Participants

Madeleine Crane; Head, Investor Relations; LegalZoom.com, Inc.

Jeff Stibel; Chairman & Chief Executive Officer; LegalZoom.com, Inc.

Noel Watson; Chief Financial Officer; LegalZoom.com Inc

Ella Smith; Analyst; JPMC

Unidentified Participant

Unidentified Participant_1

Trevor Young; Analyst; Barclays

Andrew Boone; Analyst; JMP Securities

Patrick McIlwee; Analyst; William Blair

Elizabeth Porter; Analyst; Morgan Stanley

Stephen Ju; Analyst; UBS

Presentation

Operator

Good day and thank you for standing by. Welcome to LegalZoom's fourth quarter 2024 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first 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 2024 earnings conference call. Joining me today is Jeff Gebel, 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 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 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-gap financial measures.
We use non-gap measures in making decisions regarding our business and we believe these measures provide helpful information to investors.
These non-gap financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with gaps.
Reconciliations of all non-gap 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 Jeff.

Jeff Stibel

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 24 years, LegalZoom has delivered over 9 million 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 1.8 million 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 in the long term.
Our vision is for LegalZoom to serve as the guardian of people's aspirations, lives, and legacies.
Over the last 8 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 re-accelerating subscription revenue growth and drive the business toward increasing profitability. Let's jump in.
We achieved fourth quarter revenue of 162 million 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 4 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 US business formations in 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 sustainable revenue performance. 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 IBA of $44 million representing another quarter of strong margin performance.
Adjusted but down margins of 27% benefited from ongoing cost efficiencies and a shift to higher margin formations.
As Noel will discuss, our full year adjusted butt down 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 obligation. Reorienting our products to subscriptions is key to growing our customers' lifetime value. It's also what our customers need from us to succeed.
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 the value our services provide with a goal to attract and retain high value customers who will 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'll continue to test pricing changes across our portfolio from top of funnel to renewals to accurately price for the value we provide. Will 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 reorient our customers from filing a stand-alone beneficial ownership information report, 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 to 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 new mission and vision. Our marketing plan includes more than 2 times the investment and 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 1-800-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 to receive information about 1-800 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 LegalZoom platform.
Turning to our third strategic priority, becoming an export platform by leveraging AI and our 20+ years of proprietary data, research, and legal expertise to augment human expertise.
Of 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 with an 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 estate plan AI assistant.
We're excited to offer certain customers 24/7 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 our attorney network.
Finally, let's now turn to our acquisition of Formation Nation.
Formation Nation has established itself in the industry as the 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 price do it-yourself formation 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 just the IITA in the 1st 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 complimentary portfolio of products.
We are thrilled to welcome Formation Nation's senior leadership team, including CEO Cork Christie and CFO Dean Walker, IC Authority President, Trevor Rowley, and NCH President, Raymond Marin, 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 for 2025 and beyond.
Before I turn the call over to Noelle 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?

