LegalZoom.com, Inc. Price & Performance (LZ)

Risks and uncertainties are referred to in the press release we issued today and in the Risk Factors 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, [indiscernible] or otherwise. In addition, we will also discuss certain non GAAP financial measures. We use non GAAP measures in making decisions regarding our business, 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. Will now turn the call over to Jeff. Good afternoon, everyone.

I'm excited to speak with you today about the progress we've made in our three key focus areas: optimizing our subscription business, reorienting our go to market strategy, and leveraging AI to deliver expertise. We are narrowing our focus back to LegalZoom's heritage as a trusted partner of legal and compliance solutions. In line with our efforts, we are entering 2025 with a new mission rooted in our history, to transform how businesses and individuals navigate the legal system. Over the last twenty four years, LegalZoom has delivered over 9,000,000 legal solutions to businesses and individuals. We are a leading online platform for legal services at scale. With over 25 in house attorneys through our own ABS law firm, a nationwide independent attorney network of over 1,000 attorneys, and approximately 1,800,000 active subscriptions of our legal, compliance and small business management solutions. We believe our strong technology platform supported by technology augmented legal services represents an even larger opportunity for LegalZoom Our vision is for LegalZoom to serve as the guardian of people's aspirations, lives and legacies. Over the last eight months, we've set an executable strategy and are positioning LegalZoom to drive sustainable results. Our focus is to build the best core products we can partner with others who offer best of breed ancillary products, and provide service that empowers and delights our customers.

This year, we will continue to focus on the areas of our business we can control We'll improve predictability by reaccelerating subscription revenue growth, and drive the business toward increasing profitability. Let's jump in. We achieved fourth quarter revenue of $162,000,000 at the high end of our guidance. Subscription revenue grew 2% year over year from strength in our compliance related subscriptions. Q4 marked a critical turning point for us After four sequential quarters of deceleration, we expect to reaccelerate subscription revenue growth in 2025. As we continue shifting our business toward higher value customers, LegalZoom formations declined faster than overall U. S. Business formations the quarter. We expect our deliberate focus on quality share will support our goal of driving consistent and sustainable growth. We know that high intent customers I. E. Customers who spend more with us during their initial purchase build more durable businesses. In Q4, without removing our free formation offering, we shifted over 10% more customers to our Pro and Premium packages year over year. These packages include a mix of compliance solutions, business management subscriptions, one on one legal advice and trials for certain subscription offerings. Our execution in 2025 will focus on building We aim to achieve this by focusing on quality share and concentrating on our core competencies of legal and compliance services, with an emphasis towards subscriptions.

Our actions will include driving greater brand awareness, providing best in class service, weaving expertise through our products, and pricing for the value we provide. We are confident these measures will enable us to achieve our 2025 outlook of 5% year over year revenue growth. On the bottom line, we delivered fourth quarter adjusted EBITDA of $44,000,000 representing another quarter of strong margin performance. Adjusted EBITDA margins of 27% benefited from ongoing cost efficiencies and a shift to higher margin formations. As Noel will discuss, our full year adjusted EBITDA margin outlook reflects double digit growth in dollars year over year and confirms our commitment to drive durable margin expansion in 2025. Let's now turn to an update on our key focus areas. Beginning with optimizing our subscription business, Staying current with legal and compliance requirements is an ongoing Reorienting our products towards subscriptions is key to growing our customers lifetime value. It's also what our customers need from us [indiscernible] As I mentioned earlier, we're continuing to see positive results from changes in our business formation lineup. To attract higher intent customers. We are also focused on aligning our pricing with a goal to attract and retain high value customers we'll grow with LegalZoom over the long term.

To that end, we've begun to reprice certain products.

In September, we returned the entry point pricing of our registered agent product from $199 to $249 We continue to see relatively stable attach rates. Looking forward, we will continue to test pricing changes across our portfolio. From top of funnel to renewals to accurately price for the value we provide, whether this be a price increase or decrease. With an emphasis on shifting our customers towards recurring subscription offerings. Last quarter, I also addressed our efforts to or BOR to a subscription offering. This reorientation helped shift customers to our total compliance subscription, and gave us a roadmap out of the circular roundabout many of our competitors are driving through, with the recent challenges to the Beneficial Ownership filing requirement in the court system, Since December, the filing deadline has been volatile. And subject to continued judicial review. As a result, our outlook does not assume the beneficial ownership filing will be a federal requirement in 2025. This is a perfect example of the challenges and complexities of remaining compliant as a business owner. It reinforces our commitment to reorient our legal compliance offerings towards subscriptions. It also reflects a conservative approach to our 2025 guidance. Let me turn to our second key focus area, reorienting our go to market strategy.

