LegalZoom.com Inc. Stock

Thank you. for standing by. Welcome to LegalZoom's second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

I would now like to hand the call over to your first speaker today, Madeline Crane, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's second quarter, 2026 earnings conference call. Joining me today is Jeff Geibel, 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, accept, plan, anticipate, will, intend, and similar expressions. And, and are not and should not be relied upon as a guarantee of future performance or results. Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date. 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-Q filed with the Securities and Exchange Commission.

Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. In addition, we will also discuss certain non-GAAP financial measures. We use non-GAAP measures in making decisions regarding our business, and we do We believe these measures provide helpful information to investors. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measure are set forth in our investor presentation, which can be found on the investor relations section of our website at investors.legalzoom.com.

I will now turn the call over to Jeff. Thank you, Madeline, and thank you all for joining our call. Zoom continues to execute against our strategy of building the leading services and expertise platform for small businesses, combining AI with trusted human expertise. We delivered second quarter revenue of $205 million, up 7% year-over-year, and in line with our guidance. Adjusted EBITDA of $46 million, increased 18% year-over-year, well ahead of the high end of our guidance. You too also marked our fifth consecutive quarter of double-digit subscription growth Since late 2024, we've steadily increased the mix of recurring subscription revenue in our business by acquiring customers who find ongoing value in our platform. These results reflect the momentum of the growth levers we've been building for the last year. expanding our portfolio of expert and service offerings, accelerating the use of AI across the business, and intentionally diversifying how we acquire customers, making our go-to-market model more resilient and less dependent on any single channel.

Those investments in diversification were built for exactly this moment. During Google accelerated their shift to AI-powered search, with AI-generated answers increasingly replacing traditional clicks. affecting top of funnel traffic across our industry and I want to be specific about what it means for us because there are two very different currents underneath it. The first is the pressure in our updated outlook, and it is concentrated in one place. The majority of our traditional search traffic, both organic and paid, has historically run through Google. AI-generated answers replace clicks on informational queries, fewer of those visits reach us, and paid inventory has become more expensive. That pressure is real, and we are feeling it now. To be clear, this is the repricing of a single legacy channel.

It is significant, but bounded. The second current runs the other way. Across the AI platforms where discovery is moving, we start from essentially zero. So every visit is incremental. That traffic grew more than 250% quarter over quarter. Today, we have the highest brand references across AI platforms of any competitor. Our exposure to the old channels being repriced. Our position in the new channels represents upside. outlook reflects the full weight of the first and very little of the second. This is a change in how customers find us, not in what they need from us.

We've responded by doubling down on channel diversification, expanding partnerships, strengthening our brand, and increasing our presence across AI-driven channels. I'll discuss those efforts in more detail shortly. Across each of our key growth levers, one principle remains constant. AI has made the answers abundant, but it hasn't made them accountable. When entrepreneurs move from asking questions to completing important legal, compliance, and business tasks, human expertise, accountability, and trusted execution still matter. We've seen this directly in our engagement data and that is where RegalZoom has differentiated itself for more than 25 years. Our first growth lever is expanding our portfolio of human-in-the-loop offerings.

We've discussed these offerings for several quarters, but we now have real scale and real growth to show for it. And we want to give more color on both. lever is working, increasingly displacing our older, lower-value products. We believe this remains one of our strongest competitive advantages and one of our most attractive long-term growth opportunities. Our portfolio spans two complementary layers across our subscription and transaction offerings. First, our service layer, including registered agent and virtual mail subscriptions, which provides the operational infrastructure businesses rely on to stay organized and operate with confidence. Second, our expert layer. This includes legal plans, IP-related services, and our do-it-for-me concierge offerings that have now been rebranded as business manager. This layer combines professional guidance with technology to help customers solve more complex business needs.

In Q2, revenue from our human in the loop subscription services grew approximately 20% year over year. Now represents 65% of subscription revenue. on a total company basis, our human in the loop subscriptions are now over 40% of total revenue. Back row reflects both increased adoption of our higher value products and our ability to thoughtfully price services like Registered Agent and Business Manager as we continue expanding our service offerings. We also experienced significant growth in our legal plans, where bundling legal subscriptions into formation packages is introducing more customers to ongoing legal guidance and driving higher engagement with attorney consultations. We believe AI is educating customers more, but they are still turning to us for answers. This is evidenced by an over 35% year-over-year increase in customer utilization of our legal plans this past quarter. We are seeing similar demand in our transactional expert services, including attorney-assisted trademark filings and business manager reinstatements.

Early evidence that customers will pay for expertise at each stage of the business lifecycle. Ultimately, our human-in-a-loop portfolio is allowing us to address a greater portion of our addressable market beyond business formations. By combining technology with trusted human expertise, we believe we're well positioned to serve both new entrepreneurs and the millions of established small businesses that need ongoing legal and compliance support as their business evolves and grows. Moving to our next growth lever. As a reminder, over the past year, we've been intentionally diversifying our customer acquisition channels by expanding partnerships, strengthening our brand, and investing in AI-driven distribution. The evolving search landscape reinforces the importance of that strategy. To clarify the mechanics behind what I described earlier, in the second quarter we saw fewer high intent visits from Google's informational search queries as AI generated answers reduced click through to websites, while competition for paid inventory increased, driving higher cost per click and making paid search less efficient.

Those dynamics have translated into lower customer acquisition through our traditional search channels and ultimately lower business formation volume. Importantly, the pressure is most concentrated in informational search traffic and does not reflect a structural change in the underlying opportunity we see across partnerships, brands, and AI-driven channels. We're accelerating execution on each of those fronts. At the same time, our objective is not simply to maximize formation volume. It is to acquire new and existing small businesses who are more likely to build long-term relationships with legal zip. One of the clearest examples is our partnerships business. Twelve months ago, partnerships represented a relatively small portion of our acquisition strategy.

Today, leveraging our category leadership, we've created meaningful momentum as we continue to expand both the breadth of our partner ecosystem and the depth of those relationships. Customers who come through our partners typically arrive with higher intent and stronger engagement. creating better opportunities to introduce our subscription offerings and build deeper customer relationships. In Q2, total order volumes from partnerships increased to 11% of total orders, up from 4% a year ago. We achieved this through the continued expansion of our partner portfolio, deeper embedded integrations and investing in our partner go-to-market program. We continue to see a healthy pipeline of opportunities and remain confident this channel will play an increasingly important role in our growth over time. We've recently welcomed new partners, including USAA, AAA, PayPal, and Adobe, further expanding LegalZoom's presence across trusted brands serving small businesses. systematically building this new acquisition engine one focused on repeatability attractive unit economics and growing customer lifetime value Our marketing investments remain focused on improving both awareness and customer quality. In response to the recent traffic changes, we are deepening our investments beyond traditional search into new channels, including strategic partnerships, emerging AI referral channels, and upper funnel media.

Additionally, we are closely monitoring and aggressively adapting to new AI-enabled features within the traditional search space, such as AI Max. We're focused on widening our competitive differentiation through attorney-backed experiences, bundled offerings, and industry-leading guarantees. giving customers more reason to choose LegalZen. Returns from our brand investments remain strong. In Q2, unaided brand awareness increased approximately 10% year over year, while aided awareness increased 18%. Today, more than 70% of US households are familiar with LegalZen. As awareness grows, we're experiencing improvements in the efficiency of our performance marketing helping us attract more qualified customers across our pay channels. Finally, our approach to emerging AI channels.

Over the past year, we've announced integrations across ChatGPT, Claude, Copilot, and Perplexity. We've also been testing, selling, and onboarding AI products directly to small business customers through our business managers. We view these as components of a broader AI distribution strategy rather than standalone partnerships. As entrepreneurs incorporate AI tools into how they form, operate, and grow their businesses, our objective is simple. Ensure they look to LegalZoom as the legal layer of AI throughout the small business lifecycle. This approach has three components. First, we're investing in visibility. ensure LegalZoom's position as one of the most trusted and frequently referenced brands for business formations and compliance across leading AI platforms. Much like we previously established our position in traditional search, we've been deliberately focused on generative engine optimization, or GEO, over the past year to ensure we surface favorably inside AI-generated answers. we are doubling down on that investment.

What differentiates our approach is authority. a factor we know carries significant weight in how AI platforms rank in surface brands. As the only online formations provider with an own law firm, we have a structural advantage our peers cannot replicate, attorney written content. That positions us to earn citations in AI general responses in a way that is genuinely unique to LegalZip. Second, we're testing and scaling customer acquisition within emerging AI experiences, including paid AI environments as new distribution models develop. As I noted earlier, traffic from AI platforms grew more than 250 percent quarter-over-quarter and accounted for approximately three percent of our LLC formations traffic in June. These visitors also arrive with high intent and convert at higher rates than traditional organic search traffic. And third, we're embedding LegalZoom directly into AI workflows through integrations like ChatGPT, Claude, and most recently, Microsoft Co-Pilot, making it easier for customers to move seamlessly from asking questions to taking action.

We recently announced a new agent integration directly into Microsoft 365 Co-Pilot, allowing users to evaluate Business Formation options, manage business compliance, and connect with attorneys without leaving their daily Microsoft workflow. We're pleased with our early progress. Today, LegalZoom is partnered with the leading AI companies and is at the forefront of AI integrations, giving us confidence that we're well positioned as AI becomes an increasingly important source of customer discovery. Lastly, we continue to focus on leveraging AI to improve both the customer experience and how we operate our business. Today, we announced the next step in our organizational evolution, a transformation we began more than a year ago. We are simplifying how LegalZoom is organized, sharpening our strategic focus, and aligning resources behind our highest priority growth opportunities. That work is enabled in part by AI, which is now embedded across our operations, allowing us to serve customers with greater speed and consistency.

As part of these changes, we've reduced our workforce by approximately 13%. These decisions are never easy. And I want to thank our department colleagues for their many contributions to LegalSIM. We believe these changes position us to execute with greater focus, quality, and speed, while continuing to invest behind our key growth initiatives. Stepping back, while the current search environment has created near-term pressure, it reinforces, not changes, the strategy we've been building. We're growing higher value human-in-a-loop subscription relationships. We're expanding beyond traditional customer acquisition through partnerships, brand, and AI. And we're using AI not only to help customers succeed, but to make LegalZoom a faster, more efficient, and more agile company.

We believe the companies that win in this next chapter won't simply be the ones that answer questions. They'll be the ones that help customers take action with confidence. For more than 25 years, that's been LegalZoom's role. We believe our combination of technology, trust and expertise, and long-term customer relationships positions us well for the future. I am personally proud of our team for their unwavering dedication to our company and to one another. To each of you, you continue showing up for our customers, and that says everything about who you are. I'm grateful to be part of LegalZoom.

Thank you, and I'll now turn it over to Noel to discuss our second quarter financial results and updated outlook in more detail. Noel?.

Thanks, Jeff, and good afternoon, everyone. We continue to make disciplined investments to drive higher-quality subscription revenue growth, diversify customer acquisition, and improve operating efficiency. We also demonstrate meaningful progress across each of these priorities – In Q2, subscription revenue represented 65% of total revenue, an increase of 300 basis points year-over-year, supported by stable retention and our pool growth. Adjusted EBITDA of $46 million came in above the high end of our guidance range, driven by a significant improvement in gross margin as we leverage AI and automation to improve both the quality and efficiency with which we deliver our services to our customers. Adjusted EBITDA margin was 22%, which translated into strong free cash flow generation of $34 million. Now to our second quarter results in more detail. Unless otherwise stated, all comparisons will be on a year-over-year basis.

Revenue for the quarter was $205 million, representing 7% growth and in line with the midpoint of our guidance range. Prescription revenue increased 11% to $133 million. We're continuing to shift the composition of our business toward recurring revenue streams as we aim to drive stronger customer lifetime value and more durable long-term growth. Subscription revenue showed continued momentum across our Human in the Loop subscription portfolio, including our legal advisory subscriptions, reflecting increased bundling within select formation offerings, registered agents building on last year's pricing and value initiatives, and continued growth in virtual mail and business manager. As a result, ARPU increased 5%, benefiting primarily from higher pricing in our human-in-the-loop offerings. We continue to expect ARPU to be the primary driver of subscription growth throughout the year. As we focus on shifting our mix toward higher value offerings, we are seeing an expected decline in lower value subscriptions bundled within the formation package, which we expect to continue through the remainder of the year.

As a result, we ended the quarter with approximately 1.9 million subscription units, down 3%. Importantly, retention remains stable, supported by strength across our compliance offerings and human-in-the-loop services and ongoing improvements to our customer experience. Transaction revenue was 72 million, down 1%, reflecting lower business formations, partially offset by continued growth in our consumer and IP-related offerings. Once again, the growth in IP reflects increasing demand for our expert-led services. Transaction units increased 1% to approximately 281,000, driven primarily by higher annual report filing volumes for our compliance customers. We processed approximately 125,000 business formations during the quarter, a decline of 5%, reflecting the shift to AI-powered search that Jeff described earlier. Importantly, formations from strategic partnerships continued to offset a portion of that pressure and represented a growing share of overall formation volume.

Transaction AOV was $256, down 2%, primarily due to changes in composition of our bundled small business offerings, resulting in an increased allocation of order value shifting to subscription products. This decrease was partially offset by an increase in higher value consumer and IP related offerings. Finally, deferred revenue declined $2 million sequentially. Turning to profitability, where all metrics are on a non-GAAP basis. we can long-term growth priorities Jeff outlined. Gross profit increased to 146 million dollars, while gross margin expanded approximately 250 basis points to 71 percent. This improvement reflects a favorable subscription mix and continued customer care and fulfillment efficiencies due to increasing automation across our operations. Sales and marketing expenses increased 14%, including a 13% increase in customer acquisition marketing, reflecting the dynamic search environment and investment in our diversified customer acquisition initiatives.

Consisting with our focus on customer quality over volume, we are prioritizing acquisition spend in channels we believe will have the strongest defensibility and unit economics over the long term. Non-CAM sales and marketing expenses increased $3 million or 20%, largely from targeted investments in our sales organization, which is supporting the expert-led revenue growth you're seeing in these results. Technology and development expenses declined 4%, while G&A declined 10%, improving overall operating leverage. Those efforts resulted in adjusted EBITDA of $46 million, an increase of 18%, with adjusted EBITDA margin expanding approximately 220 basis points. Our balance sheet remains a source of strength and continues to provide us with significant financial flexibility. During the quarter, we generated $34 million of free cash flow, an increase of 7%, reflecting the continued profitability and cash-generating nature of our business. We maintain a debt-free balance sheet and our $100 million revolving credit facility remains fully undrawn.

We ended the quarter with $167 million in cash and cash equivalents. The sequential decline from the first quarter includes approximately 46 million or 7.3 million shares repurchased, partially offset by the free cash flow generation. As of June 30, 2026, we had approximately $80 million remaining under our authorization. Looking ahead, we continue to expect strong free cash flow generation for the full year, providing the flexibility to execute a balanced capital allocation strategy. That includes investing behind our key growth opportunities, evaluating strategic M&A opportunities, and the ability to return excess capital to shareholders. Turning now to our outlook. For the full year, we expect revenue in the range of $795 million to $805 million, representing year-over-year growth of approximately 6% at the midpoint. Our guidance assumes the continued scaling of our subscription growth initiative and ongoing momentum from our partner channel. actually lost that by a more cautious view of customer acquisition for the remainder of the year.

This is based on the impact of the experience changes Google implemented during the quarter and that have persisted through today. Outlook assumes the current search environment remains broadly consistent through year end. As customer discovery continues to evolve, we expect to be navigating increased uncertainty with regard to the performance of traditional search channels. While we're encouraged by the progress we're making through partnerships, increased investment in our brand and emerging AI distribution channels, those initiatives will take time to fully compensate for the near-term impact of these recent changes. For the third quarter, we expect revenue of $192 million to $196 million, representing year-over-year growth of approximately 2% at the midpoint. Our guidance assumes a high single to low double-digit decline in transaction revenue based on the aforementioned acquisition trends. Turning to profitability, we continue to execute against the AI-enabled operating model we've been building for more than a year.