Noel Watson

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 re-accelerating 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 adjust a bit of margin expansion.
For the full year 2024, adjusted Ebi of 148 million 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 plans.
This restructuring, which was executed in the 3rd 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 IA margins of 22% grew by 380 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 to year basis.
Total revenue was 162 million for the quarter of 2%.
Looking at our revenue performance in more detail, transaction revenue was 53 million, up 2%.
We 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 BOIR 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 formation to macro with census EIN 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% due to a higher mix of lower price transactions, including an increase in BOIR, annual reports, and corporate dissolutions.
Subscription revenue was 109 million, 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 1.8 million subscription units, up 14% from an increase in forms and e-signature and bookkeeping subscriptions due to the bundling of these products into certain business formation packages, as well as an increase in compliance subscriptions.
Our pool was $263 for the quarter down 5%. This was primarily driven by pricing changes to our compliance related subscriptions and a mixed shift within our virtual male subscriber base.
Turning to expenses and margins where all of the following metrics are on a non-gap basis.
Fourth quarter gross margin was 71% compared to 68% in Q4 2023. The year over year improvement was primarily driven by lower filing fees as a percentage of revenue from lower formation volumes.
Margins were also supported by lower headcount expenses associated with our tax offering, as well as continued automation and process improvements in our service delivery operations.
Sales and marketing costs were 44 million or 27% of revenue, an increase of 1% from the prior year.
Customer acquisition marketing costs increased 8%, primarily due to higher brand marketing spends.
Non-cam sales and marketing expense was down 2 million or 24% primarily due to lower content production expenses and a decline in personnel costs.
Technology and development costs were 13 million, down 3 million or 16%.
General and administrative expenses were $13 million a decrease of 2 million or 12%.
Both technology and development and GNA cost savings were primarily driven by the reduction in force that occurred in the 3rd quarter of last year.
Our execution drove adjusted even a $44 billion or 27% margin.
This represents a 32% year over year increase as compared to adjusted even of 33 million for the same period last year.
As a reminder, our adjusted Ibito margins are generally higher in the back half of the year due to lower cham spend levels that align with our business's seasonality.
Deferred revenue decreased by 11 million from Q3, which was in line with expectations and the typical seasonality of our business.
Free cash flow was $36 million compared to $14 million for the same period in 2023. Our free cash flow performance exceeded our expectations, primarily due to the increase in adjusted EBA as well as an improvement in and the timing of working capital changes.
We ended the quarter with cash in the cash equivalent of 142 million.
We remain debt free with no outstanding borrowings under our $150 million dollar revolving credit facility.
Subsequent to the end of the quarter in 11, we used approximately $50 million of cash on hand related to the acquisition of Formation Nation.
During the fourth quarter, we repurchased 0.4 million shares of our common stock for approximately $2 million.
For the full year, we returned approximately $165 million to shareholders through share repurchases, repurchasing 19.2 million shares of our common stock at an average price of $8.58 per share, lowering our share count by approximately 10%.
As of December 31, 2024, we had approximately $50 million remaining under our $215 million share repurchase program.
Turning to our capital allocation priorities in 2025, 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&A opportunities that can accelerate our strategic growth plans and bolster our market leadership.
Last, we will also continue to opportunistically deploy capital for share repurchases.
Finally, turning to our outlook, I will now provide guidance for the first quarter in full year 2025, including the impacts from our recent Formation Nation acquisition on February 10, 2025.
For the first quarter, we expect revenue in the range of 175 to 179 million or 2% year over year growth at the midpoint.
We expect 1st 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 a 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 goal to re-accelerate subscription revenue growth throughout the year.
We expect to exit the final quarter of 2025 with double digit growth in subscription revenue.
Our guidance includes an assumption of a 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 rulings.
It includes the impact of shifting the commercialization of our LD 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 LZ tax and our beneficial ownership filing assumptions represent over 4 points of headwind to our revenue growth in 2025. However, the LZ tax headwind will be partially offset by revenue generated from our new 1-800 accountant partnership.
Turning to adjusted EIA, we expect to achieve adjusted EBITDA in the range of 33 million to 36 million in the first quarter, which reflects a 19.5% margin at the midpoint.
For the full year, we expect an adjusted EBITA 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 million following our reduction in force and reduced hiring plan we executed in Q3 of 2024.
A stable level of a cam investment assuming the macro conditions align with our assumption.
And hire other sales and marketing expenses following the acquisition of Formation Nation 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 in 2025 Outlook reflect continued progress toward improving the performance of our core legal and compliance business and re-accelerating 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, and delivering strong margins. Now I'll turn the call back to Jeff for closing remarks.

Jeff Stibel

Thank you, Noelle. 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 a premium service provider. Improve customer attention 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 execute against our new focus areas, 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 LegalZoom. 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.

Question and Answer Session

Operator

(Operator Instructions)
Our first question comes from the line of Ella Smith with JPMC. Your line is now open.

Ella Smith

Good evening.
Thank you so much for taking my question. So Jeff, maybe first for 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.

Unidentified Participant

Sure, so first off.Philosophically we.We.Think.That many of our products are much stronger than our competitors.

Unidentified Participant_1

In part because of the historical context, having, been doing this, for the entirety of 24 years and then RA's case, for almost that long.

