LegalZoom.com Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

Key Takeaways

  • Q2 2023 results: Revenue was $169 M (up 4% YoY), adjusted EBITDA was $30 M (18% margin), and business formation market share rose 33% YoY.
  • Subscription revenue reached $102 M (up 12% YoY), driven by higher ARPU and growth in the premium subscription lineup.
  • Transaction average order value fell 26% YoY due to the new premium lineup, and near-term subscription growth is expected to decelerate as LZ Tax retention adjustments and partnership wind-downs weigh on revenue.
  • Launched LZ Books for solopreneurs, offering integrated bookkeeping and tax services with free CPA access and seamless LZ Tax integration to drive engagement and upsell.
  • Raised full-year 2023 guidance to $642–652 M in revenue (+4% YoY) and $105–110 M in adjusted EBITDA, with Q3 revenue expected at ~$160 M (≈3% YoY growth).
AI Generated. May Contain Errors.
Earnings Conference Call
LegalZoom.com Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the LegalZoom Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Madelyn Crane, Investor Relations, please go ahead.

Speaker 1

Thank you, operator. Hello, and welcome to LegalZoom's Q2 2023 earnings conference call. Joining me today is Dan Wernicoff, our Chief Executive Officer and Noelle Watson, our Chief Financial 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, Such forward looking statements are based on management's assumptions and expectations and information available to us as of today's date. These forward looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements.

Speaker 1

These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent Annual Report on Form 10 ks filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward looking statements, whether as a result of any new information, future events or otherwise. In addition, we will also discuss certain non GAAP financial measures. We use non GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors. These non GAAP 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.

Speaker 1

Legalzoom.com. I will now turn the call over to Dan.

Speaker 2

Good afternoon, everyone, and thanks for joining our call. I'm excited to discuss our strong Q2 financial performance and some significant product and platform updates. I'll begin with a brief summary of our financial results. Revenue came in at $169,000,000 up 4% year over year. Adjusted EBITDA was $30,000,000 for the quarter, which equates to an 18% margin.

Speaker 2

LegalZoom formations The quarter significantly outperformed the market, growing 42% year over year, while U. S. Census formations grew 7%. As a result, share for the quarter rose 33% year over year. These results demonstrated continued momentum after a strong Q1 performance.

Speaker 2

Going deeper into the results, Q2 subscription revenue of $102,000,000 grew 12% year over year, benefiting from both an increase in ARPU and new subscription growth from the premium lineup roll up. Transaction AOV declined 26 percent year over year as a result of the premium lineup. Q2 represents the trough of lower year over year AOV performance, And we expect a reversion of this trend in the back half of the year as we lap the new lineup rollout. Now I'd like to lead with an overview of an Product addition to our portfolio. Last week, we announced the launch of LZ Books, which supports all three of our strategic pillars to scale the business, Build the ecosystem and integrate experts.

Speaker 2

One of the biggest challenges our customers face when launching their businesses is navigating the complexities of bookkeeping and taxes. After being in the market with LZ Tax for 2 years, We've recognized there's a gap in the market for solopreneurs. These businesses have tax questions at formation that require an expert. They want a simple accounting solution to replace tedious offline methods like storing bank statements and receipts, and they want an integrated and simplified tax experience. Their main alternative today is to navigate complex and expensive accounting software and couple that with an offline accountant.

Speaker 2

These solopreneurs are a key customer demographic for LegalZoom. Based on a recent customer study, roughly 2 thirds of our formation customers are solopreneurs, which we define as either single member LLCs or sole proprietors. Over 90% of our formation customers form with us or they consult a business tax professional and only a little over 5% have established a bookkeeping method prior to forming with us. We've built what we believe to be the most well designed solution for this large market. With LG Books, you'll be able to create your first proposal With access to an attorney if needed, send it for digital signature, go from invoice to electronic payment, Download and auto categorize expenses from your bank account and even more importantly seamlessly integrate with LZ Tax.

Speaker 2

During the launch, we'll also be providing free unlimited access to a CPA through the product to introduce and promote the value of our highly vetted network of accountants. LZ Books reaches across all our strategic pillars. Our first strategic pillar is to scale the business LZ Books represents a new customer entry point for LegalZoom. LZ Books can serve an SMB that formed with us already Our second strategic pillar is to build the ecosystem. LZ Books is a tool our customers will leverage beyond the point of formation, driving engagement while also opening up a new financial ecosystem of subscription services.