As we've discussed in prior earnings calls, our profitability outlook has assumed continued productivity improvements from AI, disciplined cost management, and the evolution of our operating model. The organizational actions we announce today represent the next phase of that evolution. Over the past year, we've invested in AI capabilities, redesigned workflows, and simplified how work gets done across the company. Earlier this year, we announced a 5% workforce reduction as part of that effort. Today's actions continue that work by further simplifying our organizational structure and aligning resources behind our highest priority growth initiatives, resulting in a 13% headcount reduction. Over time, we expect this to further strengthen operating leverage and support sustained profitable growth. We expect these workforce actions to result in approximately $7 million of net in-year savings, or approximately $14 million on an annualized basis.

We also expect approximately $6 million of restructuring and related charges, primarily in the third quarter. We now expect full-year adjusted EBITDA of $190 to $195 million, representing an adjusted EBITDA margin of approximately 24% at the midpoint. Our profitability outlook expects continued gross margin improvement, focused expense management, and the benefits of our evolving AI-enabled operating model. By the third quarter, we expect adjusted EBITDA of $49 million to $51 million, or a margin of approximately 26% at the midpoint, inclusive of the impact from the workforce actions announced today. As we look ahead, our focus is on what's within our control, driving high-value human-in-the-loop subscriptions growth, accelerating our partnerships momentum, deepening our brand presence, and converting our early AI channel traction into durable opportunity. executing against each of those fronts while staying focused on customer quality, margin expansion, and free cash flow generation. Finally, I'd like to thank all of our employees for their continued resilience and commitment to our customers and our organization. Your hard work and focus have been instrumental in executing our strategy and positioning Zoom for long-term success.

With that, I'll turn the call back to the operator for questions.

Thank you. As mentioned, at this time we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Your first question comes to the line of Ella Smith with JPMorgan. Your line is now open.

Good evening. Thank you for taking my questions. So first, I was hoping to ask about the higher value initiatives. It seems like they're taking longer to benefit the top line. What have you learned about the go-to-market motion on those new higher value products like concierge in the last few months? And I'm just wondering, are they coming with any higher churn or a tougher go-to-market motion than your existing ones?.

subscription products sure think thanks Ella we're actually pretty encouraged with the higher value products and you know if you look at our human in the loop offerings generally both service and expertise those are growing at orders of magnitude faster than the rest of the business so we're actually seeing real strength there you know they're now approaching twenty percent in terms of growth and 40% of total revenues. So we're actually seeing what we believe is good strength there. We're just coming up on renewal cycles. We're just starting to reevaluate how we package, how we promote, and how we engage, but we're,.

So we're pretty encouraged. Perfect. Thank you, Jeff. And for a follow-up, you were early to partner with some of the AI majors, so I'm just curious what you envision that you could still do to drive improvement in business formation traffic from those AI majors.

Yes, great question. We continue to be excited. I think we were very early to adopt generally and likely first in our category. I think there's three key areas and we're starting to see proof points in each of them. The first from our standpoint is just visibility and brand recognition. We know we have the authority advantage and are driving positive results there. The second is with respect to going in through GEO and AEO, where we're having significant strength, and then paid opportunities as those start to emerge, particularly right now with Chachi. And I think you're seeing that growth already.

It's starting from a small base, but we're talking about 250% growth, and now approaching 3% of traffic. So it's material, and it has the opportunity for us to lap that structural step down from.

Google much more quickly. Great. Thank you, Jeff. Thank you, Noel.

Thank you. Your next question comes in the line of John Byen with Jefferies. Your line is now open.

Great, thanks very much for the champion for Brent Hill at Jefferies. Just two question, I guess on the shifting in traffic that you mentioned, It looked like some of it had been happening for some time. So wondering, did it accelerate during the quarter? Is there a point in time during Q2 when this became much more noticeable? Is it possible it could get worse at this time? And I have a quick follow-up.

Yes, you bet. That's a fair question. And let me answer directly. We've obviously seen that slow, steady shift away from Google Search into AI-native environments. But what happened most recently was a structural shift. And Google alone literally called it the biggest change to their search box since they introduced the search box. So this was a material change and a step down. We believe we understand it. We believe we've fully taken into account that change into our guidance. And we're trying to be proactive here.

We think it's the right thing to do because we're seeing this you know, industry-wide. This is a structural shift in terms of what Google is doing.

And John, just to build on that, the impact that we saw was really in the back half of the quarter. And the performance that we've seen after that structural step down has been relatively consistent since then and quarter to date. And so that extrapolation is what we've included as a baseline expectation. in our guidance. So the expectation is that it's consistent through the end of the year, not building in any expectation around recovery or further degradation. And that's what gives us confidence in our guidance.

Great, thank you very much for that. And the 13% risk, just wanted to see if you could talk a little bit about the timeline. Is that pretty much complete? broad-based, any particular departments that are more impacted. Thank you.

Yes, so the workforce reduction was effective today. and that was the announcement. We included specifics on the size of impact, both in year and annualized. It was a company-wide report. reorganization we really looked cross-functionally at everywhere in terms of how we can reimagine work streams and speed up decision making and improve execution. So you will see it various, all the functions kind of across the organization. Thank you.

Hey, thank you. Your next question comes in the line of Matt Condon with Citizens Bank. Your line is now open.

Thank you so much for taking my question. So first one, just on the Google search trends that you are seeing, are there any quantitative stats you can give us, either as a percentage of business formations, or anything that we can get comfortable with just the size of Google as far as your traffic today? So if anything gets worse in the future,.

we can start to think about what the, what the impact could be. Yes. Google obviously historically has been one of our primary channels. Um, It speaks to the effort and the strategic focus that we've had around channel diversification here for a number of quarters. We've been heavily focused on investing in brands. heavily focused on our partner channel and driving new partnerships and investing in existing partnerships. And then Jeff Turk talked earlier about the progress we're making with GEO, AEO, and even spending into LLMs to drive progress. If you think about the guidance that we provided, that's really important. really a reflection of the impact that we're seeing from a new acquisition standpoint. We guide it to high single digit to low double digit decline in transaction revenue in the back half of the year.

So I think you can size it off of that characterization.

And you can look more broadly on the stats with what's happening with Google traffic generally. Our confidence in part comes from the fact that this was rolled out, we believe, fully in the U.S. first, and it's now being rolled out internationally. We have a de minimis amount of international traffic.

So we think we've got a good handle on that. That's very helpful. And then just as we think about some of the brand investments that you guys are making, why do you feel like now is the time to do that? There are some impacts to Google surf traffic and that can ultimately affect the effectiveness of your brand spend or the return on your brand spend.

I would argue that brand recognition and the power and authority of our brand is one of our biggest strengths. And we're able to see the improvement in that recognition and that authority very quickly with brand recognition. And yes. that immediately translates to authority with AI. So it helps significantly with AIO and GEO. So from our standpoint, it is critically important as we migrate away from Google and into the partnership and AI channels to have strength in brand and have our brand be recognized as the trusted brand in the space.

It also helps on the partnership front and in direct-to-site traffic, as well as when you think about search engines, there's a brand component of spend there that is a very high-returning spend. So anything that can enhance our brand in today's environment, I think, is hugely positive for us.

And I'll close with the fact that when you look at our higher value services, particularly human in the loop, and them now at and above that 40% mark, our goal is to push that further, both in terms of the value that we offer and ultimately the price that we offer. we're able to receive and a lot of that comes from being a trusted brand.

Thank you so much. Thank you, Matt. Thank you.

Your next question comes to the line of Pat McEvoy with William Blair. Your line is now open.

Thanks for taking the questions. So given the fluidity around Google search, can you just talk about how you evaluate the CAM spend and the overall marketing spend looking into the back half of the year? I think we had already expected less CAM in the back half given some of the front lines. loading you did, but just any thoughts on how your spending plans have evolved would be helpful.

Yes, I think a couple of questions there. So first in terms of our spend level, it's definitely an area where we're making some investment, especially as we make this transition around channel diversification. RAND is a slower returning spend. So as we ramp up spend there, we expect it to take more time for that to generate the same ROAS. And in our partner channels, as we onboard new partners, those start sub-optimized, and we iterate and optimize those relationships over time. So we've built in some space for us to make some investment in CAM. We expect overall CAM on the full year to step up a couple points relative to the prior year.

And strategically, as we think about spend on the whole, I mean, we first are performance-oriented, but we are looking clearly at opportunities to be shifting spend away from Google wherever possible.

Okay, thanks, Noelle. And so I understand it's a dynamic environment, but your Q3 guide points to a pretty sharp T cell. growth, I think, you know, in the low single-digit range. Can you just talk about what signals you're looking for before you can talk a little bit more confidently about, you know, optimizing your top of funnel and inevitably getting back to a reacceleration towards your prior growth targets?.

Yes, I mean, look, I'll say at a high level, this happened relatively abruptly. Google, you know, very recently made this announcement. So I think it behooves us and others to be conservative in the short run in terms of the, you know, the opportunities and that shift. That That said, our focus has been for quite a long time, north of 18 months, to diversify our channels. And we knew that Google was a very, very large concentration risk for us. And we have been diversifying away from it over time. Because this was abrupt, we weren't able to overcome it as quickly as we would like right now.

But I think that we put ourselves in a position with this guide to give ourselves the flexibility and the time that we need to execute and continue the efforts that we've already done, both from shifting our partnerships, from 4 to now 11%, which is up from 10% last quarter. AI going 250% increase, which is now representing 3% of traffic. That should continue to accelerate. And we are going to push on those diversification channels. But we wanted to make sure that we had the risk built in immediately, but left room for, without baking into, the opportunity that we believe we will achieve.

Yes, and in the meantime, I mean, as we focus on the acceleration on channel diversification. It's worth reminding that the business is almost two-thirds subscription, so there's a durability and a bit of an insulation there that helps while we're making this shift. And we continue to make investments on the subscription side as well. Jeff mentioned the higher value... the higher value services and expert-led services that we're focused on in driving subscription. Also, we continue to make improvements in engagement that we think will lead to retention. And, you know, we've also shown that we've had pricing power across numerous subscriptions. So while the, you know, the impact from Google, you know, is structural, at least for now, and we'll continue to try to optimize against that. does have some impact on new customer acquisition, which creates some pressure in the back half of the year and into 2027, especially since there's some lag effect on the subscription side.

But all of these efforts, we are excited about and feel confident that we can work to offset that impact.

Okay. Thank you both for the thoughts. Thank you. Thank you, Pat.

Thank you. Your last question comes to the line of Kishan Patel with Raymond James. Your line is now open.

Hey, this is Gishan Patel. I'm for Josh Beck. Can you elaborate on the differences in conversion and acquisition costs you see between AI overviews and AI mode versus the traditional 10 blue link referral traffic within the Google search channel? And what are you seeing in terms of SMB adoption for AI tools on your platform? And what are key.

opportunities and risks to keep in mind. Thank you. So, Kishan, for now, paid main AI is still quite small and really coming largely from ChatGPT and to a lesser extent Google with some of their native AI search. It's largely similar in terms of conversion and other... metrics and dynamics, but we find that we've got higher intent customers generally. That's going to change as this scales, and we expect it to scale, but it is higher intent. And the important thing there is what it means is people are going through a education process, which works very well for what we're doing with Human in the Loop. And what we hope and expect is we're going to find increasing opportunities to be able to upsell and cross-sell those customers to service-oriented and expert-oriented services. And I think that's part of the reason why that cohort has accelerated in terms of growth. which I think is pretty important.

In terms of the adoption of AI and being able to sell that directly to our SMBs, we actually just started testing that. And the tests have been pretty encouraging so far. So it is early, we've started that largely this quarter with a partner. But I think that this is a product that people are looking for in the subset of our customers are going to be encouraged to go through us to do it, in part because you need a service layer. You've got to remember these are naive small businesses who are curious about how to use and adopt AI, but they need an onboarding process. And, you know, if we do this right, we could in effect become the small business operating system. And, you know, and that's something that is both encouraging and exciting for us, but quite early.

Thanks very much. Thank you. Thank you.

This does conclude the question and answer session. And we want to thank you for your participation in today's conference. This concludes the program, so you may disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good morning, everyone. Thank you for being here. Thank you for tuning into the webcast. I'm delighted to have Jeff Stibel, CEO and Chairman of LegalZoom; and Noel Watson, CFO of LegalZoom. Thank you so much for being here this morning.

Thank you.

Thanks for having us.

So we'll talk about a lot this morning. I want to get into AI partnerships, your partnership channel, attorney and accountant network, concierge, a lot to get into after in 35 minutes. But maybe AI partnerships is a good place to start because I think investors have a lot of questions.

Jeff, so you launched the Cloud Connector and the ChatGPT formations app and called LegalZoom the de facto choice for legal services across AI platforms. Can you give us any early KPIs, whether conversion rates, average order values, attach rates on the customers coming through those integrations versus your traditional web funnel?

Sure. And I'll preface this by saying we are still very early. The AI platforms themselves haven't figured out the revenue model for their free consumers. However, what we are seeing is pretty exciting and positive. I mean, when we look at it relative to other sources, we see a higher conversion rate and a higher propensity to upgrade to our subscription offerings, which means ultimately a higher LTV.

Early innings, but we're seeing strong signs there. Probably more importantly, as we look internally at the things that we're tracking is how we're performing from the standpoint of AEO and as being a source of reference for AI. And in our category, particularly with respect to formation, we lead the charge there. So we are looking relative to our competitors as the #1 reference when it comes to formations generally, and that's inclusive of ChatGPT and the others.

Perfect. And maybe this one is for Noel. But when you think about the revenue share economic structures of these AI partnerships, are we paying for placement, receiving referral fees? Or is it a rev share? And how do those unit economics compare whether you -- compared to when you pay Google for a click today?

Yes. Currently, we're not paying anything, right? So to Jeff's point, it's still very early stage. So I think they're still figuring out exactly what the business model is. And obviously, whatever traffic we can get from them, we'd love to have. So as that evolves, we'll be there to figure out the economics. Chat now has ads, for example, I think, on their free experience. And so we're starting to play in that as a first test. But to Jeff's point, we're strategically in the right place, and we'll look to evolve with them as their sort of model takes better shape.

Great. And there's a fear among investors at times that's not unique to LegalZoom, but LLM would eventually handle the full formation workflow, end-to-end, filing included and there's a disintermediation risk. What do you think specifically prevents that? Is it the state-by-state registered agent infrastructure, the liability backdrop or something else?

Yes. Here, I actually think the markets have things a bit backwards. And when you look, whether we're talking about SaaS, software or the legal space, the question, it really isn't whether we're going to be disintermediated or disrupted. SaaS is going to get disrupted. Software is going to get disrupted. The legal space is going to get disrupted. The real question to be asking is, who's going to monetize that disruption, and from my standpoint, without question in our category, it's going to be LegalZoom.

And I'll give you 3 key reasons. And each one of them is a differentiation. And each one of them is what makes LegalZoom unique. First is positioning. And from the standpoint of the legal space online, LegalZoom's brand stands apart from everyone else's. What customers are looking for ultimately is trust. And LegalZoom's brand equates to trust. We offer value within our product. We offer a guarantee and that guarantee is backed by experts. No one else can do that.

And to the extent that the AI platforms can do it, they do it with us, not in and amongst themselves. They allow us to leverage AI to deliver that. The second is the regulatory side, which you mentioned, and it shouldn't be lost on anyone that unauthorized practice of law is not an easy thing to unpack, and it is getting more and more difficult. We've been doing this for 25 years, not always in the best way in the beginning, but we have figured this out.

The other side of that regulatory aspect is privacy and being able to have privilege. Customers demand and require privilege at times, and that requires a lawyer. The third, and I think this is probably the most important thing is margin. And margin gets, sort of, conflated with cost savings. Make no mistake, we are leveraging AI on the cost side. And if you look at the back half of our year between fulfillment, sales, service, operations, we are seeing massive cost efficiencies and that is driving our margins up in the back half and throughout 2027.

But that's half of the story and the least important one. When it comes to margin, AI has become an enabler for us. If you look 5 years ago, most of the products that we're leaning into to go after higher-quality customers, we couldn't have done otherwise. When I got here 2 years ago, we had expert products like trademarks and copyrights and patents.