Unidentified Participant

The register your. Agent product is something that needs to work when you need it and having LegalZoom behind that instead of a Copycat competitor alone speaks volumes, so that that is, that is one piece of why we are trying to align pricing with what our offerings are.

Unidentified Participant_1

The second is to remind people.
That we are trying to move upmarket 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 companies, 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.

Unidentified Participant

And that's what our registered agent product.

Unidentified Participant_1

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.

Unidentified Participant

As an example of that for some. Start agent customers who need this, we're now offering unlimited 24/7 support for those.
Customers and you know that that is something that we don't think anyone else.
In. Our space offers we did it quietly we did It In part.

Unidentified Participant_1

With a realignment on price. And as a result, 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.

Unidentified Participant

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.

Unidentified Participant_1

So, we think that there might be even more inelasticity ahead and we're.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.

Ella Smith

That makes a lot of sense.
Thank you so much, Jeff, and Noel, maybe for you, your 4Q24 free cash flow is exceptionally strong. I think it exceeded, the top end of your guidance by 15 million or so. Do you have any comments about maybe what happened in the quarter and any thoughts about maybe free cash flow to you at the conversion moving forward?

Noel Watson

Yeah, 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 EBITA is converting really well into free cash flow. Q4 in particular, I think there's a number of factors or a few factors. One, our adjusted EBITA was at the top top end of our expectations, so that sort of exceeded our expectations a bit. We also, saw a deferred revenue, outcome 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 so you see that ebb and flow from quarter to quarter a little bit better in Q4 that'll 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 EBITA into free cash flow, probably, I would say at the same level or or slightly better than what we were able to deliver in 2024.

Ella Smith

Great. Thank you both so much.

Operator

Trevor Young from Barclays.

Trevor Young

Great, thank you. First on the formation nation acquisition, can you quantify specifically how much revenue in EBITDA is baked in for fiscal '25 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.

Noel Watson

Hey, Trevor, this is Noel.
Thank you for the question. I think first just want to reiterate our excitement about the acquisition. We're happy to welcome the team. It's a seasoned and accomplished executive team. It's a highly dedicated and and capable employee base, so, we're happy to have them as part of the Legal Zoom family. I would say our our Q1 and full year guidance includes, the impact of Formation Nation, our plan with them, we are. We're already sort of working quickly to to implement an integration plan, and so we're moving fast there and exploring opportunities to really, identify and action the synergies, that are available to us with the complementary nature of the 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 are, we know that that business is largely transactional we want to shift them towards subscription kind of 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 their sales team at our products we're going to, cross sell products that 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.

Unidentified Participant_1

Expanding on. On that point, which it's a good question to be. Asking, Trevor, and. We, 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 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 #2.

Unidentified Participant

Really deeply integrating a cross sell and upsell.

Unidentified Participant_1

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 into theirs, but more importantly, they can call into our base and vice versa. And then finally on marketing, brand, and positioning, and 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.Of.We don't have either of those. We've been right in the middle.And any time we had to compete either down market or upmarket, we had to leverage the exact same brand. We now have the opportunity to.Go after.The lower end of the market.

Unidentified Participant

As examples. Such as.Free formations, but not dilute our brand. We can only do that by full, tight, deep integration. And doing that aggressively.

Unidentified Participant_1

And the opposite is. 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 expert 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.

Trevor Young

That's really helpful detail. Thanks both on that, Jeff, just back to your comments on pricing some potential increases, but maybe also some decreases as you push towards more of that subscription mix. How 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?

Unidentified Participant_1

So the way that we've approached this guide is to make sure that we as a team have confidence in the numbers and and you saw a number of elements that Noel brought up that we layered in.
Where there could be potential upside, but we're taking an approach on focusing on the things that we can control. And when it. Comes to price, the same is true there as.Well. Well. While we believe in the the pricing model.

Unidentified Participant

And we think that there is real elasticity 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.

Unidentified Participant_1

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.

Unidentified Participant

So first and foremost.
We're actually focused more on long term than the immediate term, which.
Which expresses some conservatism in.
The early periods which gives us confidence over.
The over the long run. So I think that there is a lot of opportunity. We have priced.
Into our, in, 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.