Speaker 2

Our third strategic pillar is to integrate experts And LZ Books is designed to cohesively integrate with our expert offerings. Accounting and taxes go hand in hand And LZ Books users who subscribe to LZ Tax will be able to transfer their data to our CPAs to simplify tax time. We believe this represents a meaningful opportunity to naturally upsell our LZ tax service at the moment of need In addition to our LZ Books announcement, We also continue to make significant progress across our entire subscription ecosystem. On prior calls, I've noted the lack of an integrated post formation experience. In line with our 2nd pillar to build the ecosystem, the creation of a cohesive experience within My LZ has been a top priority.

Speaker 2

Along with the launch of LG Books, we launched a complete redesign of the MyLGS experience. This is important for a couple of reasons. First, many of our solutions are more valuable together than apart, like forms and e signatures or proposals and attorney consults And now books to taxes. And so the experience needs to be fluid across offerings. But equally important, as we're creating a central hub for small business Our goal is to drive engagement that will enable post formation discovery and cross sell.

Speaker 2

Our formations channel is incredibly powerful. And over time, we believe we can expand our relationship post formation through the MyLC experience. I'm excited by the significant redesign and by the realization Our goal of creating a new software category serving small businesses' legal, compliance and financial needs in a single destination, which is something that doesn't exist anywhere else today. And while it's a meaningful first step, we'll continue to invest and our customers can expect ongoing enhancements as we continue to build out the experience. Turning to our core business and our first strategic pillar, scale the business.

Speaker 2

In Q2, We drove impressive market share gains, while also improving operational efficiencies in our core formation business. We're benefiting from our infrastructure investments In the near term, these efficiencies will continue to be offset by higher filing fee costs and the scale of a belsey tax and virtual mail. Our premium offering continues to resonate in the market. In Q2, CAM was down 18% with Traffic improving and almost all marketing efficiency measures showing strong results. Overall user session growth was strong, up 13% for the quarter.

Speaker 2

A better measure to assess health and intents is SMB product sessions, which was up more than 2 times our user session growth. This metric strips out the consumer side of the business as well as lower intent educational traffic and focuses solely on people that begin the product purchase flow. As a result of increasing traffic, we believe there are more opportunities to improve conversion as we refine the offering to fit this new expanded audience. Finally, regarding our 3rd strategic pillar, Integrate Experts, we continue to make steady progress. In our first tax season, our focus was on understanding our customers' needs, while beginning to build out an online experience.

Speaker 2

In our 2nd season, we rolled out enhancements to the LZ Tax product and platform, improved commercialization and increased service levels. As a result, we remain on track to double the number of tax returns we file in 2023. But as I mentioned in our last earnings call, We remain constructively dissatisfied with the retention rate of this service. In anticipation of our 3rd tax season, We've identified a clear set of opportunities within our control to make sure that we're getting the right experience to the right customers and retaining them for longer. Our actions here will focus on driving higher customer consideration of our tax products.

Speaker 2

As we narrow in on the right audience, The resulting impact will likely be a period of lower attach rates, while still experience higher attrition rates from our existing base. We expect this will drive long term positive results, but will be a headwind to revenue into 2024 as we work to implement these changes. We remain confident in the long term opportunities surrounding Elzitax, especially as you consider the most important feature of taxes is integrated bookkeeping, which we now offer. We're also hard at work to integrate experts with a generative AI powered product. By the end of the year, we expect to have a reimagined product and platform That will help small businesses review, understand and collaborate with experts on legal documents.

Speaker 2

As I've said before, generative AI can't replace attorney advice given challenges with accuracy as well as regulations around the unauthorized practice of law. We believe that only when coupled with access to an attorney can the full power of GenAI be realized. LegalZoom stands apart from our competitors As a platform with an established network of independent attorneys available to unlock this opportunity. We believe this platform will drive many growth opportunities. Recall that legal documents are a very small portion of our business today.