These business lines were unprofitable. They didn't scale. With our use and ability to leverage AI, we've been able to make those profitable, scalable and now introduce other products on the expert side like concierge, where we're able to do something that is incredibly unique at scale with healthy margins.

Perfect. And we'll talk more about AI and concierge in a bit, but I want to ask you about partnerships more in particular as well because I think that's been a big focus area for you in the last 2 years since you've taken the CEO seat.

So maybe if there's, first, anything that you'd like to say about the partnership business and your focus there? And then as a follow-up for Noel, I was hoping you could help us understand the economics of that business because it's opaque for investors at times.

Did you want to say something first or do you want me to?

Yes. I'm happy to talk about it. And I mean, I think the first conversation we had when I joined as CEO, we talked about this a lot and how we had a lack of diversification in terms of our go-to-market and how partnerships were critical and key but weren't prioritized.

We announced this past quarter that we went from 4% to 10%. And from my standpoint, that's not enough. I mean, when you look at best practices, we should be at 25% plus, which gives us a lot of room to grow that channel and accelerate. Working with other partners in the SMB ecosystem, it gives us scale. It gives us new channel, and it gives us customers who have a higher propensity to pay and higher likelihood to be in business over the long run because they've already determined that they're going to do something else with their business other than just form.

So we're incredibly excited about the channel. We're incredibly excited about the partners that we've already established, and we're excited to announce new ones throughout the year.

Yes. It's strategically important. It's growing fast, and it's clearly an area of focus. And we've announced some partnerships recently, and we expect to continue to announce new partnerships as we move forward here. On the economic side, it can vary pretty widely by partner. We try to be bespoke and customized to the situation.

With that said, and, I guess there's a little bit of the maturity cycle of it, right? We'll invest early on. And the good thing about partnerships is we like to be really integrated and embedded and partner closely so that we can optimize those relationships over time and the experience over time. We generally structure them as either a rev share or some sort of fixed fee, but it's tied to a conversion.

And so it's fundamentally different than a traditional search where you're essentially buying clicks and then it's intent, you're responsible for the conversion. So that's one aspect that I like, in particular, the certainty of it. And we'll focus on other aspects of the relationship in terms of exclusivity. If we can get exclusivity, that's something we often try to strive for long-term commitments as well.

We have -- again, it runs the gamut. Some are shorter term, some can be really long term in nature. But fundamentally, and Jeff mentioned this as well, we're dealing with a customer that is already somewhat established. They're already spending money. They have a -- in the case of, let's say, one of our website partners, they have a domain, they have a website.

And so the propensity for them to be around longer, given that investment and to be a different stronger profile for us is higher. And so overall, the economics when you look at in aggregate with some earlier stage and later stage, it's kind of at or better than we see through a traditional search.

That's really interesting because in the past year, I think your partnerships went from 4% to 10% of order volume. And I think you said, Jeff, that you're expecting maybe down the line, 25%, and that should continue to grow.

Yes. I mean, to be more emphatic, I hope it's more than 25%. If I just look at best practices relative to what we have done, we can do better here. And this is an ecosystem. Small businesses benefit when we, as businesses work together to provide them the services that they need and they want so that as they're growing, they don't have to think about this. Who is the best web services provider? Who is the best compliance provider? Who is the best on legal services? That isn't something they should have to spend mind share on. We should be able to provide all of that at LegalZoom.

Perfect. And maybe one more on the partnership channel before we move on to some other topics. You mentioned exclusive relationships. How important are these to you? And typically, maybe how long are the exclusivity windows? And what does LegalZoom commit in return for those partnerships?

It's a great question. I think it's critically important, not just for us as a business, but for our customers, right? We want consistency. We want predictability. We want to make sure that we're working with the best across that SMB ecosystem. You can't always get exclusivity. In other cases, it doesn't even make sense depending on which side of the equation that you're on. But when we find a good fit, we want to lean in on a long-term basis. We want our partner to lean in on a long-term basis. And for the most part, we've had great success over the last couple of years being able to do that.

And from an infrastructure standpoint, we can provide a really embedded and integrated experience, which goes a long way. Obviously, we have a really strong brand. So from a branding standpoint, we're dealing with great brands as well. So that it's benefiting both sides of the equation. And then we just bring a great experience on the back end for customers which is super important for any partner that's passing off one of their customers to us. They want to make sure that, that partner is taking great care of them and we offer a fantastic service.

Perfect. And then moving into the attorney and accountant network. This is one of my favorite parts about your business, honestly, because I don't think there's another publicly traded company out there with the network of accountants and its own law firm. So that's really exciting to me. So maybe first for Noel. For legal plan consultations outside of Arizona, where your ABS is based, LegalZoom pays independent law firms a monthly fee, I believe, and recognizes revenue net. Can you walk us through how that fee is structured? Is it per consultation, per subscriber or flat retainer? And then if you could say anything about the margin profile, that would be great.

Yes, absolutely. So as you said, we have our own law firm, ABS in Arizona that services that state and then our federal matters. And then we have a large independent network across the other 49 states with independent law firms. The structure is on a per subscriber model, and it's the subscribers that are assigned to a particular firm in a particular state.

And it allows for -- then we've got 25 years of experience around and prediction around the patterns of utilization. So we understand how to price that. And I would say it's an attractive subscription-oriented margin similar to our other subscription and accretive to our overall margin profile.

Is there any seasonality to that revenue?

No, there's seasonality in the same way that our overall business has seasonality in terms of the point in time where we attach new subscriptions. It's much more first quarter and first half weighted than back half. But outside of that, in terms of the utilization patterns, it's more episodic based on the individual business, but averages out from a true calendar year.

Perfect. And we'll dive deeper into concierge in a couple of minutes. But I believe on one of the recent earnings calls, you mentioned the potential of adding accountants to the concierge product. How would that network be structured? And would it be the same independent contractor model as attorneys? And if you could speak to any regulatory complexity that you might also face with the lawyers?

Sure. And we already have a path and pattern. So we're going to follow that with what we did with our legal network. And if you look at our current partnership with 1-800Accountant and we've had other partnerships as well, there is a natural group of experts that we can work with and bundle in these products and services.

So we've already actually started testing this with our legal plans and our business plans. And we see a relatively high take rate and propensity and interest level from our customers. I don't think that the margin profile changes dramatically. I don't think that the pricing shifts dramatically. The nice thing is between legal and accounting, you've got a very, very similar framework, but you offer far higher value, which means we can either play with the elasticity curve on price or work towards creating greater retention because what we're doing is we're adding value.

Perfect. Awesome. Maybe now to move on to the concierge product, which is another new opportunity that I'm very excited about because it's entirely a greenfield opportunity, and you're uniquely served to address it, I believe. So -- the concierge product, I think you've said that it has a 3 to 4x average ARPU than your existing products widely.

The list prices can go up to $1,400 per year. And you haven't sized this business yet, but can you give us an overview maybe of what the various concierge tiers are and how they're priced? I realize it's been about a year at this point since it's launched.

Yes, that's exactly right. It's been about a year. We launched with an MVP. So it started quite small. So we're just getting through that first renewal curve now, but we're already pleased with what the renewal rates look like and the engagement and the adoption. When you think about concierge and look more broadly at the SMB space, you generally have this notion of do-it-yourself and do it for me.

And then in the middle, you've got these do-it-with-me type of propositions that tend to fail. You don't hear a lot about them because people tend to gravitate into either I'm very cost sensitive or I'm very time sensitive. What we did with concierge was we created a effectively downsell mechanism for people who wanted expertise but didn't think they needed a lawyer or an accountant specifically and an upsell mechanism for customers who said, I can do some of this myself.

But in the end, I don't trust myself. I don't trust technology. And that comes back to some of that defensibility around AI, where it's not good enough to have an okay solution or a good solution. These are binary situations. You have to be right. So we introduced this concierge model about a year ago to say, we've got a group of experts who see thousands of formations, thousands of wills. They do tens of thousands of reinstatements a year.

They dissolve companies when needed. We can give you some of their time and all of their technology to make sure that it is done right and then LegalZoom will back whatever is being done with a guarantee to make sure that if it isn't done right, we'll do it again for free. That has resonated tremendously with customers and has become kind of the benchmark for what we think our services should become.

So I'm as excited maybe even a little bit more so than you are, Ella, because we've seen more demand than we had supplied for at the beginning with the MVP. And ironically, the supply issue wasn't a function of expertise. It was technology. We didn't have the technology built, the automation and the AI when we launched, because the trick here is we wanted to give that technology to our experts to make them more efficient. So that they didn't have 10 customers worth or 100 or 1,000, but they could have 10,000.

But every customer engagement felt one-on-one, felt personal, and it felt like they had all the time in the world for people. We've gotten to that point now, and that's why we've been able to launch more and more of these products at higher and higher prices.

Perfect. And how should we think about those various tiers? Does the service differ meaningfully? And I believe the sticker prices might go from $1,000 a year to $1,400. What would be the service difference for that?

So it's largely results driven or value driven. So, on the results side, it's when someone has a real issue. So compliance is probably the perfect one. We think that there's upwards of 1/3 of all small businesses that fall out of compliance from time to time. That's when a small business, a real small business, realizes their time is more valuable than spending $500, $800, $1,200 for a product that makes sure that it is done, it's guaranteed.

And then all of the other things that you might have been doing, you can offload on to us as well. That's the first. The second is from the standpoint of value when they are looking at using a law firm. So nonprofit is a good example. We've got a nonprofit concierge that is our highest price point. They're comparing what we do to something that's going to cost them tens of thousands of dollars.

There, we want to make sure that we are value priced, not cheap, but value priced. So we have to be very careful with how we price that so that people don't say it's too good to be true. Because in many respects, relative to going to a law firm, it is too good to be true because we are that good. So we continue to make sure that we've got that pricing right. That's how we get to the variability of pricing with those concierge suite products.

Yes. And some of it is product driven for a specific need. So if somebody is doing an entity conversion, then that's a particular product. If somebody is dissolving an entity, then we have concierge dissolution. If somebody has fallen out of compliance and needs to get reinstated, that's its own product as well.

And then a lot of times, what we're seeing, especially with our base where we can -- we're up to date on their level of standing with a particular state. If they're out of good standing, we can let them know and say, "Hey, do you want us to help you reinstate your entity?" A lot of times, they just don't know. They're not paying close enough attention. And so yes, I'd like you to do that. And then, oh, by the way, can you please handle all of my concierge needs moving forward because clearly, it's either gotten too complex or I haven't had the time to do it myself.

And so that's -- the good news about that as well is it's proving out a use case for general -- the broader SMB population where some percentage of them are going to have enhanced compliance needs or may even not be in good standing themselves. And so it gives us the opportunity through some of the partnerships that we've talked about and just through that channel to approach bases in a way where we've learned a lot through rolling these products out to our customer base.

Perfect. And maybe that's a great segue into how you slice and dice the concierge market because there's a lot of different ways you could look at it. You could look at it as LegalZoom's existing customer base, which might be 0.5 million businesses you form in a given year or the 5 million roughly that's being formed right now in the United States or the 30-plus million that are in existence. How do you -- what do you view to be currently the prime market for the concierge product? And how do you anticipate that could change?

The primary market is some percentage of that 30 million. This is a TAM expander for us. Those businesses need a product like this. And even the businesses that are using the law firm, the law firms would prefer to have us do this at that price than deal with a really expensive bill that doesn't have a lot of value attached to it.

What we are focused on right now is proving this out within our base. We want to make sure that there is excess demand that we're serving our customers well, that these products are renewing at a high rate. From there, we'll go to the partner channel, which is why we are leaning in and expanding that partner channel. By the way, both ways, it's why we want to, and it's why partners are now coming to us because they're saying, "Wow, you have a product for us now for the customers that we have that have already formed." And then ultimately, we'll go direct to market as well.

Perfect. And something I think that's also exciting about AI in your business is that you've said that AI has driven 55% reduction in trademark search time, 30% faster patent drafting, 40% of chat volume handled end-to-end by AI. And you're uniquely providing this human-in-the-loop option. But how do you prevent malpractice issues, especially as it relates to your accountants and lawyers?

It's an important question, and it's something that our teams do and look at each and every day. Luckily, we've been working with and dealing with this for 25-plus years and have never had a significant issue. The trick is to have layers of protection and layers of security, one on top of another, so that we've got redundancy.

And that's why using AI alone or using, for that matter, technology alone really doesn't work at scale. So what we do is we use technology for that first layer. We use human and artificial intelligence for the next layer. And then we have redundancy built in on top before we send something out. And then we do and a mistake happens because mistakes inevitably happen, we are quick to acknowledge it and then fix it with a guarantee.

Perfect. Noel, are you excited about concierge like Jeff and I?

Yes. I'm more excited than both of you combined.

He's jumping out of his seat...

Great. I'm going to ask another question about AI and then get into some more modeling growth questions. But maybe one more on AI. Jeff, the stock has traded at times, and again, not unique to LegalZoom like an AI loser. In maybe 60 seconds or so, can you please make the case why is LegalZoom an AI winner?

Sure. And I'm going to go back to my earlier statement. The question to ask is who is going to win when you see this dislocation? And a foundation model isn't going to do this. A start-up isn't going to have the strength, breadth or power to compete with us. They never have. They never will. And a small business owner isn't going to want to build a dozen agents and then maintain them over time. What do we have? We've got the positioning. We've got the regulatory moat that we've built and expanded. And then we've got the margin profile that allows us to do this at scale for customers.

Perfect. Thank you. Awesome. Maybe Noel's time to shine as well, getting into organic growth and financial framework questions. So Noel, I think there's a lot of puts and takes with the 2026 revenue guide. So in the first quarter, revenue grew 13%. Guidance implies 8% for the full year. But there's a lot of puts and takes between the Formation Nation acquisition and I think some one-off benefits to the first quarter. So could you maybe sum that up for us and let us know of those puts and takes?

Yes, absolutely. First and foremost, talk about shining. We're very excited about our first quarter results, where we exceeded our expectations. I think coming off of a year in 2025, where our organic growth was around 3%, and you noted guided to 8% for this year. In the first quarter, that 13% growth was partially benefited by the Formation Nation acquisition, where we're just getting to that final stage of lapping.

So with Q2, we will have fully lapped the Formation Nation inorganic benefit, and there was about a half quarter's worth in the first quarter. And then we saw really strong annual report filings in the quarter tied to some of the automation that we've done around delivering that service, which is a really nice customer experience value add that we know is going to provide really nice medium- and long-term retention benefit, and we're starting to see that in our earlier cohorts now.

That was a big driver in Q1 as well. And it's heavily concentrated from a seasonality standpoint in Q1, just given regulatory time lines. So that benefit will moderate as we move through the rest of the year. So if you take the combination of those 2 factors as drivers and adjust our growth for the quarter, it looks much more like our Q2 growth. And then that implies some modest acceleration in the back half of the year.

Perfect. Makes a lot of sense. So it's clear that the annual report filing outperformance is flowing through. Are there -- is there any other structural improvement in the subscription business that gives you more confidence through the end of the year or anything surrounding subscription AOV or ARPU?

Yes. I mean from a -- you saw AOV improve nicely in the first quarter. I think really what it's coming down to from an ARPU standpoint is customer mix. We talked about concierge being a driver. We talked about some of our partner channels starting to drive really strong, more established businesses through the funnel.

And then Jeff mentioned the delivery of these services helping margins as well. So alongside of some of the commercialization that we've done in our lineup where we continue to add more value in our upper-end SKUs, particularly our pro and premium SKU by bringing stronger value-add subscriptions there. We've expanded legal services in terms of the placements in that SKU. And so that's helping to drive ARPU as well. So we see ARPU as a meaningful driver of the business in the back half of the year.

And we're always looking at pricing opportunities as well. The combination of those things has ARPU as an important driver. We think long term, it will be more of a balance between subscription units and ARPU. And really -- and we've said this a lot over the years, like with the testing that we do, we're kind of agnostic as to whether it's subscription unit growth or ARPU growth.