This year, we will diversify our marketing spend to emphasize our overall LegalZoom brand and lean into our positioning as a premium online legal and compliance services provider. We're looking forward to launching a new marketing campaign later this spring to introduce our Numchin Our marketing plan includes more than two times the investment in brand spend we made in 2024, Without increasing our overall marketing budget. We expect our premium messaging to drive strong returns as we improve overall brand awareness and attract high value customers. Separately, we made the decision to stop investing resources into building non core products and instead invest in our partner ecosystem. In December, we partnered with one-eight hundred Accountant to provide full service tax and bookkeeping solutions. This allows us to continue serving the tax and accounting needs of our customers under a partnership model. That retains economics for LegalZoom, and allows us to reallocate our time and resources to our core legal and compliance offerings. So far, early results are encouraging. The majority of our formation customers are opting in receive information about one-eight hundred services. You should expect more updates from us as we continue to build out our partnership channel to provide our customers with access to a curated portfolio of offerings, through our legal Zoom platform.

Turning to our third strategic priority, becoming an export platform by leveraging AI, and our twenty plus years of proprietary data, research, and legal expertise to augment human expertise. Generative AI alone cannot replace attorney advice. For both business and personal legal decisions, affordable and accessible attorney advice will remain essential to ensure the best legal protection for customers. LegalZoom stands apart from our competitors as a technology platform [indiscernible] established network of independent attorneys, and the power of AI to unlock high value for our customers. We believe we can deliver powerful AI solutions to our customers attorney network and in house teams to drive growth and efficiencies in our business and provide greater value to our customers. We intend to launch more AI powered tools to help our customers during clear friction points and promote the value and services of our attorney network. Following the launch of an AI powered business name generator, we recently began testing an [indiscernible] We're excited to offer certain customers 20 fourseven access to an AI assistant who can help them navigate this very personal journey. While still early, preliminary behavior of customers who have engaged with the AI assistant includes purchasing an estate plan and an attorney services plan.

This aligns with our goal of using AI to promote attorney network. Finally, let's now turn to our acquisition of Formation Nation. Formation Nation has established itself in the industry as a best in class formations and small business service provider under two distinct brands, Nevada corporate headquarters or NCH is unique in the online formation space. As a full service do it for me white glove business formation provider. Inc. Authority provides value priced do it yourself [indiscernible] And small business services and was the first company in our industry to offer free formations. The Formation Nation acquisition is expected to positively contribute to adjusted EBITDA in the first year. Inclusive of synergies, due to our complementary ecosystems. Our integration efforts are already well underway and we expect this to drive immediate value. We expect Formation Nation to significantly strengthen our customer service profile expand our portfolio of offerings, and enable us to reach a broader customer base. At the same time, we believe Formation Nation will benefit from our strong technology platform AI products that augment expertise, scaled marketing and fulfillment, and tenured experience shifting businesses from transaction to subscription. Finally, we expect both our brands to benefit from cross selling and upselling each other's complementary portfolio of products.

We are thrilled to welcome Formation Nation's senior leadership team. Including CEO, Court Christie, and CFO, Dean Walker. Inc. Authority President, Trevor Rowley and NCH President, along with their experienced team to the LegalZoom family. Let me summarize by saying how grateful I am for the hard work of our teams over the last two quarters. And how excited we are Before I turn the call over to Noel to discuss our fourth quarter results, and in particular our 2025 outlook, I want to again express my strong conviction and our ability to execute and meet our financial goals for 2025. Noel? Thanks, Jeff, and good afternoon, everyone. Our financial performance in 2024 reflects the shift in our key focus areas and execution priorities. As Jeff noted, over the last two quarters, we have worked hard to lay the groundwork for a return to predictable revenue performance powered by our emphasis on reaccelerating subscription revenue. As we shift our top line execution to focus on the areas we can best control, our bottom line performance in 2024 demonstrates an ongoing commitment to adjusted EBITDA margin expansion. For the full year 2024, adjusted EBITDA of $148,000,000 grew 25% year over year.

This improvement highlights the impact of our ongoing efforts to drive automation, and generate efficiencies in our operations. As well as our headcount restructuring and reduced hiring plan. This restructuring, which was executed in the third quarter of last year, underscored our narrowed focus and resolve to drive growth while delivering a strong margin profile. On that front, full year adjusted EBITDA margins of 22% grew by three eighty basis points year over year, This builds on our 2023 margin improvement of almost 800 basis points year over year versus 2022. I'll now turn our focus to our fourth quarter financial performance. Unless otherwise stated, all comparisons will be on a year over year basis. Total revenue was $162,000,000 for the quarter, up 2%. Looking at our revenue performance in more detail, transaction revenue was $53,000,000 up 2%. Recorded 241,000 transaction units in the quarter. The 12% increase was primarily due to a rise in non formation business related transaction products, such as our VOIR offering offset by a lower volume of formation units. We recorded 96,000 business formations in the fourth quarter, a 15% decline. The decrease was due to a combination of a softer business formations macro, with Sensis CIN applications falling 3% year over year and our ongoing focus on attracting high value customers.