Speaker 2

As the brand and market leader in the SMB Legal Services space, This is an unrealized opportunity that we feel like is ours to win. In addition, it will leverage the power of our ecosystem. Our attorney network and e signature offering are core components needed to bring legal forms to life through a very contextual cross sell. We look forward to providing more details on our efforts here in the coming quarters. Last quarter, we unveiled our new mission to unleash entrepreneurship, And it's clear we're making significant progress against this goal.

Speaker 2

We're setting ourselves apart as the sole online platform providing the solutions small businesses need Right at the time of formation and beyond, all under one roof. Product innovation is what drives long term growth. I've been mentioning product velocity as a focus over the last couple of quarters, and I'm energized by the pipeline. There's still more to come this year, both in terms of our LZ booked roadmap and other new product releases in the queue. In closing, I'm extremely pleased with our 2nd quarter results.

Speaker 2

During Q2, we demonstrated solid performance with record share gains and continued fiscal discipline. I'm excited about the talent we have in place, The customer growth we're achieving and most importantly, the pace of our innovation. I'm also excited for what's to come as we're still in the early innings of our product evolution. I'd like to acknowledge and thank all of our LegalZoom employees for their hard work and dedication towards helping unleash entrepreneurship. And with that, I'll turn it over to Noelle.

Speaker 3

Thanks, Dan, and good afternoon, everyone. I'm pleased to discuss our continued strong performance. We remain focused on reaccelerating revenue growth and improving profitability. In the Q2, we significantly expanded our adjusted EBITDA margin year over year through continued marketing efficiency and cost discipline, while also growing our top line. Looking at our Q2 results in more detail.

Speaker 3

Total GAAP revenue in the period was $169,000,000 up 4% year over year and exceeded the top end of our guidance range. Transaction revenue was $60,000,000 down 7% year over year. We experienced strong growth in transaction units offset by a reduction in average order value driven by the full rollout of our new premium lineup in Q1. Transaction units were 283,000, Up 26% year over year, led by the increase in business formation transactions and partially offset by a decline in consumer and intellectual property transactions. We completed 161,000 business formations in Q2, up 42% compared to the same period last year.

Speaker 3

Our market share of business formations increased 33% year on year to 11.4% due to the new lineup. Looking ahead, while we expect to achieve at least a 15% year over year increase in market share for the full year, we do Year over year growth and share gains to moderate in the back half of twenty twenty three as we begin to lap the initial testing and expanding rollout of our free product and wind down certain channel partnerships. Average order value was $2.14 in the 2nd quarter, Up sequentially from the Q1 and down 26% year over year driven by our lower priced lineup. We expect year over year decline in average order value to improve to low single digit declines by the end of 2023 as we lap our premium rollout and exit certain historical partnerships. Subscription revenue was $102,000,000 in the quarter, up 12% year over year due to an 11% increase in the number of subscriptions and continued improvement in ARPU.

Speaker 3

Looking ahead, we expect subscription revenue growth to decelerate slightly through the remainder of the year as a result of headwinds in LD tax And to a lesser extent, the aforementioned changes in our partnership channel. ARPU came in at $2.59 up 3% year over year and flat sequentially from the Q1. The year over year increase can primarily be attributed to the increased mix of higher priced tax and virtual mail subscriptions within the total subscription base and pricing improvement in our consumer subscription. Looking ahead to the back half of twenty twenty three, We expect year over year ARPU growth to remain in the low to mid single digits. However, as we launch new products and continue to test and optimize our lineup, We are focused first on solving for the best overall outcome from a customer experience and lifetime value standpoint.

Speaker 3

Partnership revenue was $6,000,000 up 2% year over year. Turning to expenses and margins where all of the following metrics 2nd quarter gross profit margin was 65% compared to 67% in Q2 of last year. The decline was driven by higher filing fees as a percentage of revenue as a result of increased business formation volumes as well as an increase in revenue mix from LZ Tax Sales and marketing costs were $51,000,000 in the 2nd quarter 30 percent of revenue, an 11 point improvement from Q2 of last year. This includes an 18% reduction in customer acquisition marketing We expect sequential declines in CAM spend in each Q3 and Q4 as we remain focused on marketing efficiency gains. Technology and development expenses were $14,000,000 in Q2, up $3,000,000 or 25% year over year.