Unidentified Participant_1

And leverage in the business to the extent that we need it.
Great, thank you.

Operator

Andrew Boone from JMP Securities.

Andrew Boone

Thanks so much for taking my questions. One tactical and one more strategic, can you talk about the very strong subscription net unit ads that we've seen kind of in the back half of 2024? The attached 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 25? 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 2 to 3 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.

Noel Watson

You bet. Thanks, Andrew. This is Noel. I'll take the first one and I'll pass it to you, Jeff. The first one on the NetSub ads, 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 and e-signature subscription. And then subsequently we also started including our bookkeeping subscription in those skews and so as folks are 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 that we're driving some meaningful level. Of retention and and and renewal of those subscriptions. The 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 it had from a transaction unit standpoint, but also in the back half of the year we really started leveraging BOIR into our compliance subscriptions. To ensure that the customers as they learn that the environment is getting more complex, that we have an offering that can that can help keep them applying 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, we just started lapping this quarter, the forms and e-signature, and then in the end of Q by the end of Q3 we'll start lapping the bookkeeping inclusion.

Unidentified Participant_1

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 and in the spirit of better to be lucky than right sometimes with BOIR, we made a conscious. Off 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 yo yo that I suspect some of our other competitors have and some of these government agencies have. Because what we have done is we've used some of these transactions as engagement tools to to help educate customers on why they need a full service, full suite product that endures over time. I'm I'm not going to tell you that we feel as if our compliance product is where it needs to be.

Unidentified Participant

I think we can get much better on the product side.

Unidentified Participant_1

There. But it just shows that we can.

Unidentified Participant

Move people into these higher offering subscriptions.

Unidentified Participant_1

And over time add value that helps retain and ultimately, increase price.
Swing.

Unidentified Participant

Over to your partnership question.

Unidentified Participant_1

Which happens to be, I think.

Unidentified Participant

A good.

Unidentified Participant_1

One and very.

Unidentified Participant

Very strategically important.

Unidentified Participant_1

So I'm glad you put it in the strategy camp. It is, it's.

Unidentified Participant

My answer is less about partnerships specifically. It's more about go to market and making sure that we're insulating ourselves from the risks.

Unidentified Participant_1

Of the concentration that we had before, we were focused exclusively at the top of funnel on bringing people in through formations and then cross-selling and upselling, and the.

Unidentified Participant

Goal.

Unidentified Participant_1

Was.

Unidentified Participant

To bring people into that funnel very cost effectively.

Unidentified Participant_1

So.

Unidentified Participant

Lower marketing costs by offering formations for free.

Unidentified Participant_1

And then upselling them other.

Unidentified Participant

SMB products.

Unidentified Participant_1

We have shifted that strategy now to.

Unidentified Participant

Look.

Unidentified Participant_1

At.

Unidentified Participant

The larger addressable market in the legal services space, going after.

Unidentified Participant_1

That by doing what we do best and then being able to bring people.

Unidentified Participant

In across different channels, whether that's.

Jeff Stibel

Affiliates, our core top of funnel.

Unidentified Participant

Partners, even.

Unidentified Participant_1

M&A, as we saw.

Unidentified Participant

With. A nation in this case where it makes sense opportunistically.

Unidentified Participant_1

And and in order to do that well we need to have the best products in category and we believe we do, and those.

Unidentified Participant

Will continue to get better.

Unidentified Participant_1

And then we partner on the ancillary side and that will provide us that.

Unidentified Participant

Insulation. So you saw that with 1-800, you saw that earlier with Wix, and you will continue to The partnership channel as an ecosystem becoming more and more core to what.

Unidentified Participant_1

We.

Unidentified Participant

Do.

Unidentified Participant_1

Because that will be the thing that a customer wants from us next. We, in the business.

Unidentified Participant

Side we incorporate a customer, we make sure that they're compliant, we get them a registered agent.

Unidentified Participant_1

The next.

Unidentified Participant

Question is going to be things like where do I get a bank account.