Average order value was $220 for the quarter, down 9%, to a higher mix of lower priced transaction, including an increase in BOIR annual reports and corporate dissolutions. Subscription revenue was $109,000,000 up 2% from stronger compliance related subscriptions. This growth was partially offset by a decline in revenue from our tax offering, due to our decision to pause new customer acquisition. We ended the quarter with approximately 1,800,000 subscription units, up 14% from an increase in forms and e signature and bookkeeping subscriptions to the bundling of these products into certain business formation packages, well as an increase in compliance subscriptions. ARPU was $263 for the quarter, down 5%. This was primarily driven by pricing changes to our compliance related subscriptions and a mix shift within our virtual mail subscriber base. Turning to expenses and margins, all of the following metrics are on a non GAAP basis. Fourth quarter gross margin was 71%, compared to 68% in Q4 twenty twenty three. The year over year improvement was primarily driven by lower filing fees as a percentage of revenue Margins were also supported by lower headcount as well as continued automation and process improvements in our service delivery operation. Sales and marketing costs were $44,000,000 or 27% of revenue, an increase of 1% from the prior year.

Customer acquisition marketing costs increased 8% primarily due to higher brand marketing expense. Non cam sales and marketing expense was down 2000024% primarily due to lower content production expenses and a decline in personnel costs. Technology and development costs were $13,000,000 down $3,000,000 or 16%. General and administrative expenses were 13,000,000 a decrease of $2,000,000 or 12%. Both technology and development and G and A cost savings were primarily driven by the reduction in force that occurred in the third quarter of last year. Our execution drove adjusted EBITDA of $44,000,000 or 27% margin. This represents a 32% year over year increase as compared to adjusted EBITDA of $33,000,000 for the same period last year.

As a reminder, adjusted EBITDA margins are generally higher in the back half of the year due to lower CAM spend levels that align with our business' seasonality. Deferred revenue decreased by $11,000,000 from Q3, which was in line with expectations and the typical seasonality of our business. Free cash flow was $36,000,000 compared $14,000,000 for the same period in 2023. Our free cash flow performance exceeded our expectations as primarily due to the increase in adjusted EBITDA as well as an improvement in the timing of working capital changes.

We ended the quarter with cash and the cash equivalents of $142,000,000 We remain debt free no outstanding borrowings under our $150,000,000 revolving credit facility. Subsequent to the end of the quarter, in Q1, we used approximately $50,000,000 of cash on hand related to the acquisition of Formation Nation. During the fourth quarter, we repurchased 44,000,000 shares of our common stock for approximately $2,000,000 For the full year, we returned approximately $165,000,000 to shareholders through share repurchases repurchasing 19,200,000.0 shares of our common stock at an average price of $8.58 per share lowering our share count by approximately 10%. As of 12/31/2024, had approximately $50,000,000 remaining under our $215,000,000 share repurchase program Turning to our capital allocation priorities in 2025, we we remain committed to executing against our three key focus areas to drive growth. We will utilize our healthy balance sheet and strong cash generation to drive shareholder value. We're very pleased to begin the year with the acquisition of Formation Nation, which accelerates many areas of our growth strategy. In 2025, we will remain focused on making the right organic investments in our business namely legal and compliance services and technology to improve our customer experiences and drive organic growth.

We will also continue to evaluate synergistic M and A opportunities that can accelerate our strategic growth plans and bolster our market leadership. Last, we will also continue to opportunistic deploy capital for share repurchases. Finally, turning to our outlook. I will now provide guidance for the first quarter and full year 2025 including the impacts from our recent Formation Nation acquisition on February 10, For the first quarter, we expect revenue in the range of $175,000,000 to $179,000,000 or 2% year over year growth at the midpoint. We expect first quarter revenue performance to reflect a year over year decline in transaction revenue in part due to the impact of beneficial ownership filing injunction and year over year increase in subscription revenue driven by the commercialization of our core business subscriptions partially offset by a headwind from the discontinuation of new customer acquisition related to our tax offering.

For the full year, we expect year over year revenue growth of approximately 5% This reflects our goals to reaccelerate subscription revenue growth We expect to exit the final quarter of twenty twenty five with double digit growth in Our guidance includes an assumption of flat macro for business formations as based on census reporting of EIN applications. It also reflects our assumption that the beneficial ownership filing requirement will be on a voluntary basis given the rapid changes we have seen to federal ruling. It includes the impact of shifting the commercialization of our LV tax product for new customers. We expect 2025 to be the final year of headwind to our revenue performance from changes in our LD tax commercialization strategy We estimate the combination of LD tax and our beneficial ownership filing assumptions represent over four points of headwind to our revenue growth in 2025. However, the LD tax headwind will be partially offset revenue generated from our new one-eight hundred Accountant partnership. Turning to adjusted EBITDA, expect to achieve adjusted EBITDA in the range of $33,000,000 to $36,000,000 in the first reflects a 19.5% margin For the full year, we expect an adjusted EBITDA margin of approximately 23 This reflects higher gross margins driven by an increase in subscription mix and operational efficiencies.