Speaker 3

We expect similar year over year growth in this line in the back half as we invest in product and engineering talent. General and administrative expenses were $15,000,000 in Q2, up $1,000,000 year over year. Our solid revenue results Continued focus on profitability drove stronger than expected adjusted EBITDA of $30,000,000 for the quarter, reflecting an 18% margin. This compares to adjusted EBITDA of $18,000,000 or 11% margin in the Q2 of 2022. Our deferred revenue decreased $2,000,000 from the prior period.

Speaker 3

In the Q2, we continued to execute on our $150,000,000 share repurchase authorization. We repurchased a total of 378,000 shares of our common stock at an average price per share of $8.04 Our total repurchase of $3,000,000 Since inception, we have completed approximately $105,000,000 in buybacks with a total of 10,400,000 shares repurchased. As of June 30, 2023, we had cash and cash equivalents of $239,000,000 And no debt outstanding. I'll now provide guidance for the Q3 and full year 2023. Macro conditions remain a key factor in our performance and outlook.

Speaker 3

TENSUS business formations remained healthy in the Q2 and have been steady year to date. We've adjusted our outlook to reflect current trends. Based on these factors, we currently expect 3rd quarter total revenue of $159,000,000 to 100 and $1,000,000 or 3 percent year over year growth at the midpoint. And 3rd quarter adjusted EBITDA of 26 to $28,000,000 or 17 percent of revenue at the midpoint. For the full year of 2023, We are raising and narrowing our guidance for total revenue to $642,000,000 to $652,000,000 or 4% year over year growth at the midpoint.

Speaker 3

As a result, we are also raising our full year adjusted EBITDA to a range of $105,000,000 to $110,000,000

Operator

Please standby while we compile the Q and A roster.

Speaker 4

Our first question comes from

Operator

the line of Andrew Boone from JMP

Speaker 5

Thanks so much for taking my questions. 2 please on LZ Books. I'd like to step back and think about becoming more of a system of record business. Dan, what does that unlock in like 3 to 5 years? What does this enable you to do as you guys Just have higher touch points with consumers.

Speaker 5

And then secondly, near term, how do we think about LZ books in 2023 2024? What do we think about in terms of timing? Thanks so much.

Speaker 2

Yes. Thanks for the question Andrew. Yes, LZ Books is a big bet for us. I mean I think It's probably worth just stepping back and explaining why we entered this space first and then get to the question on engagement. But first principle is we go where our customers take us And we just haven't found a solution that maps really well to the core segment of customers that we have that are solopreneurs.

Speaker 2

And these are smaller businesses, single member LLCs, sole props, typically don't have employees. And what we've seen is that most providers use a simple SKU more as a teaser to move a customer up the lineup then to really solve that very specific need. And what that means is one of a couple of things happens either They're sort of limited in terms of the functionality to drive people up a lineup or over time it just gets bloated, it gets feature rich and if it gets Successful, it gets over monetized. And so, again 2 thirds of our base are these types of customers and we just haven't found Something that's been purpose built for them. So when we think about our channel, 95% of our customers they come in without In accounting solution, we know that a lot of people come in with tax questions and they don't need a full time account, but they have Very specific tax questions that they want to ask and 2 thirds of them have never even spoke to an accountant about their business.

Speaker 2

So, this is a group that's being introduced to finances, introduced to taxes And so we felt like we have to be there to get them established right in their books. And if you want to do that, you have to do it in a way that's going to Good to the ultimate integration with doing taxes as well. One of the things that we've been talking about from the beginning is we have this Extremely powerful formations channel, but post formations historically there hadn't been as big of an investment. We're now making that investment and the key opportunity there is to drive ongoing engagement, Which then also opens up the opportunity to expand our relationship with customers in a way that's more organic and natural for them. So even if you take an example of LZ Tax, I've mentioned this before, almost half of our customers, they're non operational when they come to us.

Speaker 2

And yes, we market in the formations channel to them, because we traditionally haven't had a place to market post formation. So something like LZ Books really provides ongoing value and engagement and then in a much more natural way As it becomes tax time and we've helped you with your books, we can introduce you to an account and we can introduce you to LZ Tax in a way that's going Be much more of an expansion of the relationship and that goes well beyond just books and taxes. I mean that goes into forms turning into e signatures. It goes into legal doc reviews turning into attorney consults. Most of our products want to work together.