Unidentified Participant_1

Where do I get credit?

Unidentified Participant

How do I build my business credit versus my personal credit? Something I know really well from my early.

Unidentified Participant_1

Career. .

Unidentified Participant

How do I form a website and get a web presence, our partnership with Wix, and then ultimately.

Unidentified Participant_1

How do I pay taxes in the most advantageous way with my business, these are the, my, what I'm doing personally. And you know it is that.

Unidentified Participant

Where this partnership ecosystem can be really valuable to driving higher value opportunities to our customer base without us having to tax our technology and product.

Unidentified Participant_1

Teams. And then secondly.

Unidentified Participant

Which I think is going to be equally important, if not more, leaning on partners to drive. Customers to us into our core business.

Unidentified Participant_1

And that is something that we haven't done in a significant manner historically.

Unidentified Participant

But.

Unidentified Participant_1

It's something we're going to lean in on this year and.

Unidentified Participant

Beyond.

Unidentified Participant_1

Because we think that.

Unidentified Participant

There.

Unidentified Participant_1

Is a world of opportunity where we can lean.

Unidentified Participant

On partners.

Unidentified Participant_1

To start bringing customers into our SMB ecosystem and consumer consumer ecosystem.
A great question, Andrew.

Operator

Patrick McIlwee from William Blair

Patrick McIlwee

Hi team, thanks for taking my questions. So your implied market share stepped down by another point this quarter, and I 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 you hope to maintain and further how material Formation Nation is in terms of volumes.

Unidentified Participant

Sure, so I'll take this at a high level and.

Unidentified Participant_1

You know feel free to jump in on details.
This distinction between quality share and market share is a really important one in our space because the way we define market share.

Unidentified Participant

Or at least the way to measure market share is with formations or the proxy for formations.

Unidentified Participant_1

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.

Unidentified Participant

There are a large number of incorporations that.

Unidentified Participant_1

Really aren't valuable to us, and you, we have been focused. Too much on that market share number and.

Unidentified Participant

And I think.

Unidentified Participant_1

We've we've said over the.

Unidentified Participant

Last couple of.

Unidentified Participant_1

Quarters that we are going to reorient to focus on quality share even if it means at the cost of perceived.

Unidentified Participant

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.

Unidentified Participant_1

We're.

Unidentified Participant

Driving.

Unidentified Participant_1

Higher value customers into our flow, and I think this quarter, we to some extent proved that by.

Unidentified Participant

Able 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.

Unidentified Participant_1

Education. Don't get me wrong.

Unidentified Participant

Plenty of others fell.

Unidentified Participant_1

Out of.

Unidentified Participant

The funnel.

Unidentified Participant_1

But the ones who fell out of the funnel.

Unidentified Participant

I don't think they were high intent customers or had high propensity for upsell, cross sell, or to buy. Something down the line. So we're pleased for.

Unidentified Participant_1

Now 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 the, to those EIN numbers.

Noel Watson

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

Unidentified Participant_1

I'm getting good at stealing Noel's thunder. The one thing I'll add with, Formation Nation is, ink 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.

Unidentified Participant

Shore.

Unidentified Participant_1

Up.

Unidentified Participant

The lower end of.

Unidentified Participant_1

The.

Unidentified Participant

Market.

Unidentified Participant_1

.

Unidentified Participant

That are still quality.

Unidentified Participant_1

Customers, and.

Unidentified Participant

Number 2, it will do so in.

Unidentified Participant_1

A manner that won't devalue the Legal Zoom brand.

Patrick McIlwee

Right, okay, that's all very helpful.
Thank you both and then great, thank you. Just one more if I may, Jeff in in recent quarters, you've talked a little bit more about your strategy with AI leveraging your library of documents to power the capabilities on your platform and you know 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.

Unidentified Participant

Yeah, great, great.

Unidentified Participant_1

Question. And what I would say is long term.

Unidentified Participant

The strategy and goal is.

Unidentified Participant_1

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.

Unidentified Participant

We can leverage.

Unidentified Participant_1

When.

Unidentified Participant

You look at our two competitive sets.