Annualized OpEx savings of approximately $13,000,000 following our reduction in reduced hiring plan we executed in Q3 of twenty twenty four. A stable level of a CAM investment assuming the macro conditions align with our assumption. And higher other sales and marketing expenses following the acquisition of Formation Nation's skilled small business service experts In closing, I'd like to thank the entire LegalZoom team for their contributions this quarter. And welcome Formation Nation to LegalZoom. Our Q4 performance and 2025 outlook reflect continued progress toward improving the performance of our core legal and compliance business and reaccelerating our subscription revenue performance. We feel confident in our ability to achieve our 2025 outlook as we maintain our focus on building sustainable growth driving operating efficiencies, delivering strong margins. [indiscernible] turn the call back to Jeff for closing remarks. Thank you, Noel. I want to reiterate the strong confidence we have in our ability to meet our 2025 outlook. Achievement will reflect the success of our three key focus areas, and the prioritization of positioning LegalZoom to drive recurring, predictable subscription revenue. We are focused on the areas of our business we can control We are executing against a narrowed focus on our core legal and compliance competencies, and an emphasis on quality customer acquisition and a deep emphasis on subscription economics.

This is a measured approach that will take time to execute. But we expect it will drive compounding returns over the longer term. We believe these changes will solidify our market position as premium service provider improved customer retention and lifetime value and drive ongoing growth and predictability in our business in the years to follow. I'd like to thank all of our LegalZoom employees who have been working diligently to And I'm once again thrilled to welcome the Formation Nation team to LegalZoom. I am confident that we are building a stronger, more durable legal Zoom. And look forward to providing you with continued updates on our progress in the coming quarters. With that, let's now open up the call for questions. Thank you. At this time, we will conduct the question and answer [indiscernible] Our first question comes from the line of Ellis Smith with JPMC.

Your line is now open. Good evening. Thank you so much for taking my question. So, Jeff, maybe first for you. You mentioned raising the registered agent price. I think it was from $199 to $249 I was wondering if you can update us on how that's going and maybe how LegalZoom differentiates that product versus your competitors? Sure. So first off, philosophically, we think that many of our products are much stronger than our competitors in part because of the historical context, having been doing this for the entirety of twenty four years and then RA's case for almost that long.

The registrators are agent product is something that needs to work when you need it. And having LegalZoom behind that and instead of a copycat competitor alone speaks volumes. So that is one piece of why we are trying to align pricing with what our offerings are. The second is to remind people that we are trying to move up market and we're trying to leverage what we're doing on the product side to offer real value to customers. And herein, you will see some changes that speak to what it means to build product. And historically, in a lot of and I think we're not that different, we equate product with technology. But they're not synonymous. Product is a function of technology plus service. And that's what our registered agent product does so much better than others. We have really strong technology that helps for scale. And then we have a service element that helps give people peace of mind. And as an example of that for some registered agent customers who need this, we're now offering unlimited 20 fourseven for those customers. And that is something that we don't think anyone else in our space offers. We did it quietly.

We did it in part with a realignment on price. And as a result, we we believe that we're actually having a positive impact Specific to your question, Ella, we're actually pleased with the price change. By the way, it was a price change back to where we were at prior periods. So while the rest of the market and world was inflating, we were actually in a race to the bottom. So we actually only returned our pricing back to where we were historically. So we think that there might be even more in elasticity ahead. And we're looking at that as a measured approach to make sure that we're offering value above and beyond what our customers would expect, so that as we do this, we can increase retention as well and ultimately drive long term value. That makes a lot of sense. Thank you so much, Jeff. And then maybe for you, your 4Q 'twenty four free cash flow was exceptionally strong. I think it exceeded the top end of your guidance by $15,000,000 or so.

Do you have any comments about maybe what happened in the quarter and any thoughts about maybe free cash flow to EBITDA conversion moving forward?

Yes. Thanks for the question, Ella, and thank you for pointing that out. We're happy with the performance that we saw in Q4. We're happy with our free cash flow performance for the year. We think our adjusted EBITDA is converting really well into free cash flow. In particular, I think there's a number of factors or a few factors. One, our adjusted EBITDA was at the top top end of our expectations, so that sort of exceeded our expectations a bit. We also saw deferred revenue exceeded our expectation somewhat as well. And then just with working capital changes, some structural improvements that benefited us in the quarter and will benefit us moving forward. And then there a bit of it was just the natural timing of working capital. You see that ebb and flow from quarter to quarter a little bit better in Q4 that will create a little bit of a headwind in Q1. But overall, I think it speaks well to how we're converting free cash flow. As it relates to how we think about it looking forward for 2025, I would expect that we'll continue to see strong conversion from adjusted EBITDA into free cash flow.

