How do you create something that is more immune to competition and allows you to build a long-term sustainable base?
A: The bottom line is we, in large part, created this category and have allowed it to be commoditized. We have the strongest brand around, and this does not need to be a race to the bottom. We need to build the best products and ensure we fit the right products to the right customers at the right time. This is about orienting back to customer needs and aligning with them on their journey. I have every confidence that this is a highly defensible business, and we will continue to take the lead and build that defensible position.
Q: It sounded like you're revisiting the freemium products in terms of maybe turning more into subscription products and getting them differently. Can you clarify anything there?
A: We need to make sure that we're bringing the right customers into our ecosystem. Sometimes you get what you pay for with free. We need to ensure we don't have looky-loos but real customers trying to build businesses. We want to help them incorporate quickly and efficiently, then get them a registered agent and ensure they are fully compliant initially and over time. Eventually, we want to help them with web services, marketing services, tax, bookkeeping, and more.
Q: Can you double-click on the first priority of focusing on subscriptions? Could you give us one or two examples of the key segments where there's an opportunity to market better and target those specific segments?
A: Historically, we have focused almost entirely on formation, targeting brand new businesses or prosumers. We drop off pretty rapidly after that. We need to segment our customers by their business lifecycle: from day zero to month 12, years one through three, and year three onwards. Each segment has different needs, and we need to tailor our solutions accordingly. Additionally, we need to consider the different categories of businesses, like a florist versus a pizza shop owner, and offer the right solutions at the right time.
Q: Can you provide more details on the headcount reduction and where those reductions are focused?
A: The reduction was dispersed broadly across the company, with a heavier focus on the cost of sales side, particularly given the lower volume expectations and a concentration on LDTAC. The rest was split across marketing, G&A, and technology and development. We feel confident that we have the right level of resources to deliver on our existing initiatives.
Q: Is it fair to assume that as part of the management transition and the shift in strategy, we might get some updated long-term guidance at some point?
A: Yes, you are correct. We are moving quickly and will be testing regularly. We aim to provide interim updates and long-term guidance as we get more visibility into the changes. However, we are still too early to speak to long-term guidance.
Q: Are you envisioning that the product footprint doesn't change much, but the go-to-market and onboarding strategies do?
A: Our product ecosystem is strong, and our technology stack is industry-leading. This is more of a go-to-market focus, ensuring we push towards recurring revenue and follow customers' journeys over their lifecycle. We need to rethink the types of businesses coming into our free channel and ensure we bring in the right customers for the long term.
Q: Can you size the potential revenue opportunity in the consumer side of the business relative to small businesses?
A: The consumer market is significantly bigger than the small business market. Wills and trusts are a major need, with two-thirds of people advocating for them but only one-third having them. The go-to-market strategy is very transferable, and our marketing can serve double duty as every small business has an owner who needs a trust and will.
Q: LegalZoom has a retention rate around 60% for its subscription business, whereas website builders have rates in the 80s. Do you think LegalZoom can get there?
A: Our early life churn is higher due to the nature of new business formations, which have a higher failure rate. Our late life churn should be similar to other SMB ecosystems. We help businesses get their start, knowing many won't survive even to the point of needing a website.
Q: You announced a reduction in force but made no change to the profitability guide. Why is that the case?
A: The reduction in force was already factored into our guidance. We had estimated the impact and included it in our previous guidance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