We're looking to drive LTV. And from that equation, if there's a bunch of really low-priced subscriptions that make sense for the customer and ultimately, that's what they're buying, we're more than happy with that or if it's fewer higher-priced ones, we're happy with that as well as long as it's driving overall performance in the business. And so that's helping us to unlock margins as we think about the back half of the year as well.

There's a couple of things from that standpoint. One is the annual report volume that I described in Q1, that's sort of neutral to gross profit neutral to EBITDA. And so filing fees as a percentage of revenue is smaller in the back half of the year. Our CAM spend is lower in the back half of the year as well because peak seasonality is in the first half.

And then we're expecting to continue to expand on some of the AI efficiencies that Jeff talked about earlier, and that's baked into our expectation for the year as well. So the combination of those things is really lifting margins in the back half of the year.

Perfect. And what we've seen happen in the public markets in the past few years is there was a time where software investors would focus more on EV sales, EV EBITDA, but times are changing, they're looking at GAAP more. So stock-based compensation is increasingly a big focus for investors.

And you have made great progress there. I believe that in the first quarter, SBC was at $21 million, down from $30 million a year ago. But how do you think about modeling full year 2026 stock-based comp? And how should we think about stock-based comps in years out?

Yes. It's certainly a focus for us as well as it is for everybody. It's an important tool, let's be clear, for recruiting and retention. And with that said, we're trying to optimize for our overall profitability as well. And so we've been focused on it, and you did see it come down meaningfully here sequentially the last few quarters. I think this is a sort of a new baseline right now.

So I would kind of model off of that for the full year as a good sort of quarterly number to be around with some puts and takes depending on -- it's somewhat hard to predict because there's forfeitures and there's maybe some unplanned new hires that happen. And so that can move the needle a bit. But we're generally in that right baseline. And it's something that we'll continue to try to optimize as we move forward.

Perfect. And maybe anything on M&A? How interesting is the pipeline right now? And if you were to pursue it, what would -- what do you think would be attractive in your existing portfolio?

Yes. I think we're always -- we have a team that's always having great conversations and keeping the pulse of what's happening in the market. We are very intentional about making sure that our balance sheet is healthy. So we have the flexibility to be opportunistic if something happens. Our framework has stayed pretty much the same. We're looking at anything that is a really strong adjacency to some of these service offerings that we have today that might help a small business owner either get compliance, stay compliant or run their business.

And so that continues to be how we think about it. At the same time, are open to -- if there's something in our space where we think that we can drive some meaningful synergies in the relationship, we'll look at that as well. But it's not something that we have to do. It's something that we can be opportunistic around.

I would argue M&A is another leg of that stool like our partner channel. So when it makes sense, where it fits, it's a great use of capital. We haven't seen it since formation Nation. That was a tremendous acquisition. So I think we've proven as a team that we can buy right, integrate and leverage it to be a series of pieces in our puzzle.

Right now, we're predominantly focused on the partner side and growing that. In fact, we're literally going to leave here and go to our first-ever Partner Summit in New York. We've got 100-plus people who are partners, potential partners, soon to be partners. So that's the core focus for now.

Awesome. Great. Jeff, Noel, thank you so much for being here today.

Thanks, Ella. Appreciate it.

Really appreciate it.

Good day, and thank you for standing by. Welcome to LegalZoom's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's First Quarter 2026 Earnings Conference Call. Joining me today is Jeff Stibel, 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's assumptions and expectations and information available to us as of today's date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent annual report on Form 10-K 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 financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in our investor presentation, which can be found on the Investor Relations section of our website at investors.legalzoom.com.

I will now turn the call over to Jeff.

Thank you, Madeline, and thank you all for joining our call. LegalZoom is a different company than it was 2 years ago, more focused, better positioned and increasingly differentiated. We are building a subscription-led AI-enabled platform that serves small businesses across their entire life cycle. Our results this quarter show that the strategy is working. Total revenue growth of 13% year-over-year and adjusted EBITDA of over $36 million, both exceeded our expectations. In 2026, we are focused on 3 core growth levers: one, driving high-quality subscription growth through premium human-in-the-loop offerings; two, scaling customer acquisition through partnerships and AI channels; and three, leveraging AI to enhance the customer experience and to drive efficiency. We are seeing clear traction across each of these areas.

Q1 marked our fourth consecutive quarter of double-digit subscription growth, led by strong momentum in our human-in-the-loop offerings. Through these personalized higher-value services, we are strengthening our customer relationships and increasing lifetime value. This is how we've repositioned LegalZoom for more durable growth in an AI-driven market. AI is reshaping the first mile of the customer journey, expanding access and bringing more customers into the market. But at the last mile, where high-stake decisions are made, expert judgment, execution and accountability still matter. That's where LegalZoom is differentiated.

Our human-in-the-loop strategy remains central to how we differentiate and where we see some of our most attractive growth opportunities. At a high level, this includes both our service layer, products like registered agent and virtual mail and our expert layer, which now includes legal plans, IP services and concierge offerings. Together, these solutions address higher-value customer needs through a combination of automation and professional guidance, supporting stronger ARPU and lifetime value.

In Q1, revenue across our expert-led offerings grew more than 2x faster than our overall business year-over-year and continues to accelerate. The standout performer is our concierge suite, now at over 3x average ARPU. We are tapping into an underserved market. For example, we estimate that nearly 1/3 of U.S. small businesses are in bad standing or at risk of falling out of compliance each year. LegalZoom is the only provider offering a fully managed do-it-for-me reinstatement and compliance solution, and demand has consistently exceeded our expectations since launch. We are extending this strategy through curated, high-value formation and concierge bundles sold exclusively through our sales team. These packages combine entity formation with ongoing compliance and advisory services, bringing customers directly into higher-value subscription relationships from day 1.

We are excited to see the robust rate of adoption with customers increasingly opting for higher tier bundles. These packages support higher ARPU, are driving more durable customer relationships and reinforce the value of expert-led support. As a result, we are using concierge not just as a product, but as a strategic entry point to engage more established small business customers, a key long-term growth opportunity for LegalZoom.

Moving to our second growth lever. We are continuing to diversify our go-to-market model to make customer acquisition broader and more efficient over time. We've accelerated both the number of partners and the velocity of growth within this channel. In Q1, our expanded partner portfolio drove order volume from partnerships to 10% of total orders, up from 4% a year ago, reflecting both increased scale and higher intent customers. New partnerships include LinkedIn, Chase and our strategic partnership this year with GoDaddy, where LegalZoom is now the sole legal services provider across their ecosystem. We have a strong pipeline of diversified partnership opportunities and expect these to fuel a greater share of high-value customer acquisition in 2026 as we work to diversify our top of funnel.

This quarter, we made a deliberate decision to front-load our marketing investment, aligning spend with peak business formation seasonality. That investment delivered. Unaided brand awareness increased 19% year-over-year. Direct traffic to legalzoom.com grew 13%, and conversion remains strong. These are important signals that our brand investments are driving both awareness and higher-value customer acquisition. Our goal is straightforward: meet customers where they are, bring them into the LegalZoom ecosystem and introduce them to higher-value services over time. Importantly, this approach extends to how we are positioning LegalZoom within AI ecosystems. We've long described LegalZoom as the last mile solution in an AI-driven world.

In this quarter, we continue to embed ourselves into the platforms where customers are asking questions and making decisions. That includes the LegalZoom Connector for Quad and the LegalZoom ChatGPT formations app, both launched in Q1. While still early, these integrations are strategically important, allowing us to be present at the moment of intent when a small business owner is ready to act. Over time, we believe this will position LegalZoom to capture more high-intent demand and further strengthen our role as the trusted partner to help customers complete their journey.

Finally, we are embedding AI across our workflows and reimagining our organization to increase speed, improve quality and drive efficiency. As Noel will detail, we are already seeing tangible impact. Our AI-powered tools are empowering our experts, improving sales effectiveness, increasing customer satisfaction and allowing us to scale output without proportional increases in headcount. This is translating into real operating leverage and will be an increasingly important driver of our planned margin expansion throughout the year.

Stepping back, these initiatives reflect a business that is becoming more durable, more efficient and better positioned for long-term growth. As we move through 2026, we are executing with clarity and building momentum across each of our growth levers. AI is changing how businesses start, but starting is the easy part. Getting to the finish line is what matters, and that's where we win. We combine technology with real human expertise to solve the last mile, deliver outcomes and help our customers move forward with confidence. That combination is difficult to replicate and is what we believe will continue to set LegalZoom apart. Thank you. And I'll now turn it over to Noel.

Thanks, Jeff, and good afternoon, everyone. Let me connect our growth levers to what you're seeing in the numbers. Our results this quarter reflect continued progress in shifting the business toward higher-value subscription-driven revenue. While a portion of our growth benefited from factors I'll discuss shortly, the underlying performance of the business continues to be strong. At the same time, leveraging AI, we are quickly scaling efficiencies across the business and improving execution through our core workflows, which we expect to be an increasing contributor to margin expansion. With that context, I'll turn to our first quarter financial results. Unless otherwise stated, all comparisons will be on a year-over-year basis.

Total revenue was $207 million, ahead of our expectations, reflecting growth of 13%. Subscription revenue increased 12% to $130 million, marking our fourth consecutive quarter of double-digit growth. Performance was led by the human-in-the-loop services Jeff highlighted, including strength in registered agent services, benefiting from our pricing initiatives implemented last year, higher revenue from legal advisory subscriptions bundled into certain formation offerings and contributions from Virtual Mail and our concierge suite. We also saw strength in our compliance offering, driven by strong retention from experience improvements rolled out over the past year, including annual report auto file.

ARPU increased 4% year-over-year, reflecting our strategy to grow higher-value human-in-the-loop offerings. These services drive ARPU expansion and improve overall revenue quality as we aim to increase customer lifetime value. We expect ARPU to be the primary driver of subscription growth throughout the year. As we execute this strategy, we are seeing a decline in lower-value subscriptions previously bundled within the formation package. As a result, we ended the quarter with approximately 1.92 million subscription units, stable year-over-year, reflecting the continued shift in mix toward higher-value offerings.

Turning to transactions. Revenue increased 15% to $77 million. Transaction revenue benefited from the higher-than-expected annual report filing activity within our compliance offering. As a reminder, these filing fees are seasonal in nature with more activity heavily weighted in Q1. Transaction revenue was also driven by strength in trademark and IP offerings as well as a full quarter of contribution from Formation Nation. Growth was partially offset by the expected decline in BOIR revenue. AOV was $205, up 5%, reflecting packaging changes in our formation bundles and the lapping of low-value EOIR transactions in prior year. Transaction units increased 10% to 375,000, reflecting higher annual report volumes as well as growth in business formation volume. We processed 142,000 business formations in the quarter, up 8%, driven by a full quarter contribution from Formation Nation and increased business formation volume from partnerships. Finally, deferred revenue increased $20 million sequentially, reflecting normal seasonality.

Turning to profitability, where all metrics are on a non-GAAP basis. Gross margin was 67%, flat year-over-year, driven by more efficient service delivery, offset by higher filing fees. Sales and marketing costs were $72 million or 35% of revenue, up 29%. Customer acquisition marketing increased 25%, reflecting a shift in the timing of investments to align with peak business formation seasonality and diversification of investments in brand and partnerships. Non-CAM sales and marketing expenses increased $5 million or 45%, largely reflecting a full quarter of Formation Nation and targeted investments in our sales team, both of which are directly supporting the higher value revenue growth you're seeing in these results. Technology and development costs were $14 million, down 6%. General and administrative expenses were $15 million, an increase of 2%.

Across the organization, we are actively managing cost structure and productivity to ensure investments are aligned with higher value growth. This includes leveraging AI, which is fundamentally changing how we operate the business. We are rapidly transitioning to a fully AI-native organization with tools deployed broadly across the company, backed by ongoing training to drive real workflow transformation. We've launched targeted initiatives to redesign workflows and drive efficiencies through year-end and into 2027.

In product and software development, AI is now integrated across the life cycle, improving engineering velocity and enabling increased output without proportional increases in headcount. We are already seeing tangible results. Across our law firm workflows, AI is driving efficiency gains, reducing trademark classification search time by 55%, accelerating patent drafting by 30% and automating key processes, resulting in faster turnaround and more efficient use of attorney capacity. Further, AI-powered coaching has reduced missed sales opportunities by roughly 1/3, enabling our teams to offer more solutions and cross-sell our products. Agentic AI is also handling thousands of customer care chat interactions, fully resolving approximately 40% of inquiries end-to-end. Our operational execution drove adjusted EBITDA of $36 million, representing a margin of 18%.

Moving now to our balance sheet and capital allocation. Free cash flow was $41 million, flat year-over-year. We continue to generate strong free cash flow, maintain a debt-free balance sheet and our $100 million revolving credit facility is fully undrawn. We ended the quarter with $183 million in cash and cash equivalents, down $20 million from Q4. The sequential change reflects share repurchases and a $13 million payment of deferred consideration related to the Formation Nation acquisition, partially offset by solid free cash flow generation. During Q1, we repurchased approximately 5.3 million shares of our common stock for $43 million. As of March 31, 2026, we had approximately $126 million remaining under our authorization. We have remained active in the market in Q2, a direct reflection of our confidence in the long-term value of the business relative to current valuation.

Now turning to our outlook. For the full year, we are increasing our revenue outlook to a range of $810 million to $830 million, representing approximately 8% year-over-year growth at the midpoint. We continue to expect adjusted EBITDA in the range of $190 million to $200 million or approximately 13% growth at the midpoint. For the second quarter, we expect revenue in the range of $203 million to $207 million, representing approximately 6% growth at the midpoint. Relative to the first quarter, this reflects the full lapping of our Formation Nation acquisition as well as a reduced volume of annual report filings due to seasonality. We expect adjusted EBITDA in the range of $40 million to $42 million. In terms of quarterly cadence, we expect adjusted EBITDA to build throughout the year from improved gross margin, disciplined cost management and AI-driven efficiencies realized in the back half of the year.

To wrap up, our first quarter results reflect continued execution against our business strategy, and we look forward to building on our momentum. We have the foundation in place to leverage our differentiated market positioning to drive higher quality revenue growth and margin expansion in 2026 and beyond.

With that, we'll open the call for questions. Operator?

[Operator Instructions] Your first question comes from the line of Ella Smith with JPMorgan.

So first, you framed AI as a tailwind and have seen some major partnerships in the past few months. How are you seeing the customer acquisition funnel change? And what kind of conversion are you seeing from that kind of customer?

Yes. Thanks, Ella. Good to hear from you. Look, we're incredibly excited about what's happening with AI for a couple of reasons. And in effect, we're becoming the execution layer that AI can't replace. We've now launched products into ChatGPT and Cloud, both of those launched in Q1. We've started expanding our partnerships with them and the reach that we're driving to address and attack the additional incremental traffic that's coming from these AI engines. What we're not seeing, I don't think anyone is seeing right now is traffic coming directly in significant volumes. In large part, it's too early, both because they're trying to figure out how that works as are we.

So, what we're doing is we're embedding products. We're embedding their AI intelligence into what we're doing. And that's helping to drive the throughput that we're seeing into our business. And the thing that's encouraging for us is what that's allowing us to do is drive incremental formation volume that is coming from higher-value customers and lifting ARPU up.

Very clear. And for my follow-up, how do you see ARPU contributing to growth in 2026? You said that it's going to be an important driver. I was curious if you or Noel could walk us through the customer trends and sentiment that you're seeing that give you more confidence to realize ARPU expansion in 2026 and beyond.

Sure. I mean I can start and then let Noel finish. I mean, if you look, we've had now 2 sequential quarters of ARPU growth, 1% in Q4, accelerating to 4% in this past quarter, and we expect that to continue from a trend perspective. That drives through the entire business. And historically, what we've seen both at LegalZoom and across the ecosystem of SMBs is when you increase value alongside driving higher-priced, better products, you ultimately reduce churn. That's a virtuous cycle for lifetime value. And we've already seen the benefits of that. We've spoken, I think, over the last couple of quarters, in particular, about how our compliance products have seen decreases in churn despite the fact that we're seeing improvement in ARPU. And we're pleased to just start the lapping of concierge right now given that launched about a year ago, and we're pleased with the trends there on retention as well.