Probably, I would say at the same level or slightly better than what we were able to deliver in 2024?

Great. Thank you both so much.

Thank you. Thank you.

Thank you. Our next question comes from the line of Trevor Young with Barclays.

Your line is now open.

Great. Thank you. First on the formation acquisition, can you quantify specifically how much revenue and EBITDA is baked in for fiscal twenty twenty five before any of the synergies And then how should we think about layering that in from a modeling perspective across transaction and subscription revenues? That's my first question.

Hey, Trevor, this is Noel. Thank you for the question. We're happy to welcome the team. It's a a seasoned and accomplished executive team. It's a highly dedicated and capable employee base. So we're happy to have them as part of the LegalZoom family. I would say our Q1 and full year guide guidance includes the impact of Formation Nation our plan with them. We are already sort of working quickly to implement an integration plan. And so we're moving fast there and exploring opportunities to to really identify and action the synergies that are available to us with the complementary nature of the two businesses. I will say it's going to get messy because we're jumping in, we're going to disrupt some things. We know that business is largely transactional. We want to shift them towards subscription and take them on the same journey we've been on with LegalZoom That's going to impact some of the performance this year. We're going to point some of their sales team cross sell products that we have And so really we're looking at the blended performance of the two businesses because there's going to be impact on both sides. And so we've included that and it gives us the flexibility to sort of manage the outcome and how deep and how aggressive we get on some of those transitions and integrations to the expectation that we're setting within that constraint for guidance.

Expanding on that point, which it's a good question to be asking, Trevor, and we've sort of struggled with this ourselves because as we start to look at integrating this business, we can either keep it somewhat separate and segmented or we can do what we think is the right approach, which is really lean in on integrating this business quickly. So we can take advantage of a number of key things. Noel already brought up one of them, which is an aggressive approach to pivoting from a transactional business, which they largely are as we were at one point as well to subscription. Leveraging our technology, number two, really deeply integrating across sell and up sell approach where we're not thinking about how to separate things, but how to unite them and combine so that we can sell some of their products into our base. They can sell ours into theirs. But more importantly, they can call into our base and vice versa. And then finally, on marketing, brand, and positioning, we've effectively acquired a low oriented value brand as well as a very high touch, do it for me product, something that is white glove. We don't have either of those.

We've been right in the middle. And anytime we had to compete, either down market or up market, we had to leverage the exact same brand. We now have the opportunity to go after a the lower end of the market as examples such as free formations. But not dilute our brand. We can only do that by full [indiscernible] deep integration and doing that aggressively. And the opposite is true as well. As we think about some of these higher end products and services that we've been testing with success in market that are priced orders of magnitude higher than what we offer. Being able to do that by leveraging their export experts service force is going to benefit us significantly. So we've taken the approach of looking at these companies on a combined basis on a go forward basis.

That's really helpful detail. Thanks both on that.

Jeff, just back to your comments on pricing, some potential increases, but maybe also decreases as you push towards more of that subscription mix. Do we bridge that with the overall full year guide How much is baked in in terms of pricing lift in that 5% revenue growth for the full year? So the way that we've approached this guide is to make sure that we as a team have confidence in the numbers. And you saw a number of elements that Noel brought up that we layered in, where there could be potential up upside, but we're taking approach on focusing on the things that we can control. And when it comes to price, the same is true there as well. While we believe in the pricing model and we think that there is real inelasticity both with new customers and our existing base. What we're focused on first and foremost is driving towards that double digit subscription growth. That's what's going to deliver us into the future in a predictable and consistent way. And it is something that we had lost previously. And we have now earned the right to have that back. And we're not going to lose sight of that.

So first and foremost, we're actually focused more on long term than the immediate term. In the early periods, which gives us confidence over the long run. So I think that there is a lot of opportunity We have priced into our into our guide, what we think is reasonable to do on pricing. But we don't think that we're being aggressive on pricing either. So it gives us levers and leverage in the business to the extent that we need it. It. Great. Thank you. Thank you. Our next question comes from the line of Andrew Boone with Citizens.

Your line is now open.

Thanks so much for taking my questions. One tactical and one more strategic. Can you talk about the very strong subscription net unit adds that we've seen kind of in the back half of twenty twenty four. The attach rate, if I think about that compared to kind of business formations, has just been much higher than we've seen historically. Can you talk about the drivers of that? And then how do we think about the drivers of that for 2025? And then a little bit more strategically, Jeff, can you just touch on the partnership strategy? Where does that go over the next kind of two to three years? What does that help you guys unlock? Both internally in terms of more resources as well as then touching new partners and bringing new services on the platform? Thanks so much. Thanks, Andrew. This is Noelle. I'll take the first one and I'll pass it to you Jeff.