Unidentified Participant_1

On the one hand you.

Unidentified Participant

Have mom and pop lawyers who are very adept, have great expertise, but.

Unidentified Participant_1

Can't scale because they lack the technology prowess. On the other, you've got the online largely formation companies and the.
Services they have great technology.

Unidentified Participant

And that technology is designed to replace expertise.

Unidentified Participant_1

We are unique in the sense that we have.

Unidentified Participant

Deep expertise in the form of lawyers.

Unidentified Participant_1

Paralegals, legal network, and now these.

Unidentified Participant

Service experts, and we're the leader in the space on the technology side. So.

Unidentified Participant_1

The idea here is to.

Unidentified Participant

Is to take artificial intelligence and particularly generative.

Unidentified Participant_1

Artificial intelligence. And make.

Unidentified Participant

Things easier and simpler.

Jeff Stibel

For our customers.

Unidentified Participant

For our agents, for our experts, and for our lawyers to help customers.

Unidentified Participant_1

At scale. And for us, I think that that is.

Unidentified Participant

A.

Unidentified Participant_1

Key differentiator.

Unidentified Participant

And that will pull more and more customers off of.

Unidentified Participant_1

Main Street to our online.

Unidentified Participant

Platform.

Noel Watson

Yeah 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 our attorneys and and our sales teams and 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's still a meaningful opportunity, to leverage AI to help us make that much more efficient.
Very helpful, thank.

Patrick McIlwee

You both for the thoughts.

Unidentified Participant_1

Thank you. Thank.

Operator

You.
Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.

Elizabeth Porter

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. I think 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.
Thank you.

Unidentified Participant_1

You bet. Good question. I'll I'll take it to a high level if you want to jump in on on some of the numbers.

Unidentified Participant

Our go to market strategy historically has been pretty uniform.

Unidentified Participant_1

And it is, it has been.

Unidentified Participant

Leveraging search.

Unidentified Participant_1

Probably to to a point that is too extreme.
And you.

Unidentified Participant

Know, unfortunately when you're leveraging search and then.

Unidentified Participant_1

Your brand is. The high-end brand in the market.

Unidentified Participant

But is offering a free product.

Unidentified Participant_1

You effectively race to the bottom and 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, that.

Unidentified Participant

Value.

Unidentified Participant_1

Oriented products that are priced lower and offer that using a different brand, in this case, Inc. Authority.

Unidentified Participant

Our premium.

Unidentified Participant_1

Brand services, meaning, being LegalZoom.

Unidentified Participant

Move those further and further upmarket.

Unidentified Participant_1

And and having those two brands and that model.

Unidentified Participant

Will actually allow us to bifurcate our marketing spend and.

Unidentified Participant_1

Do.

Unidentified Participant

More targeting both in our core in terms of the.

Unidentified Participant_1

Way that we've done and using other ancillary marketing vehicles such as affiliates and partnership channels.

Unidentified Participant

Secondly, on brand, the way we went about brand marketing and, since we IPOed.

Unidentified Participant_1

We.

Unidentified Participant

Actually.

Unidentified Participant_1

Did early.

Unidentified Participant

On.

Unidentified Participant_1

Spend a significant amount of money on brand marketing. It just wasn't affected.
We.

Unidentified Participant

Were going.

Unidentified Participant_1

After the market.
They claim that we were an SMB player, not that we were focused on legal services and being a technology augmented provider. And.

Unidentified Participant

Because of that we we were diluting our message and it just wasn't effective. So we.

Unidentified Participant_1

We in large part stopped.

Unidentified Participant

Doing.

Unidentified Participant_1

That spend, I believe late in 23 and really haven't come back.

Unidentified Participant

I think now that we're focused on being the industry leader that we are. In our space, it allows us to leverage our.

Unidentified Participant_1

Brand messaging around.

Unidentified Participant

To be around.

Unidentified Participant_1

Education.

Unidentified Participant

Because if you educate properly and customers know what they're getting and they know the risk of going with a subpar provider.

Unidentified Participant_1

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.