Yes. I think you hit the nail on the head. Some of it is driven by some of the pricing initiatives that we took last year and matching kind of price to value. But importantly, we're also seeing a shift in customer mix as we drive more customers towards our higher-value human-in-the-loop offerings like concierge. So, it's the combination of those 2 things that's really driving ARPU, and we see it as a sustainable driver of revenue growth throughout the rest of this year and beyond.

And then the only thing I'll add is it's what gives us confidence in our raised revenue guide because this is a roll-forward exercise. So, you can see those improvements compounding in the organic business.

Your next question comes from the line of Patrick McIlwee with William Blair.

My first, just following up on Ella's question on the Cloud OpenAI and Perplexity partnerships, it sounded like, Jeff, you said those were not driving a material amount of your traffic at this point. Can you just confirm that, first of all? Because initially, I was curious if those were -- if those represented a material portion of that 10% of volumes you talked about coming through your partnership channels.

Yes. It's too early for it to be material at this point. This is still test and learn. We are seeing material increase in our partnership channel broadly, and we talked about that in the prepared remarks. That 10% growth is disproportionately coming from the partnerships around GoDaddy, Chase, LinkedIn and others, and we can continue to accelerate that. With these new traffic channels through AI, it really is just too early for it to be a significant driver.

But what's important there is that strategically, we positioned ourselves as the brand and the player that these AI companies are looking to work with when they're looking to work with somebody in the legal services space. So, it's strategically important for us to be there. And obviously, we all expect that this will evolve and become much more significant over time.

It's probably the most important point. So, I'm glad you brought that up, Noel. I mean we are effectively the de facto choice for legal services across AI. And we're pretty excited about that. And I think it's in part because of our brand, it's in part because of our product and it's in part because of our 25-year history.

Understood. And last quarter, you talked about leaning into the positive formation environment earlier this year with some incremental TAM, and we definitely saw that come through this quarter. Obviously, it seems like that yielded the intended results with the top line performance and also some implied share gains on the formation front. But my question is, can you talk about how you evaluate the ROI on that TAM as we look further into the year, what channels you're leaning into and how your spending plans have evolved, if at all, since last quarter?

Yes. So, we clearly and intentionally spent up into a stronger environment, but also to get our brand messaging across in Q1. We're expecting that to continue, but to a lesser extent. Year-over-year, we expect spend to be up in the -- for the rest of the but to a lesser extent than in Q1. And we measure it in several different ways. We're heavily performance marketing oriented. So, we're measuring ROAs on a daily basis and making tweaks and adjustments to our bidding strategy. But we're also measuring in intangible ways, things like unaided brand awareness, which we mentioned in our prepared remarks where we saw a marked improvement in unaided brand awareness in the quarter as we surveyed it as we know that this will lend itself to supporting our efforts around channel diversification, things like how we show up in AIO and how we do in terms of our partner channel where we're seeing strong momentum. The brand strength really supports all of those initiatives as well.

And make no mistake, the point we're making, the positioning we're making is we are the choice. There shouldn't be alternatives. And that's one of the reasons why we're pushing towards these exclusive relationships with other small business channels that have great existing and established small businesses.

And I guess one other thing to mention is as we partners, we think that's just a great strategic opportunity for us. It does take some investment upfront to onboard them and start to scale them up. We have clear plans that we engage in to optimize those over time. And it gives us not only the opportunity to drive customer acquisition, that's new formation, but for us to start to roll out initiatives that target established businesses within those partner bases. And there's a lot more flexibility when you're working with a partner on your go-to-market and approaching acquisition as a whole, much more so than we see in traditional search.

Your next question comes from the line of Kishan Patel with Raymond James.

This is Kishan Patel on for Josh Beck. How are you thinking about utilizing AI internally as a way to grow number of SMBs managed per expert or concierge manager while maintaining your service levels? And what areas of the business are furthest along today?

Great question. We're not thinking we're doing, and we've seen tremendous progress here. And at the risk of overstating, the answer is all areas from the office of the CEO down to anyone taking out the trash, including me. And the reality is we've seen greater throughput almost across the board. We mentioned a handful of things on the side of customer service. We've talked in the past about what we're able to do with concierge reps. and expanding throughput there. Legal services, we're having a great deal of success with our owned and operated law firm, and we're starting to push that out to our network in terms of understanding there. And just the ability to use AI as a true partner here is probably more valuable within LegalZoom than it is with most customer -- with most companies because our expertise has to be right. There is no sense of good enough.

And we hinted at the progress we expect to be making on the margin side in the back half of the year. So much of that is because of our ability to scale our AI investment and push that down throughout the organization and do it effectively and aggressively. And the final point that I'll bring up is this requires an organizational sea shift as well. And we've embraced that pretty deeply. And because of it, we feel pretty excited and downright confident in our ability to execute.

And it's moving real metrics in the business. We -- I'll reiterate maybe a couple of them that we called out in our prepared remarks. So, for example, on our -- on the legal side, in terms of servicing our customers, we saw a 55% reduction in trademark search classification time and a 30% increase in efficiency around drafting patents. On our customer care side, AI is now handling approximately 40% of our chat volume end-to-end and doing it at a TNPS that's on par with our human agents. And then when it does transfer chat, it's increasing the efficiency with the human agents can bring that to closure. On the sales side, we're using it in terms of onboarding sales reps more quickly and providing on-call guidance that's helping identify cross-sell and upsell opportunities. So, as Jeff said, we're really using it cross-functionally and in a way that's directly impacting the customer experience.

Your next question comes from the line of Matt Condon with Citizens Bank.

My first is just on the concierge suite. Great to see that it's doing very well. Just as you think about 2026 and the product road map, how does that really form where you're going to go next with the products? And what can we see coming down the pike here? And my second question is just on partnerships, getting to that 10% volume. How big can this be over time? And what types of partners are you finding that are working really well?

Both great questions. I'll take them and Noel feel free to fill in on anything I missed. Concierge has been a great success. Obviously, it's early. It's a recurring revenue product, typically annual. So, we're just getting through the first set of renewal cycles. But the most important thing to understand is it's roughly 3x the ARPU of our average product. So, when you look forward, where we headed to drive ARPU higher and higher so that we have enough margin to add greater and greater value to ultimately reduce churn and extend lifetime value. So, this has been a tremendous success, and we're now leveraging some of that success to go back into our other products like our legal plan products, Business Advisory as an example, and learn from that and integrate some of those learnings.

So, our expectation is that is going to grow. We're going to leverage other human-in-the-loop products to push on that motion. And we're going to leverage more and more experts at greater and greater scale as we integrate both human and artificial expertise using AI to give us both a margin boost but also drive ARPU further up the curve while adding value for our customers so that we can keep them longer. It really is a virtuous circle.

On switching to the partnership side, the partner channel, I think, is an area of missed opportunity in the past and something we have spent a huge amount of time investing in. And the leaders of that channel, Kathy and Liz have been laser-focused on this for the last 6 to 9 months. You've seen a marked increase in a very short period of time. But mark our words, there's more to come. This is underpenetrated because anyone who has access to, has built relationships with, has a trusted relationship with a small business audience, we should be working with them. And we can help them. We can help them if they haven't formed, form their business. But more importantly, if they have, through concierge products, through legal plans, through compliance offerings. And these are all things that are native to what we do, but that we haven't offered outside of our platform.

Even concierge, we're still in that test phase such that we've been selling only to our customers. Opening that up to other partners is a really exciting avenue. So, I think you should expect more to come from us and we want that pressure.

Your last question comes from the line of John Byron with Jefferies.

This is John again for Brent Thill at Jefferies. Actually, I had another question regarding concierge suite. I mean I'm looking at your slide deck, it looks like the list prices are between $1,000 and $1,400 compared to ARPUs like the $260. So obviously, it can be a very big contributor. But just wondering if you can kind of size up the percentage contribution maybe either as an overall business or the subscription business? And also wondering where are you getting the lead gen sources? I mean, I guess you just mentioned it's your base itself. And then a follow-up would be in terms of formation nation sales rep productivity, wondering if there's any -- if you can talk about that and whether the number of reps is growing at all.

Sure. Yes, I'll take the concierge question. It's a continuation. We haven't disclosed the size and scale in part for 2 reasons, both of which we think warrant a bit more time. The first is we are only using leads from our base. And to your specific question, John, that means we're looking at that base of customers. We're checking whether they're in compliance or not in compliance, whether they need to be reinstated and what the direct needs from LegalZoom's perspective are. You can imagine over time, once we perfect this, the ability to go out to partners and direct marketing because we'll be able to help people get banking relationships, get insurance they might not have been able to get otherwise. Get off personal guarantees by helping them become and maintain compliance over the long run with these concierge products.

The second is we haven't perfected the product itself yet. We're still looking at pricing. We think that there is huge inelasticity, and we've tested it, but we won't pressure test that until we have the product right. Do we want to include lawyers in that product? Do we want to include accountants in that product? How far up the chain do we want to go? Because we know that the more we can offer a customer, the longer they're going to stay, and they are willing to pay for that value if we're providing a strong service for them. So, we continue to tease apart what the different variables of concierge are currently and should be. And so far, we're incredibly pleased. We're seeing incredible growth from that. And when you look at it, it is the predominant driver of our human-in-the-loop growth here, and we expect it to continue to be. So, we're excited, but we think it's premature to discuss the overall contribution. And Noel, I'll let you take that.

Yes. Just on the sales question. So, for Formation Nation specifically, I think the call out is that this quarter represents a full quarter of Formation Nation sales costs relative to a partial quarter last year because we acquired them partway through the calendar quarter. With that said, we are investing in sales both -- across both of the brands, Formation Nation and LegalZoom, in part to support the growth that we're seeing on concierge on the LegalZoom side. And then on the Formation Nation side as we see greater demand, and we're very much tying any incremental hires on the Formation Nation side to an ROI equation and ensuring that there's enough demand to support the incremental hire. And so that's how we're determining when to add sales reps there.

This does conclude the question-and-answer session. Thank you for your participation in today's conference. This concludes the program, and you may now disconnect.

Good day, and thank you become to the LegalZoom's Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded.

I would now like to hand it over to your speaker, Madeleine Crane, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today is Jeff Stibel, 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's assumptions and expectations and information available to us as of today's date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, 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 financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in our investor presentation, which can be found on the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.

Thank you, Madeleine, and thank you all for joining our call. 2026 marks LegalZoom's 25th anniversary, reflecting our longevity and evolution as a company. Our founders set out to democratize law by transforming how people navigate the legal system. Today, AI is making legal work easier to start. LegalZoom makes it safe and seamless to finish.

Since I became CEO, we have been steadily refocusing our business to capture the AI opportunity while recognizing that certain tasks and complex legal matters will always require human judgment and supervision. We are winning by combining intuitive technology with trusted experts, strong execution and ongoing compliance. In short, we solved the last mile with humans in the loop.

Our performance in 2025 is an early validation of our strategy. I'm proud of our results, but I am even more excited for what's to come. We entered 2026 from a position of strength. Let me remind you of our strategy, how we're winning and why it's durable. Our goal is to be the trusted guardians of small businesses and individuals lives and aspirations, enabled by the best technology available. We do this through our ecosystem of AI and expert powered legal, compliance and business management solutions that support small businesses as they form and grow.

Our strategy is simple, automate what can be automated and then win through deep expertise and high-touch service where it matters most. AI can help you start. LegalZoom helps you get it done.

Today, more customers are starting with AI platforms like ChatGPT, Gemini, Claude and perplexity, getting information, document reviews and insights while increasingly trying to complete complex tasks.

We believe AI tools are accelerating entrepreneurship by lowering barriers to starting and running a business, as evidenced by the data, U.S. business formations have accelerated over the last few quarters. We suspect some of this is anomalous, but we believe AI is a meaningful tailwind. Crucially, this is expanding our addressable market, and we plan to capture more of that market but not with the old software-only playbook. As our market expands, we will leverage AI to continue to lead in what can be automated, but we recognized early that long-term growth cannot come from automation alone. That's why in 2023, we moved our flagship automated formation product to free, choosing to cannibalize our own business before the market did.

Here is the key insight. Defense alone is not a strategy. We believe durable growth will come from what AI cannot automate, nuance, judgment, execution and accountability. Over the past 2 years, we've laid the foundation for the shift by strengthening our subscription business, reorienting our go-to-market strategy to focus on higher-value customers and scaling AI while strategically integrating human experts into the workflow at critical junctures. Better still, a human in the loop also increases conversion and attachment across our automated products because customers move forward with confidence knowing we stand behind that.

This brings us to the opportunity ahead. We are expanding beyond formations to serve existing businesses. We are confident this will enable us to capture a greater share of our serviceable addressable market by broadening our customer base and driving higher wallet share. Human expertise applied where it matters most will drive our growth. We are capturing this opportunity through our human-in-the-loop strategy, which is 2 layers, expert and service.

Our expert layer includes our legal advice subscriptions delivered through our nationwide attorney network, trademark and IP services delivered by our owned law firm and most recently, our white glove concierge offerings. We expect these products to be our fastest growing. This is where we solve the last mile for AI by inserting the right level of human review by building trust, ensuring quality, maintaining confidentiality and meeting ongoing regulatory requirements.

Our service layer, products like registered agent and virtual mail, benefits from structural advantages tied to regulation, physical presence and human execution, making it inherently durable. Over the past 2 years, we've enhanced service levels and have grown through premium pricing and retention improvements. These products anchor long-term relationships and function as a platform from which we can expand into higher-value services across our entire existing base.

Our near-term goal is to accelerate growth in our human-in-the-loop strategy by prioritizing high-value subscription products. Longer term, as we expand our go-to-market efforts to reach established businesses, we expect to capture accelerated share of our serviceable addressable market. As Noel will detail, we will leverage our partnerships both with key AI platforms and our broader partner channel as we unlock to activate and scale.

To sum up, we are leveraging AI to grow efficiently scaling human-in-the-loop services and expanding our ecosystem to help small businesses stay compliant, protective and confident over time. AI may change how businesses begin but LegalZoom is how they thrive. We are uniquely positioned to deliver what others cannot. The last mile, real accountability, real expertise and real outcomes. Our 25-year foundation of data, trust and legal infrastructure gives us a moat that compounds as technology evolves. This positions us for durable growth not just in 2026 but for decades to come.

With that, I'll say thank you for your continued support and turn it over to Noel. Noel?

Thanks, Jeff, and good afternoon, everyone. Before I walk through the results and our outlook, I want to briefly reanchor on our financial priorities. Over the past year, our focus has been clear: driving durable, high-quality subscription growth while scaling efficiencies across the business to expand margins. We made meaningful progress on both in 2025, and we expect that momentum to continue in 2026.

As you heard earlier, our strategy is focused on building a more resilient revenue base through higher value subscription offerings and AI-enabled human-in-the-loop services. These efforts are improving unit economics, driving predictable revenue and reinforcing our competitive position where execution and expertise matter most.

With that context, I'll start with our financial results and then discuss our outlook for the year. For the full year 2025, we grew revenue 11% to $756 million, more than double the growth rate from our initial outlook, inclusive of the Formation Nation acquisition. This performance reflects successful integration and incremental growth of Formation Nation, organic revenue growth of 3% and strength across our subscription portfolio. Full year subscription revenue increased 13%, the result of continued focus on higher-value customers and differentiated premium human-in-the-loop service offerings.

We also delivered strong profitability. Full year adjusted EBITDA was $172 million representing a 23% margin, up approximately 100 basis points year-over-year. We expanded margins while continuing to invest in AI and product innovation, demonstrating our ability to grow efficiently and with discipline.

Turning to our fourth quarter results. Total revenue was $190 million in the quarter, reflecting growth of 18%. Subscription revenue increased 20% to $131 million marking the fourth consecutive quarter of accelerating growth. Subscription revenue was driven by strength in our registered agent and compliance offerings, along with contributions from Virtual Mail, our 1-800Accountant partnership and Formation Nation. This performance reflects the combined impact of several initiatives executed throughout the year, including pricing actions and improved retention in our registered agent and compliance offerings.