The first one on the net sub adds, I think it's a combination of things. First, we started bundling certain subscriptions into our pro and premium SKUs as we continue to look to differentiate the higher end SKUs and seek out a higher quality, higher value customers. So we included our forms in e signature subscription and then subsequently we also started including our bookkeeping subscription in those SKUs. And so as folks are buying into those packages, they're automatically getting those subscriptions and that's creating the ads. We're really focused with those additions on creating activation, creating engagement, so we can ensure [indiscernible] retention and renewal of those subscriptions. Other thing I'll point out is our compliance subscriptions, we've done a better job. We talked a lot last year about BOIR and the impact that had from a transaction unit standpoint, but also in the back half of the year, we really started leveraging BOIR into our compliance subscription. To ensure that the customers as they learn that the environment is getting more complex, that we have an offering that can keep that can help keep them compliant across the board rather than just addressing the single point related to BOIR.

So I think those are the factors. We'll obviously start to lap the inclusion of these additional subscriptions in those packages. We just started lapping this quarter forms and e signature and then in the end of by the end of Q3, we'll start lapping the bookkeeping inclusion.

And the only thing I'll add there, Andrew, is this is a test and learn strategy in terms of how we drive first subscription units, which increases our funnel and then the ability to upsell and cross sell. And increase price and value to those products and services. In the spirit of better to be lucky than right sometimes, with BOIR, we made a conscious effort of pushing people from BOIR to our total compliance package, before all of the lawsuits came up with BOIR. So we ended up creating some amount of friction in BOIR before the deadline started to unwind. So we didn't see quite the yoyo that I suspect some of our other competitors have and some of these government agencies have had. Because what we have done is we've used some of these transactions as engagement tools to help educate customers on why they need a full service full suite product that endures over time. I'm not going to tell you that we feel as if our compliance product is where it needs to be. I think we can get much better on the product side there. But it just shows that we can move people into these higher offering subscriptions and over time add value that helps retain and ultimately increase price.

Switching over to your partner [indiscernible] Strategically important. So I'm glad you put it in the strategy camp. It is it's my answer is less about partnership specifically. It's more about go to market. And making sure that we're insulating ourselves from the risks of the concentration that we had before. We were focused exclusively at the top of funnel on bringing people into formations and then cross selling and up selling. And the goal was bring people in to that funnel very cost effectively. So lower marketing costs by offering formations for free and then upselling them other SMB products. We have shifted that strategy now to look at the larger addressable market in the legal services space, going after that by doing what we do best, and then being able to bring people in across different channels. Whether that's affiliates, our core top of funnel, partners, even M and A as we saw with Formation Nation in this case where it makes sense opportunistically. And And in order to do that well, we need to have the best products in category. And we believe we do and those will continue to get better. And then we partner on the ancillary side, and that will provide us that insulation.

So you saw that with one-eight hundred. You saw that earlier with Wix. And you will continue to see partnership channel as an ecosystem becoming more and more core to what we do, because that will be the thing that a customer wants from us next We in the business side, we incorporate a customer We make sure that they're compliant. Get them a registered agent. The next question is going to be things like where do I get a bank account? Where do I get credit? How do I build my business credit versus my personal credit? Something I know really well from my early career. How do I form a website and get a web presence?

On partnership with Wix? And then ultimately, how do I pay taxes in the most advantageous way with my business vis a vis my what I'm doing personally. And it is that where this partnership ecosystem can be really, really valuable To driving higher value opportunities to our customer base without us having to tax our technology and product teams. And then secondly, which I think is going to be equally important, if not more, leaning on partners to drive customers to us into our core business. And that is something that we haven't done in a significant manner historically, but it's something we're going to lean in on this year and beyond because we think there is a world of opportunity, where we can lean on partners to start bringing customers into our S and B ecosystem and consumer consumer ecosystem. Great question, Andrew.

Thank you.

Moment for our next question. Our next Our next question is from Patrick McElwee with William Blair. Your line is now open. Hi, team. Thanks for taking my questions. So your implied market share stepped down by another point this quarter and know you're focused more so on customer quality versus market share at this point, but I just wanted to ask how we should think about your share going forward? And if there's a certain level or critical mass of formations you hope to maintain and further how material formation nation is in terms of volumes?

Sure. So I'll take this at a high level and and feel free to jump in on details. This distinction between quality share and market share is a really, really important one in our space. Because the way we define market share or at least the way to measure market share is with formations or the proxy for formations EINs What you end up is with a bunch of noise in that system. Whether that's fraud, whether that's bulk, whether that's high volume, there are a large number of incorporations that really aren't valuable to us. And we have been focused too much on that market share number. And I think we've said over the last couple of quarters that we are going to reorient to focus on quality share even if it means at the cost of perceived market share.