Speaker 2

And so that's what we're really trying to do is drive that engagement on an ongoing basis. And then Noelle, you're going to

Speaker 3

take the Yes, if that's a forecast question Andrew. For 2023, we don't have anything in the forecast for it right now. We're really just focused On the user experience and learning over the next few months and then that will help to shape some of our assumptions around it from a monetization standpoint moving forward.

Speaker 2

We really do want to learn from our customers there. I mean, it definitely is a business in and of itself, but we also feel like one of the real benefits again is retention on the LZ tax solution and subscription where people we've seen come in, They get a couple of questions answered, but they don't necessarily have any more and it's 6 months from tax season and so we see higher attrition as a result of that. The idea of driving that ongoing engagement we think will definitely lead to a better LZ tax retention rate as well. But we really to Noelle's point, that's not something that we're necessarily focused on initially in terms of driving revenue

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question.

Speaker 4

Our next question comes from

Operator

the line of Ron Josey from Citi.

Speaker 6

Great. Thanks for taking the question. Maybe a little bit more on the here now. And can you just talk a little bit more, Dan Noelle, around just business formations? It looks like in June, there was a change in trajectory overall from what we saw in May.

Speaker 6

And so any thoughts on the updated broader macro picture, I'm sure you do, in terms of how you think about SMB formations and And then maybe just on the trends in the quarter, insights on just a subscription Right. We're seeing benefits in terms of greater share gains. Talk to us about these newer premium customers, what are they buying, how are they acting, things along those lines? Thank you.

Speaker 3

Thanks, Ron. This is Noelle. Just I'll take the first half and then maybe pass the second half to Dan. So on the macro, Yes, you called it. The macro has really been steady year to date and consistent, which is great.

Speaker 3

We did see some improvement in Q2. And as we said on our prior call, we had updated our expectations for the macro for the 2nd quarter relative to the trends that we're seeing. And we're doing the same thing here with our Q3 guide, Looking at the recent performance, factoring that in and then raising our Q4 expectations as well. So we're overall a bit more bullish Given the length of the consistency that we're seeing there, we are still leaving some room and embedding some room In terms of caution in our particularly in our Q4 expectation for the macro, just As we've done year to date, just being cautious as we know things can soften and we know there's still some prognostication around the overall economy slowing. But overall, we've taken up our expectations for the macro.

Speaker 2

Yes. Maybe just a quick add on the macro. I think macro is we've talked about there's the historical growth in the macro and whether or not there's A little bit of a trajectory change post COVID. And I think we've given the data before, it's Simple to start a business, there's little risk of capital, lots of platforms, there's tech that can make reduce barriers, get you sort of Into a market much quicker at a lower cost. All that's really pretty incredible, and we think durable.

Speaker 2

The thing that I think is newer is the work from home dynamic. And one of the studies that we recently just put out on our own base Showed that over half of our customers, started their business with while they were working in their prior employer, And a good portion were obviously working from home as well. And if you think about the dynamic of people going back to work, a lot of that is Part time going back to work versus sort of more of like a hybrid model and we think that that's a pretty durable trend as well. So the macro feels like It's strong. It remains stronger than we expected and yet at the same time we're just cautious.

Speaker 2

That's just kind of how we've been managing it. On the subscription attached for new customers, I'd say it's doing exactly what we'd expected it to do. The core subscriptions that we look at are the compliance subscriptions as well as our attorney assist subscription And they continue to attach at a nice rate. The rate again is slightly lower than what it was in the past, But it's overwhelmed by the fact that you're seeing such significant formation growth as well. And we're also really starting to track to The retention dynamics of those customers and they look relatively stable relative to the prior cohorts that we have.

Speaker 2

Although the one thing we'd say is we're going to be kind of cautious in thinking about what that looks like when we get to annual renewal because that's where The bulk of our customers actually renew and we're conscious of there's many different types of customers in our base. So we'll watch that closely.

Speaker 6

That's great. Thank you, Dan. Thank you, Noel.