We ended the quarter with approximately 1.94 million subscription units, up 10% year-over-year. Unit growth was driven by increased virtual mail adoption, the inclusion of Formation Nation subscriptions and bundled offerings that combine bookkeeping and legal advisory services with certain Formation products. We expect modest unit growth in 2026 as we fully lap the bundling of these offerings.

ARPU was $266 for the quarter, up 1% year-over-year. This reflects the early benefit of our focus on ARPU expansion, particularly in higher-touch human-led services, partially offset by bundled subscriptions that included lower-priced offerings. Looking ahead to 2026, we expect ARPU to be an important driver of subscription revenue growth as we see a customer mix shift toward higher-value subscriptions, including legal plans, compliance and concierge where human expertise, regulatory rigor and ongoing engagement matter most. This mix shift toward higher-value offerings reflects the early success of our human-in-the-loop strategy.

We continue to see encouraging adoption of our concierge product suite. These white glove do-it-for-me offerings provide one-on-one guidance and related full-service filing and fulfillment services, allowing customers to offload complexity and focus on running their business. Today, we are selling our concierge subscription offerings online and directly through our sales force. At an average price of over $1,100 per year, they are driving stronger lifetime value and higher quality customer relationships.

Turning to transactions. Revenue increased 12% to $59 million. driven largely by Formation Nation and growth in annual report filings. This was partially offset by the expected decline in BOIR revenue. Transaction units declined 1% to 239,000, reflecting the elimination of BOIR activity, partially offset by Formation Nation transactions and higher annual report volumes. Excluding BOIR and Formation Nation, transaction units increased 5%.

We processed 112,000 business formations in the quarter, representing 17% year-over-year growth. This increase was driven by Formation Nation and continued growth in formations acquired through our partner channel. This year, we aim to further leverage our partner channel to acquire high-quality small businesses.

In 2025, we laid the foundation to scale by modernizing our partner platform building new embedded partner experiences and adding more than 100 partners and collaborators, including Perplexity, OpenAI's ChatGPT, Vistaprint, SoFi and American Express.

In 2026, we plan to build on this momentum as we deepen these relationships, expand embedded integrations and onboard a strong pipeline of SMB-focused brands.

Average order value was $248 for the quarter, up 13% year-over-year, driven by increased adoption of higher-priced concierge services and the elimination of lower-value BOIR transactions. Looking ahead, we expect transaction revenue growth in 2026 that benefit from higher value customer acquisition and growth in our concierge suite. Finally, deferred revenue declined by $10 million sequentially, reflecting normal seasonality in the business.

Turning to profitability, where all of the following metrics are on a non-GAAP basis. Fourth quarter gross margin was 71%, flat with the prior year period. Sales and marketing costs were $56 million or 30% of revenue, an increase of 29% from prior year. Customer acquisition marketing costs increased $5 million or 13%. You may recall last year, we tested lower performance marketing spend levels to evaluate efficiencies. In 2026, we expect to continue investing in brand and partner channel initiatives concentrated in Q1, resulting in CAM spend increasing slightly faster than revenue. Non-CAM sales and marketing expenses increased $8 million or 103% from the addition of Formation Nation and investments in our concierge sales team.

Technology and development costs were $14 million, up 5%. General and administrative expenses were $15 million, an increase of $1 million or 10%. Our strong execution drove adjusted EBITDA of $50 million, representing a margin of 26%.

Free cash flow was $28 million in the quarter, down 22% compared to $36 million for the same period in 2024. Our free cash flow decrease was largely due to the timing of changes in working capital. For the full year, free cash flow was a record $148 million, up 48% year-over-year.

We ended the quarter with cash and cash equivalents of $203 million. Our cash position decreased by $34 million versus Q3 2025, driven by share repurchases, partially offset by strong free cash flow generation.

During the quarter, we repurchased approximately 4.3 million shares of our common stock for approximately $42 million. For the full year, we returned approximately $80 million to shareholders through share repurchases, repurchasing 8.3 million shares of our common stock at an average price of $9.71 per share.

Through consistent share repurchases since our IPO, we've reduced our share count by approximately 10%. As of December 31, 2025, we had approximately $70 million authorized and available under our share repurchase authorization.

So far in Q1, we have remained active in the market. As a reflection of our confidence in the business, our Board of Directors approved a $100 million increase to our existing share repurchase authorization. Our $100 million revolving credit facility remains undrawn. Supported by a strong cash position and robust free cash flow generation, we intend to continue to balance returning capital to our shareholders, investing in high-growth areas of our business and selectively assessing strategic M&A opportunities.

Now turning to our outlook. We feel confident in the trajectory of the business as we exit 2025 and the stronger, more scalable foundation we are operating on. This positions us well to continue to drive high-quality growth even as we lap several initiatives from last year.

For the full year, we expect revenue in the range of $805 million to $825 million, representing approximately 8% year-over-year growth at the midpoint. This compares to 3% organic growth last year, representing meaningful acceleration. Critically, the acceleration is being driven by contributions from higher value offerings as we prioritize quality customer acquisition and our human-in-the-loop strategy.

For the full year, we expect to achieve adjusted EBITDA in the range of $190 million to $200 million or growth of 13% at the midpoint. Our outlook reflects improved gross margins and disciplined cost management, partially offset by higher product and marketing investments focused on higher value and established business customer acquisition.

Of note, we continue to be disciplined with head count as our organization onboards more AI and technology into our processes. Relatedly, we recently completed a gross reduction in headcount of 5% earlier this month, allowing for improved operating leverage while preserving investment in high-growth initiatives.

For the first quarter, we expect revenue in the range of $200 million to $203 million or 10% growth at the midpoint. This includes continued execution of our initiatives and balanced growth across transaction and subscription revenue. And we expect to achieve adjusted EBITDA in the range of $34 million to $36 million, representing a 5% year-over-year decline at the midpoint. This reflects a shift in the timing of our CAM investments with brand spend and partner channel investments weighted more heavily toward the beginning of the year to align with peak business formation seasonality. As reflected in our full year guidance, we expect a stronger year-over-year adjusted EBITDA performance over the remainder of 2026.

In closing, we've never been more optimistic about the future of LegalZoom and the opportunities that lie ahead. The transformational progress we have made uniquely positions us to lead in the online legal services space as the only company that combines AI-assisted legal services with human expertise at scale to deliver trustworthy, high-value products to small businesses. Through a series of high-impact initiatives, we are confident in our ability to drive strong financial performance as we further differentiate LegalZoom's competitive positioning. I'd like to thank the entire team for their efforts and dedication to our success.

And with that, I will now turn the call back to the operator for Q&A. Operator?

[Operator Instructions] Our first question will come from the line of Ella Smith from JPMorgan.

So first, Jeff, maybe for you. Are there any early metrics on how the concierge product is doing? And to what extent is that factored into your 2026 expectations?

Thank you, Ella. There are some early proof points and the green shoots, and we have factored those in. That said, we factored them in, in a conservative way. We're still in the early innings. We're still launching products regularly. We continue to launch products, but the success that we've seen is quite encouraging. And it's one of the reasons why we said this will become one of our biggest growth drivers.

Great. And given the strength of the business Formation Nation environment, do you see any likeliness of sizing up customer acquisition marketing throughout the year?

We do. And you see this to some extent, with our Q1 marketing and we accelerated a bit of that spend earlier in the year as a result. What we're looking for are the right types of customers, not just all customers who are forming, but the ones who will go through their life cycle alongside us. And we have gotten really, really good at identifying those, targeting those and marking to them, both through traditional marketing means through our brand advertising and ultimately through the partner channel.

And just to add, Ella, the Q1 incremental marketing spend is driven primarily by brand. And so that's a message that we want to get out there early. That's their peak seasonality in terms of customer demand. And you'll see for the full year, we're still expecting CAM spend to be relatively in line from a percent of revenue standpoint for the full year, maybe a slight -- growing slightly faster than revenue, but the timing throughout the year will be a little bit more optimized to our peak seasonality.

And the other thing to mention is our marketing is performance-based, right? So if we see strength in demand, we will spend up into that. And if we see some softer demand, then it adjusts appropriately as well.

Our next question will come from the line of Trevor Young from Barclays.

Great. Two for me. First, just on the revenue growth guide and the cadence throughout the year. It does imply a bit of a step down for the full year, kind of starting the year in 1Q at 11% at the high end full year 9%. Is that just a function of the tougher compares as the year goes on, lapping Formation Nation here in 1Q? Or is there something else going on?

And then my second question for Jeff kind of relatedly, what needs to go right from here to be a durable double-digit grower? You've said in the past that you intend to accelerate growth without having to dip into margins. And my rough math is you grew kind of high single digits organic in '25. In '26 is somewhere around kind of stable or slight acceleration in that upper half of the guide. So what needs to go right to get back to double-digit growth durably?

Yes. Thanks for the question, Trevor. I think importantly and excitingly, the outperformance we saw in Q4 was driven by several different initiatives where we're seeing strength in the business. We mentioned in our prepared remarks, our compliance-related retention rates are improving, which we're really excited about. I think that speaks generally to the health of our customer base in the broader environment, but we're also seeing strength in the younger cohorts, which we think is a reflection or a signal of some of the value improvements we've made in terms of the delivery of our service. We also saw a strength in Virtual Mail, Formation Nation, our partner channel. So lots of initiatives that we expect to carry forward and drive growth in 2026.

But to your point, there are some meaningful initiatives that were really successful in 2025 and drove growth that are creating some comping challenges and grow overs including Formation Nation, our 1-800Accountant and tax partnership, some pricing that we did last year and those do accelerate throughout the year. So you hit the nail on the head. That is what is creating some of the decel that you see from Q1 relative to the full year guide.

And to address your second question, which is very much related to the first and similar to what we were talking about earlier with Ella's question and as well, what we talked about at your conference when we dug into the things that need to happen, we've laid most of the groundwork there. And I think we're being appropriately smart and thoughtful about what our guide is in '26. But the reality is our guide does show organic acceleration, and it's already pretty significant. To shift over into the double-digit side where we want to be, where we are looking to be as we come out of '26 and into '27, what needs to go right is this human-in-the-loop strategy. First and foremost, it needs to expand our serviceable addressable market. We talked about this a number of times. This allows us to penetrate into a broader set of small businesses, those who are established, those who will give us greater share of wallet and those who are going to grow with us and such that we can grow alongside them.

And then second, as we look at this AI opportunity, it also incrementally drives the SAM in a different way. in that what you're doing is you're opening up a market of individuals, mainly small business owners who didn't know they previously had a legal problem. And we are already seeing that now. So we're seeing green shoots on the market expansion and then we're able to capture those, clip those with the new products that we're developing. So as we deploy more and more products, as we start to lap the 1-year indicator on subscription so that we can see what churn looks like and retention, that's where we're going to have increasing confidence and be able to increase that guide.

Next question come from the line of Michael McGovern from Bank of America.

I guess could you speak to the conversations that are ongoing with some of your partners, I think you mentioned Perplexity, OpenAI. How do you -- can you update us on like the mechanics of how you get to being that last-mile delivery type of provider for legal services for LLMs and what does that kind of handoff look like from the middle mile to the last mile in that scenario?

Great question, something we're deeply focused on something I am personally incredibly excited about and have taken the initiative and lead alongside our business development team and the operations and technology folks. The bottom line is the right answer is we don't know and they don't know yet. However, both parties have identified a problem, whether AI is able to complete the first 80%, 85% or 90% can be in dispute. Whether they will be able to finish the job for most small businesses is not dispute. There is no question that more and more people are self-identifying as having a legal issue. And what we want to do is make sure that we are front and center and perhaps the only solution in many cases to solve that last mile. And when you think about the infrastructure that we have, thousands of network lawyers and owned and operated law firm, the ability to tackle national matters, local matters, state matters, IP matters, personal matters, there really isn't anyone on the technology side positioned at all, forget well positioned to tackle the problem of I've reviewed something, I've identified some issues. I either feel reasonably comfortable with like a second opinion or I don't even understand what I'm supposed to be signing outside of LegalZoom. And that's where we come in, and we've been rapidly working both on the partnership side and on the technology and product integration side to make sure that we are there when these technologies actually get a customer to an awareness stage and 80% stage and then now what? And we want to be that solution to the now what.

Got it. And a quick follow-up. I think in the past, you've talked about how you're relatively platform-agnostic, if you will, when it comes to LLM. Is it safe to say you're attempting to have more and more conversations throughout the industry longer term, expand partners longer term?

Absolutely. That is that statement is spot on.

Next question will come from the line of Elizabeth Porter from Morgan Stanley.

This is Lucas [indiscernible] on for Elizabeth Porter tonight. Could you talk to the contribution from Formation Nation to both subscription and transaction revenue in Q4? And how might that progress throughout the year if new business formations remain strong?

Yes. This is Noel. I'll take that question. So in Q4, Formation Nation contributed about $9.8 million on the transaction side and $5.7 million in subscription revenue. Formation Nation, since we acquired them, the business has performed really nicely. A lot of that stems from the integration and the sharing of resources and knowledge between the 2 groups. And we have an expectation that, that business will continue to grow in 2026. So we're seeing growth throughout 2025, and the expectation is that momentum carries forward.

Got it. Super helpful. And then how do you think about the additional investments needed to ramp up the human-in-the-loop and last-mile services within the business? And then as you expand into new products next year, how that progresses?

Yes. I'll take it at a high level and maybe speak to any specifics, but there will and have been and will continue to be significant investment going into that. That's at the high level. Underneath, we're seeing material savings in other areas. Both of these are driven by AI. One is strategic, shifting to that human in the loop. The other is tactical, driving AI throughout our organizations to create savings that we can use to deliver what we need to do on the product side for human-in-the-loop and continue to drive margin expansion. And you can see this in the dichotomy between a really strong print in Q4 accelerated growth into 2026 and beyond. Yet we did an approximately 5% reduction of force that we just announced because we were able to do it with some of the technology efficiency that we've driven throughout the organization.

Yes. And I would just say that you can see that reflected in our guide. We've been very conscious of balancing both the focus on revenue growth as well as profitability. And so we've realized margin improvements for several consecutive years now in our guide. suggest a margin improvement, both from a gross margin standpoint and an EBITDA margin standpoint in 2026. So those efficiencies -- and we still feel like we're middle innings. We're getting more efficient every day. We're leveraging a lot of the tools that folks are talking about in market to generate efficiencies. And as Jeff said, we're balancing, reinvesting some of those in growth and taking some to the bottom line.

Our next question will come from the line of Matt Condon from Citizens.

My first one is just as you continue to focus more on acquiring existing businesses and last on business formation. Have you seen any material change in the top of funnel metrics to date? Or is that more of an opportunity as we move into 2026? And then my second question is just on competitive dynamics. Just have you seen or observed any meaningful changes in the competitive landscape over the past few quarters? Any new entrances, anything different from existing players? And just how do we think about competitive intensity in 2026?

Those questions are actually interrelated. So I'll again try to take those at a high level. When you look at the opportunity for existing businesses, as we mentioned in the last couple of quarters, we've started with our own base of businesses, and we have seen proof points and growth therein. We have gone from there to leverage partners. It is probably one of the biggest unlocks in the strategy because we can now go to an SMB ecosystem of partners to start to drive customers that way and leverage other people's channels. And we've had some success, some early success with the partner channel and driving partnerships. And ultimately, we think that the real opportunity is going to come in '26 and beyond. as we start to grow those partnerships and then do direct marketing. But again, that's really a '27 and beyond point more than anything.

And then on the competitive intensity side, sorry, I didn't mean to ignore that. Although we haven't seen much. Frankly, we look at much of what people have considered as competitors, potential partners for us because what we are doing with this human-in-the-loop strategy isn't something that those competitors can do. They are largely pure-play software providers. So from my standpoint, our standpoint, the real focus is how can we work with them and dominate this larger expanded SAM in such a way that what you might historically think of as a competitor should actually want to partner with us or might need to actually send customers our way just so that they can solve those customers' problems.