Versus real market share. I don't think we're significantly impacting our market share. Because I think what we're doing is we're driving higher value customers into our flow. And I think this quarter, we some extent, proved that by being able to pivot over 10% of the customers that were coming in and looking to form companies from going from our free formation to one of our higher end premium and pro formations. And that was done organically through education. Don't get me wrong, plenty of others fell out of the funnel. But the ones who fell out of the funnel, I don't think they were high intent customers or had high propensity for upsell, cross sell or device something down the line. So we're pleased for now with with the work that we're doing on market share versus quality share because again, we don't think it is impacting our actual market share as much as it might be impacting perceived market share. That said, this will stabilize over time. This is going to take a couple of quarters for us to get right. And then we'll probably tick and tack back to those EIN numbers.

Yes. I think you hit the point that I was going to bring up on the stabilization at some point. So as Jeff said, sort of we're working through it. The work is not fully done. But as we get closer to our identifying exactly where we want to be in terms of the customer profile that we're attracting, we will see market share stabilize. Obviously, Formation Nation will be additive, to our business formation count and market share. But to the extent at which, is unclear at this point. And so we're looking at it again in totality. I'm getting good at stealing Noyes Thunder.

The one thing I'll add with formation nation is Inc. Authority originated to my understanding the free formation model. And frankly, we copied from them.

And I can say that now that we own them. We were behind the ball on it. And in our urgency to try to catch up, I think we may have done some damage to our brand.

So the other side of the equation with this Formation Nation acquisition is we can now leverage Inc. Authority as this free to pay brand. And I think that that will help us in two ways. Number one, it will shore up the lower end of the market that our still quality customers. And number two, it will do so in a manner that won't devalue the legal Zoom brand. Right. Okay. And then just one more if I may. Jeff, in recent quarters, you've talked a little bit more about [indiscernible] Leveraging your library of documents to power the capabilities on your platform and You've launched a couple of new products recently, but I just wanted to ask if you could quickly touch on your longer term vision for what other products or capabilities could look like with that technology?

Yes, great question. And what I would say is, long term, the strategy and goal is to leverage AI to augment expertise. And again, Formation Nation is a critical component here because they have that 100 plus, 140 plus service experts that we can leverage. When you look at our two competitive sets, on the one hand, you have mom and pop lawyers who are very adept, have great expertise, but can't scale. Because they lack the technology prowess. On the other, you've got the online largely formation companies in the pure services. They have great technology and that technology is designed to replace expertise. We are unique in the sense that we have deep expertise in the form of lawyers, paralegals, legal network, and now these service experts And we're the leader in the space on the technology side. So the idea here is to take artificial intelligence and particularly generative artificial intelligence and make things easier and simpler for our customers for our agents, for our experts and for our lawyers to help customers at scale. And for us, I think that that is a key differentiator and that will pull more and more customers off of Main Street.

To our online platform.

Yes. And I think just to build on that, there's there's an operational efficiency side of that equation as well. We talk about augmenting our attorneys and our sales teams and our developers, but also on our fulfillment on the fulfillment side of our business. We have a really broad and long tail product set. And many of which still require manual steps in the process and we think there is still a meaningful opportunity to leverage AI to help us make that much more efficient.

Very helpful. Thank you both for the thoughts.

Thank you.

Thank you. Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open. Great. Thank you so much. I wanted to ask about the marketing piece a little bit more and was hoping you could just unpack the strategy around building out more of the education and increasing brand spend at you said 2x, but without increasing the marketing budget. So first, just where are some of the offsets? And secondly, what are you doing differently in terms of the messaging or the channels, now compared to what you were last leaning in on marketing after the IPO?

You bet. Good. Question. I'll take it at a high level if you want to jump in, Noel, on some of the numbers. Our go to market strategy historically has been pretty uniform. And it has been leveraging search Probably to a point that is too extreme. And unfortunately, when you're leveraging search and then your brand is the high end brand in the market, but is offering a free product. You effectively race to the bottom. And the only the only ones who win are the people you're buying marketing from. Because you're competing against like substitutes. So as you think about how we move forward, the first thing and I've talked about this earlier, is we will have a multi brand strategy that will allow us to take our value oriented [indiscernible] that are priced lower and offer that use a different brand, in this case, Inc. Authority. Our premium brand services meaning being LegalZoom.com those further and further upmarket. And having those two brands and that model will actually allow us to bifurcate our marketing spend and do much more targeting both in our core in terms of the way that we've done and using other ancillary marketing vehicles such as affiliates and partnership channels.

Secondly, on brand, the way we went about brand marketing and since we IPO ed, we actually did early on spend a significant amount of money on brand marketing. It just wasn't effective. We were going after the market with a claim that we were an SMB player.

Not that we were focused on legal services and being a technology augmented provider. And because of that, we were diluting our message. And it just wasn't effective. So we we, in large part, stopped doing that spend I believe late in 2023 and really haven't come back. I think now that we're focused on being the industry leader that we are, in our space, it allows us to leverage our brand message to be around education. Because if you educate properly and customers know what they're getting and they know the risk of going with a sub par provider, they will inevitably come back to LegalZoom over and over again. And that really is the core focus of what we're going to be doing as we pivot how we're going to market with our marketing messages, Elizabeth.