Speaker 3

Thanks, Ron.

Operator

Our next question comes from the line of Matt Pfau from William Blair.

Speaker 7

Great. Thanks for taking my questions. I wanted to ask around the commentary on the LZ tax changes. I think just some more detail there in terms of what you're doing and why it's going to create some additional churn This year would be helpful to understand that dynamic a bit better.

Speaker 2

Yes. Thanks for the question, Matt. I've said this Before tax is just such a unique business because you get one swing every season. And our first season was one where we relied on People to be the glue and didn't really have a lot of software in place to make the process efficient And also make it delightful. And I think in the second season, we made a lot of changes, a lot of updates, and improved the experience.

Speaker 2

We're seeing filing Increase which is great because we know that ties to better retention, but we still have a lot of work to do there. And if you step back, What I'd say is interesting to reflect on. I mean this is a very fast growing business. Probably in some ways it grew faster Then I think we were capable of supporting that business as we went through that scale with an incredible experience. And now we're sort of rightsizing that experience.

Speaker 2

We're continuing to invest in it. We're also starting Tamped down attach in a way like we want to get the attach lower because we keep finding that our customers They know they have a tax question, but they aren't really sure what it is. And so they sign up for the service and then they may ask that question and then they realize They either don't have more questions or they don't have a return to file and so we see higher attrition. And that churn is something that is expensive for us to support, But it's also not a great customer experience because they have to go through a cancellation process. And so what you'll start to see us do is make the purchase A little bit more considered.

Speaker 2

So we've done this as a monthly subscription. We're testing things like doing an annual subscription. You might see us pull it out of specific segments of customers not really offered as cross sell. And the great news there is We now have other products that we can cross sell that are more relevant like LZ Books and we also have a post formation experience where We can actually cross sell with to an engaged customer. But the reality is what that means is in the short term, Our attach rates will come down for newer customers.

Speaker 2

And in the near term as well, we'll still have those higher attrition rates until the new channels pick up And the new motion it hardens. So I would say that we're extremely excited about LZ tax, especially when we have LZ books In the mix as well, and it's been a fast grower. But in some ways, we're taking this opportunity as well to make sure that we create the right experience and We're focused on long term durable growth versus more episodic growth tied to that the churning customers.

Speaker 7

Great. And then just was hoping to follow-up on the other component of the deceleration in subscription growth in the back half of the year, The channel partner component, maybe just a little bit more commentary on that would be helpful.

Speaker 2

Yes. I mean, I think one of the things We've said for a couple of quarters here is that given the share gains that we're starting to realize, we felt like this was the right time To reset on some of our partnerships where they weren't bilateral, and instead they were vendor like relationships where in most cases they're dilutive to economics. And so that's what we're doing. We Committed at the beginning of the year, if you remember at the middle of last year, we committed for this year to have a 15% share gain, while also getting to 15% EBITDA margin, we take both of the commitments really seriously, and we're going to achieve both. We expect to achieve both.

Speaker 2

And so I think in some ways that share tied to those partners didn't really fit within that profitability goal. And so that's all we're doing. We're cleaning that up. I think in a lot of ways, hopefully, you've seen us Multiple times really manage our portfolio and take an opportunity when we have some strength to work through something that we don't Certainly feel like it's a long term strategy and that's exactly what we're doing here.

Speaker 8

Great. Very helpful. Appreciate it.

Operator

Thank you. One moment for our next question.

Speaker 4

Our next question comes from

Operator

the line of Jackson Ader from Moffett Nesayanson.

Speaker 8

All right, great. Thanks for taking our questions guys. Dan, you touched on this a little earlier, but can you remind us the mechanics or maybe some numbers around that 1st year retention rate that you have traditionally seen in the past from business formation and maybe subscription customers. And then, Yes, just any color you think about as we look to 2024 and we start to renew this kind of much Larger 2023 cohort, what we should be expecting from the different segments?

Speaker 2

Yes. We don't share any Cohorted retention numbers for our subscriptions at this point. I think we talked about before one of the challenges we have. We have a portfolio of subscriptions, how they attach their relative nature, all of that plays into what we see At the individual level of subscriptions and so we've recently provided more like an annual churn number, which is slightly improved for the quarter. What I have said in the past is, we obviously are serving small businesses that almost verge on the side of Like a consumer behavior, in that a good portion almost half of the businesses that form with us Are not yet in operation.