Next question will come from the line of Patrick McIlwee from William Blair.

Great results here. And so my first question, I believe in September of 2025, you lapped some of the changes you made to your compliance pricing and your bundling strategy. Noel, with that said, is there any way you can frame or quantify the impact that had over the last year, just as we think about how impressive your fourth consecutive quarter of accelerating growth was?

Yes. I think first of all, the growth acceleration came from multiple fronts. Part of it was the bundling. Part of it was pricing action. Part of it was just some of our other products attaching well and then finally starting to see some improvement in retention as well. So it was really multifaceted.

I will say the bundling that we did -- we did multiple different trials of different bundles throughout the year. That's something that we're going to continue to do. We're going to continue to test in that regard and include different products. What we saw was that really helped progress us along our focus on quality share and driving quality customers to us. And it really impacted SKU mix. So we started to see people move up SKU into more of our premium SKUs as some of the foundation that supported what we saw on the concierge side.

So it has different tentacles and there are multiple fronts driving it. I wouldn't call out any one in particular, as being the clear driver of growth.

Okay. And I know formations grew substantially year-over-year, understanding that's not a big focus anymore, but Obviously, they grew largely year-over-year. You've got a larger denominator there, but it does look like your share slipped a bit more than normal even with the contribution of Formation Nation. Is that largely a result of your focus on higher intent customers? Or how should we think about your pursuit of share versus customer LTV going forward?

Yes. This is something we've been talking about for a while, where we are keenly focused on quality share. We want customers that are serious about starting a business or willing to make an investment in that business. And we think those customers we can help and they'll sustain longer, which creates more of an LTV opportunity for us.

And so from a macro standpoint, I'd say the macro has been supportive. We feel like it's a very healthy environment, but we think some of the census reporting is anomalous. And we've seen it where it's been weak, and we don't feel that in our business has been stronger. We don't feel that same impact that we had previously. And I think that's partly because of this focus on quality share. It's partly because we've increased the percentage of our business that's subscription-oriented. So we generally take a neutral position when we think about our plan and expectations moving forward from a macro standpoint. And our expectation is that we will meet the guidance that we set out for the year regardless of the macro backdrop.

Our next question will come from the line of Brent Thill from Jefferies.

This is John Byun on behalf of Brent Thill. Just two questions. One, you mentioned 3% organic growth in '25. And how we should think about the 8% guide that you gave. I mean is that comparable to that 3%? And obviously, it depends on how you treat Formation, I guess.

And then on the concierge products, I mean you've rolled out several, I suppose, in -- which one is doing better? Are you seeing more traction, more success?

Yes. On the guidance, yes, you could think about -- we think about those as apples-to-apples. There's a little rounding errors around that in terms of we're not taking any credit in that 3% for growth that we drove post the acquisition within Formation Nation. And then this year, there's a little bit of inorganic from the timing of the acquisition last year. But that's the reason why we called that out is to really shed a light on the fact that organically the business we expect to accelerate this year from a full year basis.

Yes. We're actually pretty excited about the organic trajectory. I'd say we're pleased but not satisfied. We can do better, but it's in the right direction.

And on concierge, I would say our compliance-oriented products around concierge feels like the strongest uptake in adoption right now and the biggest opportunity for us long term. So that's the predominant one that we're focused on because it is so opaque between regional, state and national levels. How to remain compliant, particularly how that changes over time, and that's where our concierge experts and specialists really add a lot of value.

And one of the ways we really activate customers within our base is through communication around their compliance status, right? Many businesses, they start -- in compliance when they start their business, but over time, their businesses evolve and change in their compliance either regulatory requirements change or the business becomes more complex in their individual set of requirements change and they fall out of compliance. And so starting with reinstatement by letting folks know that they're out of compliance and those folks responding saying, "Hey, I need your help," getting reinstated. And then clearly, I also need help managing my compliance moving forward. So that's been a real successful approach for us as well. And that really extends that learning, we think, will extend into the opportunity for existing businesses.

Our next question will come from the line of Kishan Patel from Raymond James.

This is Kish Patel on for Josh Beck. How are you thinking about the potential impact to key workflows or billing terms across the core business and human expert network as agentic legal tools and software start to proliferate?

I mean for us, it's actually an accelerant in two respects. First, internally because we use so many of those workflows to actually power our human-in-the-loop strategy. It actually allows us to scale more cost effectively. And externally, it drives increased SAM, serviceable addressable market. So as we said earlier, this is a big unlock for us to increase our market and market share of those established and existing businesses.

Got it. And can you share any trends through the year into 1Q '26 on how AI search is impacting traffic and conversions?

Sure. I mean, look, it's still pretty early in terms of what is happening, but the trend should look no different and look no different than what you're seeing overall in the general market. You're seeing less and less traffic and quality traffic come through traditional search engines and more and more coming from AI queries. And we're seeing that as well, and we're actually taking advantage of that as what we see as a key opportunity into '26 and '27.

Yes. I think one other trend to call out there is when you think about the traffic coming through, it's higher qualified traffic. There's more folks that are getting questioned and answered without while still in AI experience. So the ones that actually come through tend to be more highly qualified and convert better.

Our next question will come from the line of Ron Josey from Citi.

Jeff, you talked about reorienting to higher-value clients and broadening the customer base. Just talk to us about the tools the team is using to do just that and the progress you're making. And then, Noel, on the shift in timing of marketing it makes a lot of sense given the seasonality here in the year, but talk to us about the brand focus and where you plan to be ramping the spend on marketing? And when do you think you'll see the returns, is this a 1Q thing? Or is this a quarter lag?

Great. Thank you. On that first question with respect to the tools that we're using, I'll break it up into 2 categories and then probably break it down even further. On the tools question directly, what you're asking, we're leveraging a variety of different AI systems. What we're not doing is leveraging specialized systems. So most of them are on the generalized side. We discussed what we're doing with Perplexity and with OpenAI and ChatGPT. We're seeing huge efficiency gains and advantages that help us drive new product deployment at faster rate, which is absolutely critical as we focus on the other side of the toolkit which are these experts that we're bringing in. We -- right out of the gate, when I joined, started to bring in that service layer back that we didn't have prior, and we've now been filling that out with layers on top of that. So we went from service and sales to concierge, think of those as business consultants and business advisers to our legal network, which we're getting more and more in twined indoor products and becoming more customer facing.

What is effectively allowing us to do is take a model that wouldn't have scaled prior because if you had a lawyer, they might be able to manage 10 clients a day and get the lawyer to leverage technology or the concierge rep to leverage technology or the service rep to leverage technology to go from 10 customers to 100 to 1,000 and then on so that it scales proportionately or super linearly even in some cases such that we can expand margins and drive more throughput while satisfying our customers' problems.

So we are rapidly deploying technology. Some of it is owned and operated, and we're doing it in-house. This is particularly around our data on the proprietary side. But most of it, we're leveraging generalized systems and specializing it to our various use cases.

Yes. And on the brand side, we've been very happy with some of the changes we made throughout 2025, the new assets that we created, the messaging has worked really well. And what we saw is as we increase brand as a percentage of our total CAM spend, we really still saw a strong ROAS without some of that deferred realization of value that you would otherwise would expect. And so we're leaning further into that, in particular, in Q1, which we think is well timed, and that's through connected TV, YouTube, social channels. We're trying to stay very diversified with the places that we post our brand messaging. And we expect that to pay dividends in a relatively short period of time.

As a reminder, with the heavy subscription orientation of the business from a revenue standpoint, if you generate bookings in Q1, you'll realize some of that revenue throughout the year. But that's why we're making a...

And the final piece and this speaks to the spend that we're doing in brand right now is this also drives forward into our partner strategy. As we show the brand strength and the quality of our human-in-the-loop strategy intertwined with that trust that comes with an answer and a service that comes from LegalZoom, that helps drive that partner strategy forward as well.

Next question will come from the line of Stephen Ju from UBS.

If I heard you guys correctly on the prepared remarks section, it seems like Formation Nation is driving growth in subscription units as well. So can you talk about the success that you might be having in moving that customer base from what was probably historically, the one-and-done transaction to upselling them other products from the broader sort of LegalZoom portfolio?

Sure. And look, the success is similar to what we have done in LegalZoom proper. I would argue that if anything, it is slower than what we would like. And I think that there is even more to be done. But remember, this is our value price service offering. So we have been driving more and more of the lower cost or lower propensity to purchase customers towards those brands, particularly Inc Authority, but they continue to have strong success both converting in general and then shifting to subscription where appropriate. So I actually suspect there'll be more to come.

All right. Thank you. I'm not showing any further questions at this time. With that, this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Okay. Great. I think we are on time. So we'll go ahead and get started. Good afternoon, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. I'm pleased to be hosting the LegalZoom team, Jeff Stibel, CEO; Noel Watson, CFO. Thank you so much for attending. I think this is at least third, maybe fourth year in a row. So we appreciate your continued support.

Jeff, let's start with you. The business is in a much different place than when you took over as CEO roughly 18 months ago, give or take, even as much of the longer-term vision is becoming a much more of a subscription-focused business remains the same versus that time. What are the two or three big wins this year as part of the strategy reset and efforts to reaccelerate growth?

Sure. And thank you for that, and we're incredibly pleased with the progress that we've made so far. I'd say the #1 thing is we have the business stable. We were not in a position when I joined the company to say that. We were beholden to some macroeconomic forces, to some competitive forces and we were watching subscription growth decelerate. And if you fast forward to today, we are now at a point where we've reaccelerated subscription growth, we've started driving top line growth, both organically and through M&A, and we've completed and successfully integrated an acquisition that was accretive.

You mentioned some uncertainty. And frankly, I think that's persisted even this year, right? We've had tariff uncertainty, government shutdown, probably maybe played a role in some business formation, that backdrop. What -- how would you assess like how those have impacted the business this year, tariffs, government shutdown, have they been impediments? Or has the momentum in the business remained solid and business formations remain on track?

So it's interesting. I'm not even sure if you can call it uncertainty since we don't even have a dial anymore. They're not producing metrics. I would say, holistically, it has helped us tremendously as a team because what we were able to do is say these external factors cannot be a reason for a success or failure. When we have tailwind, we can take advantage of that, and we'll call that luck and we'll own that. When there's a headwind, we've got to operate our own business. And we've got to use the levers we have at our disposal.

So if you look at the first half of the year versus the last half, the first half, there was a bunch of pressure right up until, call it, Liberation Day or so. And the business ticked and tacked along just as we thought it would. We had to pull a few different levers, but we successfully executed around that. As we saw, in particular, small business starts to accelerate towards the middle of the year. We took advantage of that as well. So I'm actually quite pleased with the fact that we are relatively decoupled within a degree of freedom or two from this macroeconomic.

Okay. So some decoupling, but you mentioned that we have seen business formations firm up a little bit. So that's probably helped a little bit with results of late. Do you think that as we look into 2026, we are in a kind of a better business formation environment? Or is it still somewhat uncertain?

I think the print comes out tomorrow, if I'm not mistaken. I don't know whether we should be believing the print these days. But the point from the perspective of LegalZoom is we are less dependent on that. The good news is when you look at the small business economy, it's pretty robust, it's relatively strong, it tends to be a good counter-indicator to job growth because when people lose their jobs, they tend to start a business. And what we have been doing is focusing more and more on moving up channel. So working with do-it-for-me products, concierge-like service and focusing on our own existing businesses. So that gives us insulation regardless of what the print is seeing. But from a forecast standpoint, we're assuming neutral because we can't figure out which way it's going to go.

Yes. And we've seen small businesses consistently be resilient in a bunch of different macroeconomic scenarios and the latest of which was tariffs. And I think part of that is it's just -- it's never been easier to get a business formed through a company like LegalZoom, but then to get it operational with enterprise-like capabilities, and to do that at extremely low cost of capital. So to be operating without a heavy upfront investment.

And so the trends, the secular tailwinds in the space, I think, help. And to Jeff's point, it can be countercyclical. And then the work that we've done around focusing on quality share, we're really focused with our premium positioning and increasing value in our products is in that core formations where people are really serious about starting a business if not on that real edge case of, "Hey, I'm going to defer that out because something is a little bit less certain than the macro".

That makes a lot of sense. Jeff, to borrow one of your terms, decoupling performance from the macro, how resilient is the current growth algorithm if we were to see renewed pressure on business formation trends. And then relatedly, what tools do you have at your disposal to execute through maybe a tougher macro environment, even if that's not what your base case assumption is?

Yes. And by the way, great question, and we pressure test that base case against pressure from various forces that are outside of our control, one of them being that small business formation macro. And I think it's quite resilient. And I think the reason is when you look at how we're going to market now, we've significantly diversified away from what was purely if not exclusively small business formations.

We, first and foremost, started moving away from free formations. This hurt us on market share, but ironically, but not surprisingly, didn't hurt us, in fact, helped us in terms of total revenue and revenue growth because these were not quality customers. These were lookie-loo businesses, hobbyists.

Second, we started to reposition the brand as the premium leader in the space. So where we might lose some revenue and some customers at the low end of the fringe. This is a point Noel has repeated to me over and over, and I now believe it intrinsically. When these macros soften, particularly on the economic side, generally, what you see is the fringe cases start to go away. The good small businesses, they double down and their time becomes more valuable than the cost that they're paying us. So we're reoriented towards that premium brand and reinforcing that.

And then the last thing is we're, in some ways, penetrating further into our TAM by creating multiple serviceable markets. You've got formations. Now you've got existing businesses that we can go after, you have do-it-yourself, which we are doing. We're now doing do-it-for-me. That level of diversification, it insulates us because we haven't penetrated it further, which means we see formations contrast. We can go after a different piece of the market that's greenfield opportunity for us. We see -- Google search market are getting too expensive, we move into a partnership or into AI, same general theory. It's something that's an external factor, it hinges on our ability to grow as long as we've got that diversification, we've got multiple ways to execute and still hit our numbers.

Okay. So go-to-market has certainly changed. It sounds like a focus on those higher -- potentially higher value customers, they will be the ones that stick around better throughout a cycle. They're not going to be the weekends at full, that type of thing. That makes a lot of sense.

Related to that then, how has the customer funnel really evolved over the last year? And where do you want to take it from here? How effective have you been graduating users from maybe entry-level bundles to some of the higher-value compliance and advisory subscription products?

So I think it's evolved pretty dramatically so far. I'd almost say it has revolved over the last year because of how aggressive and blunt we have been. But I will tell you '26 and beyond much more exciting. The ways in which we evolved, we were, in many ways, a one-stop shop 18 months ago. We drove most of our customers inbound through search marketing. Most of that search marketing came specifically from Google. We now see less than half of our marketing efforts being driven by that channel. That's a huge shift. We've leaned into brand, we've leaned into AI, we've leaned into affiliates, we've leaned into partners in a way that we hadn't done historically. The vast majority of our customers were DIY. We're now broadening into do-it-with-me and do-it-for-me. We had a disproportionate amount of revenues coming in transactionally, and we were pulling in those transactional revenues, and we're seeing subscription degradation as a result. We're now seeing subscription acceleration, which is driving our top line growth, but also bookings, which is going to lead to '26 and beyond.

More importantly and more excitingly, next year, as we look ahead, we have this opportunity, and I talked about it a little bit before of going from just new businesses and then attaching products to establish businesses. And that opens up a whole another channel. To give one example, just think about partnerships. There are many existing partners that we have. Take Bank of America, for example, that we really can't sell anything to because in order to be a banking client at Bank of America, you had to have already formed. And the way we used to do business you had to form with us so that we could attach a subscription. Now we can go directly to them with a compliance concierge product, as an example, or a legal plan. We wouldn't have been able to do that historically. So as you look to next year and beyond, those are the green shoots we want to see because it creates a whole new addressable market for us.

Okay. So clearly, go-to-markets changed, customer funnel, massive evolution there, for sure. Clearly, a push up market. How should we think about the implications for ARPU evolving over time? Can you get back to like 4Q '23 peak? Does that even matter in your view? Is the business so different now that that's not the aspirational goal?