Noel Watson

Yeah, I guess I'll probably reiterate a little bit what you said, but just to say it again, the brand message now encompasses a broader.
Suite of services and better cap encapsulates our full offering while not reducing the relevancy to to SMB 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 the lowest efficiency portions of our performance spend, and that's how we get to kind of holding spend relatively flat a year to year basis.

Unidentified Participant_1

And I'll give.

Unidentified Participant

You a specific case study, so we're tangible.

Unidentified Participant_1

Here. When we launched our tax product, a number of years ago.

Unidentified Participant

We effectively changed our brand name from LegalZoom to.

Unidentified Participant_1

LZ.

Unidentified Participant

Because we.

Unidentified Participant_1

Couldn't sell.

Unidentified Participant

LegalZoom tax. So we started marketing as an acronym.

Unidentified Participant_1

And.

Unidentified Participant

An acronym is not a brand.

Unidentified Participant_1

And, that It.

Unidentified Participant

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.

Unidentified Participant_1

LegalZoom.

Unidentified Participant

As.

Unidentified Participant_1

The.

Unidentified Participant

As the guardian for our customers.

Unidentified Participant_1

It makes it so much easier because.

Unidentified Participant

This company has.

Unidentified Participant_1

Spent an.

Unidentified Participant

Inordinate amount of money over the last 24 years building that brand. So we're able to draft off of.

Unidentified Participant_1

That, I think, quite effectively.

Elizabeth Porter

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 could you help us to understand the bridge better from 2 for 2% in Q4 of 2024 to double digits, exiting 2025, how much is just driven by the fact that year year comps are materially easing. Kind of the contribution from Formation Nation 100 1800 accountant you know you have price in there also is 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.

Noel Watson

Us.
Yeah, I mean, I think.
There's a number of factors and you obviously called out a handful of them all sort of contributing to our view on the re-acceleration. I think a couple of central ones, one is the. 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 a 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 provides some momentum in terms of the the growth reacceleration.

Unidentified Participant_1

Yeah, and the thing I'll add, and you can see this in our numbers.

Unidentified Participant

We were watching deferred revenue.

Unidentified Participant_1

Decline. And and that is now going to change.
That's that's a.

Unidentified Participant

Key forward-looking metric.

Unidentified Participant_1

And it speaks to to subscription growth or lack thereof. So it's something that we've been focused on, intently for the last 6 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.

Operator

Thank you so much.
(Operator Instructions)
Our next question comes from the line of Josh Beck with Raymond James. Your line is now open.

Stephen Ju

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

Unidentified Participant

Yeah, it's a good question.

Unidentified Participant_1

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 you know 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 in a wrong way or EINs get turned off for two weeks, like, we've seen recently.
All.

Unidentified Participant

Of these things are And should be manageable.

Unidentified Participant_1

And once you.

Unidentified Participant

Have that.

Unidentified Participant_1

You have a.

Unidentified Participant

Business that's not necessarily good or bad.

Unidentified Participant_1

But it's predictable and and that's a business that can be managed. So.

Unidentified Participant

For me, a lot of what we're doing strategically is first and foremost.

Unidentified Participant_1

Design 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 and.

Unidentified Participant

Finally and ultimately once we do that we're. We're going to build and lay that path, towards success and we're we're going to start carving through it. Super helpful thank you.

Operator

Thank you. One moment for our next question.
Our next question comes from the line of Steven Ju with UBS. Your line is now open.

Ella Smith

Hi, this is Vanessa for Steven. So your customer acquisition spend has remained fairly steady 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?
Thank you.

Noel Watson

No, as I mentioned earlier, we expect our our marketing spend to be relatively flat year over year, so that's inclusive of formation nation.

Unidentified Participant_1

Yeah, and.

Unidentified Participant

Remember, we're going to get some benefits for sure.

Unidentified Participant_1

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 being flat is pretty meaningful improvement.

Noel Watson

Yeah, the one other thing I'll mention around that is just our assumption in our in our plan and our guide is for a flat macro, next year, and so you know 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 and vice versa if we if we see some softness.

Operator

Thank you.

Noel Watson

Thank you.

Operator

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.