Speaker 2

And then at the same time, the stats are out there that about 30% of businesses fail in the 1st year. So you can almost assume that just on the failure side alone that's sort of the ceiling that you can reach Probably a little bit below 70% on retention.

Speaker 8

Okay. All right. Got it. And then Just on LT tax and LT books and compliance and turning in all these things that are kind of like I think some of these that like You're becoming more of a system of record. And I'm curious whether just strategically, whether you're thinking At the moment, it's like a bunch of different separate offerings, right?

Speaker 8

Like $9.99 or $9.99 a month for this and then a separate thing for this. Any thoughts on just One big broad bundle or something or like a package a bunch of different stuff together that might drive additional stickiness.

Speaker 2

Yes. It's a really good question. And actually like if you think about one of the big announcements we have this quarter, it's a complete Redesign of the experience post formation and we called it internally Project Negroni, but externally It's really just our MyLZ experience, which had been almost a launch of multiple different applications that had very different experiences across. What you'll see now if you go into the account experience in My LZ It's a uniform experience and that's the first step of starting to think about how we commercialize all the post formation Applications that we have, a little bit differently. So that they maybe over time instead of selling in LZ books and in LZ tax Solutions separately with e signature maybe there's a package very specifically is sort of like a premium SKU tied to books to tax and it includes Something like Signature or maybe there's something where you sort of have a good, better, best lineup that gets into you have simple legal needs more complex and then premium needs.

Speaker 2

So the first step in being able to even approach commercialization differently than how we've done it historically Is to make the experiences uniform so that these are they can become integrated solutions and can be packaged differently and that's what we did with this release. So I encourage everybody to go log in. It's a bit night and day. I mean it's a complete redesign of the product and it looks more like a traditional SaaS application.

Speaker 8

Awesome. All right, great. Thank you. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Mario Lu from Barclays.

Speaker 9

Hi. This is Jack Butler on for Mario. Thanks for taking my questions. Starting out regarding the premium model, so you've had a great amount of success the past couple of quarters with 27% in share gains in Q1, I think you said you had around 33% share gains in Q2. Given the strong performance you have demonstrated these past few quarters, are you seeing any signs that The competitive landscape could be changing for the freemium offering moving forward or anything like that?

Speaker 9

And then just unrelated, I know you've talked about this a bit on prior calls, Had one announcement earlier in this call about it, but in terms of generative AI, I was just wondering whether there was any update to how you were Thinking about the role that Gen AI might play in the business, whether the focus might be on improving current offerings

Speaker 2

you have or if there's

Speaker 9

a way Further ways that I could expand your offering suite or just maybe anything else about how the strategy is evolving?

Speaker 2

Yes. Okay. Thanks for the questions, Jack. First one on competition, I think we have seen competitors adjusting price down In response to our new lineup and all of that's great for all small businesses. So we encourage prices down especially on the formation side.

Speaker 2

It's worth noting though one thing we haven't seen from competition is a heavy investment in their product experience and launching new subscriptions and creating that ecosystem, which is what in our case is helping us fund that reduction in pricing. So I think It's probably impacting them disproportionately relative to us. We haven't seen a big change in marketing spend levels by competition. And I think, one of the things I would say that is probably, it goes without saying is the biggest opportunity for us It's a little bit more around non consumption, and going, to attracting customers That typically have gone to the Secretary of State site themselves and kind of muddled through the experience. We know that that has had A strong negative net promoter score associated with it.

Speaker 2

And we also know that the customers that visit us Have disproportionately visited the Secretary of State site before us, much more so than any of our competitive alternatives. So I think a lot of what we're doing on the pricing side is actually pulling from people who may have tried Navigate those sites on their own, get all their questions answered, done a lot of research in different disparate spots. We've just made that whole experience much more Simple and taking the decision point away, by reducing that price so that they could form with us. And then when they form with us, they're being introduced to a lot of new subscriptions. So I think that's probably the bulk of the trend that we're seeing.