Yes. I guess I'll probably reiterate a little bit what you said, but just [indiscernible] to say it again, the brand message now encompasses a broader suite of services and better encapsulates our full offering. While not reducing the relevancy to SMBs. So allows us to capture a broader audience with our brand message and do it more efficiently. And therefore, we can replace some of the lowest efficiency portions of our And that's how we get to kind of holding spend relatively flat on a year over year basis.

And I'll give you a specific case study. So we're tangible here. When we launched our tax product, a number of years ago, we effectively changed our brand name. From LegalZoom to LZ because we couldn't sell LegalZoom tax. So we started marketing as an acronym. And an acronym is not a brand. And that was entirely ineffectual and it might have actually been counterproductive. To the way in which we were going to market. So now that we are owning and embracing LegalZoom, as the guardian for our customers, It makes it so much easier because this company has spent an inordinate amount of money over the last twenty four years building that brand. So we're able to draft off of that I think quite effectively.

Great.

No, that's super helpful context. And then just as a follow-up, I wanted to dig in on the subscription revenue guidance.

I know there's a lot of moving pieces, but was could you help us just just understand the bridge better from 2Q for 2% in Q4 of twenty twenty four to double digits exiting 2025. How much is just driven by the fact that year over year comps are materially easing kind of the contribution from Formation Nation one-eight hundred accountant you have price in there. Also just demand changes in the core. So I know there's a couple of moving pieces, but any sort of like factors or ranking would be super helpful for us. Yes. I mean, I think there's a number of factors and you've you've obviously called out a handful of them all sort of reacceleration. I think a couple of central ones One is The job that we've done in terms of shifting the value across our SKUs and starting to attract higher quality customers that then are attaching more products and will retain longer, thus driving higher LTV. So we started that couple of quarters ago and we'll start to see the benefit of that this year. Also Jeff talked earlier about some of the pricing changes, pricing changes on the front end as folks come in through the funnel.

As well as some pricing changes on renewals on subscriptions as well. And that as you're price changing renewals that cohort builds throughout the year, and thus provide some momentum in terms of the growth reacceleration?

Yes. And the thing I'll add, and you can see this in our numbers, we were watching deferred revenue decline. And that is now going to change. That's a key forward looking metric and it speaks to subscription growth. Or lack thereof. So it's something that we have been focused on on intently for the last six months and something we're going to continue to focus on because ultimately that's what drives stability and allows you to go into future periods with the wind at your back instead of headwind.

You bet. Thank you.

Our next question comes from the line of Josh Beck with Raymond James. Your line is now open.

Yes.

Thanks for taking the question. Maybe just a bigger picture for you, Jeff. So I think we'll be going on a year this summer since you've been in the CEO Do you feel like by that point of strategic update will have largely been in place? And then then to this discussion, really around the formation number itself, It seems like it's much more about the cohort value of the customers that you're bringing on. So just over time, does the actual market share and business formation number that you print maybe mean less? Just we'd love to hear your thoughts there.

Yes, it's a good question. And I mean, I've got relatively high confidence that that almost directly onto your point, As we head into the summer, we're going to have a really good handle on this business. It's going to look more like a recurring revenue business. And it's going to tack to that recurring revenue number such that we've got more flexibility and freedom within how we operate. So that we're not running the risk of a change because the government decides not to do BOIR next week as an example. Or the macro shifts massively or we see small business starts turn in a wrong way or EINs get turned off for two weeks, like we've seen recently. All of these things and should be manageable. And once once you have that, you have a business that's not necessarily good or bad, but it's predictable. And that's a business that can be managed. So for me, a lot of what we're doing strategically is first and foremost designing to build predictability in the business. And we do that by focusing on the things in our control. And minimizing what is out of our control. And finally, and ultimately, once we do that, we're going to we're going to build and lay that path towards success and we're going to start carving through it.

Super helpful. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Stephen Ju with UBS.

Hi.

This is Vanessa on for Steven. So your customer acquisition spend has remained fairly steady over the last two quarters. But now you've got Formation Nation through the door presumably that helps with the top of funnel. So should we be expecting any meaningful changes to your marketing spend through 2025?

No. As I mentioned earlier, we expect our marketing spend to be relatively flat year over year. So that's inclusive [indiscernible] Yes. And remember, we're going to get some benefits for sure from Formation Nation to your point. But they were also spending on marketing as well. So I think when you look at that on a combined basis being flat is pretty meaningful improvement.

Yes. The one other thing I'll mention around that is just our assumption in our plan and our guide is for a flat macro. Next year. And so so our marketing spend is dynamic and reacts to market changes, very quickly. So if we see a really healthy and strong macro, we would expect to be spending more and vice versa if we see some softness.

Thank you. Thank you. Thank you, Vanessa. There are no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.