Speaker 2

On the generative AI side, We talked about this last call. We don't want to foreshadow product releases before they're out there. I think the thing I'd say is that we're making steady progress. We're trying to do something a little bit different than I think most of the alternatives in the market and that we wanted to serve small businesses directly. You're seeing a lot of Gen AI products that are built very specifically for attorneys and law firms.

Speaker 2

And so there's some things that we need to work through to make that possible. But it will Most likely be integrated in a way where you start to think about how people interact with docs, How they interact with their attorneys through documents and how they get insights out of their documents. And so, it's very similar to what I said last quarter, Making good progress and you'll hear some announcements in the next quarter or 2.

Speaker 9

Great. Thanks. That's really helpful.

Operator

Our next question comes from the line of Brent Thill from Jefferies.

Speaker 10

Hi, this is John Gend for Brent Thill. Thanks. The question, obviously, you've done very well with the business formation, the freemium product, very high growth 42%. Transaction units also very fast with 26%, but obviously there's a delta. I'm wondering how you're thinking about That delta is that according to your expectations?

Speaker 10

How do you expect a lot of those that don't actually end up Attaching to convert over time, if there's a certain cadence. And then second, I'm wondering how you're managing to wait on the gross margin from the free filing fees.

Speaker 2

Yes. Great questions, John. Yes, on the first one, what weighs down some of the aggregate Transaction growth is really the consumer side of the business. And we've been clear that we've been prioritizing Pretty aggressively on the small business side relative to consumer. One of the interesting things though is that the foundation of our consumer business Our forms, and so the nice thing about making the investment that we're currently making That is both an integration of GenAI capabilities as well as attorneys directly on to a new forms platform Should ultimately translate into a reinvigorating of our consumer side of our business.

Speaker 2

And we have nothing New to announce at this point or any this year I would say on the consumer side, but I will say that it's the first time there's been an investment there In probably almost a decade. And so I would expect that we'll start to turn that corner hopefully in the next year or so. On the margin side, do you want to take that, Noelle?

Speaker 3

Sure. Yes, on the margin side, so as you mentioned, I think at the beginning of your question, John, The business formation growth that we saw in the quarter at 42%, That higher volume is driving higher filing fees and so that's what we're seeing impact margins as Filing fees as a percentage of revenue have increased. We also have 2 businesses that are growing fast that are still subscale In tax and virtual mail that have a slightly different margin profile and as those kind of take up a bigger share, it weighs on margins a bit. We are excited about the fact that we continue to make progress on the core business in terms of the efficiencies that we're driving In delivering the services, so over time as those businesses, the faster growing businesses start to get to scale and we get more leverage, We'll see some margin improvement in support of the efficiencies we're driving on the core side of our margin profile.

Speaker 10

Okay. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Porter from Morgan Stanley.

Speaker 11

Hi, good evening everybody. This is Fiona Hynes on for Elizabeth Porter. Thank you for taking the question. I wanted to ask on the channel partners side of the business. Where are we in resetting that side of the business?

Speaker 11

Any view on what hitting we're currently in? And longer term, sort of what the vision is for that part of the business on a go forward basis?

Speaker 2

Just for clarity, do you mean the like the partnerships where we're marketing third parties or the partnerships where we're distributing Our service through a channel.

Speaker 11

I guess an update on both would be very helpful.

Speaker 2

Okay. Yes, on the partner channel side, we mentioned it upfront that we're currently exiting a couple of relationships because they are they have dilutive economics and we're Not just focused on share, but we're also focused on profitability. And so that will lead to a deceleration in growth in the back half on share gains. But on the partner side where we're distributing third parties through our platform that's going extremely well. And there's a couple of moving parts there.

Speaker 2

We've exited some partnerships that we talked about at the beginning of the year, while at the same time we have newer partnerships where We're actually seeing growth that is exceeding the growth of our core business. It's just on a very, very small base at this time. So We're excited about it over time. Again, we have an incredibly powerful channel and our customers are quite actively asking us what are best in breed Solutions and we're getting better and better at targeting, what we offer specific customers. So we'd expect that to continue to accelerate, but again off a much, Much smaller base than the core business.

Speaker 11

Understood. Thank you for the question.

Operator

Thank you.

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