So it matters, but it matters as a larger function of the LTV equation, right? It's about retention, subscriber growth and ARPU and that calculus is what we focus on each and every day. We're seeing retention increase and improve across our core products. we're seeing improvement across our core products. When you pull away some of our basic bundle products, ARPU is going up. So our LTV curve is actually moving in the right direction.

As far as I'm concerned, if ARPU dropped by 90%, but retention improved by 10,000%, that would also be fine. The reality is our customers, there's a tighter band which means we need to drive both of those. So I would expect that we can get to those levels that you were mentioning and beyond.

Okay. But there is some calculus there contemplating what potentially...

Solving for LTV, but I think just to add to that, when you think about our product level, we think we have pretty good positioning in elasticity in some of the pricing opportunities there. Where you're seeing pressure on ARPU in the last several quarters is because we're bundling, going back to some of the commercialization changes we made, additional subscriptions that are higher in SKUs, which is driving the behavior we want. We're seeing people engage with our higher-end SKUs and select them and then get exposed to more of our products. The incremental products we've been adding there have been lower ARPU products, so they're driving down sort of the aggregate mix. But on an individual product level, we still feel like we have pricing opportunity, some of which we've realized in 2025, but probably more to come.

Okay. Got it. Jeff, you mentioned Formation Nation earlier in the conversation, that's -- for the audience, that was an acquisition we completed earlier this year. That has been a contributor to growth as well as enhancing some of the customer segmentation and providing a higher touch sales force. How has that integration been going? What are some of the milestones that you're still working on in terms of the integration?

Sure. And I'll back up to give some context for anyone who isn't familiar with the story. We effectively, over the past call it, 3, 4 years, took our brand and our product set and bifurcated between our traditional high-end services and a free offering, thinking that if the market for formations was moving towards free, we want to dominate in that market. What it effectively did was it shipped to market, that's a positive, while devaluing our brand, which is a negative. You're the branded category leader, you don't want to do that or at least not for a long time.

We went after Formation Nation for a couple of reasons. But paramount among them was that they, in effect with their "inc Authority" brand, we're the category leader in discount or value-oriented formations. And they did a very good job of acquiring and then rotating those customers that succeeded up the funnel.

In that respect, our integration has been a huge success because what we've been able to do is now reorient our brand to be a premium brand. We've taken our basic SKU, which is our free formation SKU and reduced it by, call it, 20, 30 basis points overall without eliminating it entirely. It's there, it's still positioned but through education, we're able to move our customers, LegalZoom customers up the stack prior to their first purchase, while spending an incremental amount of marketing on that discount value offer for a certain subset of customers using the "inc Authority" brand. So I highlight that because that was the underlying thesis.

Second, the business is performing really well. This was a slower growth business when we acquired it, and that growth has accelerated, largely in line with our growth. So we've been able to share best practices.

Where we have not been successful yet on integration is cross-sell and upsell. And that was deliberate and by design, but not planned. It was one of those planning is everything, plans or nothing. As we got in, we realized how successful we were being and said, first, do no harm. So for us, that's now a lever. They have a handful of products that are really powerful and potent for our customers. They have a credit building product, as an example, that we know we will cross-sell and upsell. We actually took a team to do that cross-selling and upselling and realize that, that team was so good, they should actually be selling LegalZoom services. Then we shut that down and said, "start selling LegalZoom services", and they're now exclusively doing that. Next year, we will build a team on credit.

We have products like our legal plans products, our compliance products, our RA products that are, in many ways, superior to theirs, some where theirs are superior, a perfect opportunity for cross-sell and upsell. We will get to that in time. We didn't need to do it now and didn't want rock something that was working and was already accretive.

Okay. And is it on the plan for maybe next year, next couple of years to see that cross-sell?

Correct.

Got it. Sticking with that, what role does the white glove kind of do-it-for-me services offered by Formation Nation in acquiring those higher touch and higher-value customers? Are some of the capabilities here contributing to the compliance concierge offerings?

Sure. And in many respects, one of the things we got effectively for free with Formation Nation was this white glove model where they had a service model, both for credit, for business advisory and then a very high-touch brand known as Nevada corp. And we actually use that as an archetype in many respects for our concierge product.

In hindsight, I won't tell my product team in this. But in hindsight, I don't think we would have had as much success as we have building that concierge product if we weren't learning from the formation Nation team. So we've taken the best of what they offer. And then we improved it to be a level at which it fit well under the LegalZoom brand, not just the inc Authority or the NCH brand.

Okay. And on the compliance concierge offerings, how much runway for adoption do you have there? Like among the existing subs, as well as historically transaction-based customers, is there a long prospect list where you can check for compliance on behalf of those folks and then go to them and say, like, "Hey, wait a second, like, we went out on your behalf. We see there's some compliance issues. We can take care of this for you." What does that like runway look like? And how much runway is there?

Yes. I'm excited to jump in on this one. So that's exactly one of the early approaches that we've taken is to looking at our customer base, and letting them the folks that are become out of compliant with their secretary estate. That fact. And we've got a very high response rate of folks raising their hands. These folks are very busy running their businesses, right, raising their hands saying, "I didn't know, first of all, can you help me get reinstated?" And then "Clearly, I need somebody to manage this for me going forward because I'm not doing a good job. Can you do that for me as well?" And that's where that white glove service -- sure. It's not the easiest of things once you become out of compliance to necessarily get reinstated. So that's where that white blood service is very helpful for them. And what that does for us is it gives us confidence that this could extend beyond our base, right? If it works for folks that have been -- they may not have any of our subscription products, helping them to stay compliant today. And they may be a couple of years since they had a formation. So now you think about the 30 million-plus businesses that are out there that are existing and operating, some healthy percentage of them have the same profile. They're either at risk of not being compliant or they're already there. So that's our next step is to go and try to attack that part of our TAM that we haven't tackled yet today.

There's over 30 million existing businesses in the U.S. we largely set them aside from what we were trying to service, all part of our TAM. Every one of them needs to be compliant. They'll be fined if they're not. Many of them are out of compliance, many of them are in compliance, but they're paying way too much money to do it. And even their service providers want to do it. And still others are doing it themselves and are frustrated. So it feels like a huge opportunity.

So a huge opportunity in-house as well as outside of...

And through -- and outside partnerships as well, right? When you think about some of our larger partners, take Wix for example. They have a huge base of customers. A lot of them are established businesses that may have some type of increasingly complex set of compliance needs.

And when I got here, I went around to our partnership team and said "Stop selling our customers. We want to buy other people's customers, from partners", and they kept saying, "Jeff, I use Bank of America" -- as the example like "We want Bank of America's customers. We don't have anything to sell them, they're already incorporated. What about our compliance part? Well, you kind of have to form with us to use that." I'd say, "Well, let's build a product that's decoupled from it." And we now have. And the beauty is we can not only market to them. We can tell them which businesses are out of compliance. And that's a huge failure point for Bank of America and for many other businesses.

So let's hit on partnerships since you mentioned it. Historically, it's been a focus. It then went through a period of deemphasis and now once again, an area of focus. What's different this time from a partnership perspective? And can you give us some examples of real wins in terms of customer acquisition or revenue from some of these deals?

I'd say the biggest is customer acquisition. It wasn't a focus. By the way, even in the early days when we were focused on partnerships because I was on the other side of this running Dun & Bradstreet credibility. We weren't -- LegalZoom was not looking at partners to drive business to them. They're looking to monetize their customers. And I think that deemphasis was because of that focus. What we're now focused on is where we have a hole in our ecosystem that our customers want. We will sell that customer so that we have a tight partnership. It's integrated and we control that environment. But the real focus on a go-forward basis is to drive subscribers to us. And that comes with really everything we've been talking about in these conversations.

Okay. So drive that customer acquisition and really it's subscription customers?

Correct.

And then really key adjacencies as well. And so one of the important partnerships this year that we spend a lot of time around is our 1-800 accountant partnership for -- we're kind of replacing our owned offering on the tax side which has done extremely well, and we're excited where that partnership can go.

It's been a tremendous success and a good archetype for how to do partnerships as well.

Got it. So let's shift gears a little bit to the cost side of things in some of the investments you're making in the business. How confident do you feel about the direction of your technical development, especially with some of the new leadership changes there? What sort of road map do you have planned? And what are some of the obstacles in achieving this vision? And have you had any key unlocks this year?

Sure. So one of the obstacles is, hard as this always is, was leadership. And we were oriented long to take advantage of the technology stack and integrating artificial intelligence. So what you're alluding to is we restructured a large portion of our team so that we could put technology, product sales, service and fulfillment under one roof. And the reason was we realized holistically, that's what makes up a product. Product is not technology. And if we were going to be successful with this notion of human in the loop, being able to have technology prowess where something can be done with technology and then insert a human being for expertise where it is needed. It is a place where we cannot only win but we will dominate because no one else can compete with us. So I'm incredibly excited by the changes that we've made.

The proof points that we've had, particularly in Concierge and our growth in our legal plans and watching that SKU shift from do-it-yourself to do-it-for-me and from what I would call products that either can be or have the potential to be commoditized to products that are unique in market to the extent that our competitors want to work with us. It feels very, very potent.

Okay. And how should we think about striking the right balance between R&D spend to drive product improvement versus kind of traditional sales and marketing muscle and dialing up advertising? Typically consumer and SMB Internet companies sometimes struggle to find the right balance of R&D spend versus sales and marketing. How do you feel about the balance that you have right now and on a go-forward basis?

I mean I'm actually pretty comfortable with the balance right now. And I think we've proven that we can drive growth with efficiency in this business and continue to expand margin.

The way that we're thinking specifically about the newer AI opportunities is to leverage AI first to drive efficiencies, put some of that to the bottom line and use the remainder to go after customer opportunities, kind of product opportunities. To me, that feels like a balanced approach to not take undue risk. So I'm pleased with the way the team who predominantly went by Noel has driven a thoughtful approach. It's not that we won't hit the gas if we see something working really well. But we're not going to do that if it's a big bet on what we do with it incrementally and make sure that we've got proof points, leverage those proof points to make an investment decision and then lean in from there.

There's a number of ways that we're using AI today to drive efficiency in our operations. But we still feel like we're kind of early to middle innings on it. So there's a lot more room to go. And to Jeff's point, as we generate more efficiency, we'll look to reinvest part of that into different areas that we think can accelerate the business. And then we're also being conscious of wanting to make sure we continue this balanced approach to revenue growth and margin profile.

Yes. And on that point, I know you don't have formal guidance out there yet for '26, but how should we think about the margin path from here? Is there any reason you wouldn't be able to achieve double-digit top line growth and expand margins such that EBITDA growth trends better than revs over some medium-term time frame?

Yes. I mean it's certainly our focus, right? That's certainly what we're driving towards. We don't have any formal guidance out there. I will say all of the initiatives that we've talked about over the last few minutes here have -- are really clear to us and feel like they're durable and sustainable. So we're excited about what we're doing. We're excited about the acquisition that we did and the opportunity for organic growth, leveraging that acquisition.

There are some grow overs that we have next year, specifically related to the acquisition and the tax partnership and still some BOIR in Q1. But overall, like that's certainly where we want to be, and we think it's realistic for us.

And qualitatively, we've made that statement, right? We said that we intend to accelerate top line growth, and we don't think we need a dip in the margins to do that so saying anything to the contrary quantitatively would contradict those.

Yes. Makes sense. On free cash flow and capital allocation, there's clearly really strong EBITDA to free cash flow conversion on pace to have $250 million or more on cash on hand by year-end. With Formation nation, it sounds like that integration has gone pretty well, maybe some more work to do, but largely done. How should we think about appetite for further M&A from here and balancing that with ongoing share repurchases?

Yes. I think balance is the right word. We've been pretty consistent from a share repurchase standpoint. Obviously, we still feel like there's some dislocation in our valuation today that warrants us being opportunistic there. And we have plenty of cash, we're debt free. We're generating a lot of cash, as you said. And that doing that will still allow us the flexibility to be opportunistic around M&A as well. And we have a very healthy pipeline. We're having lots of conversations there. We don't feel like we absolutely need to do anything. But if the right set of circumstances occur, we have the firepower to go and act. And we have the success metric with the last couple of acquisitions that we've done to feel confident that we know how to integrate -- yes, we built that muscle internally.

Okay. Great. So as we come up on time here just to wrap. If we have you back here a year from now, what would be the one or two KPIs that we should be looking for to assess whether LZ has been successful at the end of the year of '25 here as well as in '26?

Yes. A $30 stock price. Working backwards from how we get there, accelerated top line growth, maintaining or growing margins, so accelerating EBITDA and driving that through subscription acceleration. I think those are the key things. I mean, those are the fundamentals of any subscription-based business. And it's no different with us.

Okay. Great. Well, congrats on the success so far.

Thank you. Appreciate it. Thank you.

Thank you, operator. Welcome to LegalZoom's Third Quarter 2025 Earnings Conference Call. Joining me today is Jeff Stibel, 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's assumptions and expectations and information available to us as of today's date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, 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 financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at investors.legalzoom.com.

I will now turn the call over to Jeff.

Good afternoon, Madeline, and welcome back. I want to thank you all for joining our third quarter earnings conference call. We are very pleased with our performance and the progress we've made against our key focus areas. Our third quarter results both validate the strategic shift we made to our subscription business and exemplify the outstanding execution by the team. The proof points we're seeing across the business give us confidence that we have transitioned beyond stabilizing the business, having now built a strong foundation for accelerated growth.

Turning to highlights of our third quarter financial results. We achieved record third quarter revenue of $190 million, an increase of 13% year-over-year, well exceeding expectations. Subscription revenue also grew 13%, accelerating from the second quarter and marking our third consecutive quarter of sequential growth. Subscription revenue growth was again led by our compliance offerings, demonstrating the strong demand for our expanded compliance concierge product suite.

Further, our compliance offerings continue to show encouraging improvement in first year retention rates, demonstrating that more established customers are recognizing the incremental value of our premium products. Profitability remained strong with an adjusted EBITDA margin of 24%, resulting from disciplined execution and continued efficiency gains. This is despite incremental investment in product and AI. We generated solid free cash flow of $47 million in the quarter, further strengthening our balance sheet and financial flexibility.

With our strong third quarter performance and the momentum in our business, we are raising our full year revenue growth outlook to 10%, effectively doubling our initial full year guidance. We're maintaining our 23% adjusted EBITDA outlook as well. As we continue to identify cost savings, we plan to redeploy much of these gains into strategic investments that position the business for future growth.

Turning now to our 3 strategic focus areas. When we initially laid out these key focus areas last summer, our objective was to attract quality share by strengthening our subscription business and offering greater value to customers. This strategy not only fueled our turnaround, it has allowed us to attract more established businesses, activating a larger portion of our SAM and helping us accelerate growth. Building on this progress, we are now expanding our focus areas beyond business formation to serve existing businesses.

We believe we are best positioned to capture this opportunity through our core competencies of technology and AI supported by our vast data set and large network of attorneys and other experts. We believe this positions us to capture a greater share of our serviceable addressable market by broadening our customer base and driving higher wallet share. Our goal is to activate the existing SMBs who today don't act on legal and compliance needs due to cost, access or fear.

We expect to achieve this goal through the continued introduction of higher-value products and investments in AI, both in our people and in the tools that enhance productivity and decision-making. This strategy is rooted in integrating human experts into the workflow at critical junctures that AI cannot fully address to ensure accuracy and customer confidence. Importantly, our AI tools will provide a level of customization to help businesses focus on their goals while LegalZoom supports the back end.

Turning now to the progress we've made across our 3 strategic focus areas. Our first focus area is delivering innovation across the subscription business. On our last call, we talked about the early success of our compliance concierge product offering, and we continue to see greater opportunities here. We were also in the testing phase for several new concierge products for SMBs, nonprofit, reinstatement, dissolution and entity conversion concierge. Each of these high-end products afford customers the ability to offload their business' compliance needs, enabling them to focus on running their businesses. We saw encouraging signs of adoption across these offerings. Notably, we expect these products to carry profit margins at or above those that we typically see with DIY solutions.

Additionally, via our sales center, we are testing the bundling of these do-it-for-me services into a subscription-only formation product bundle. We've been testing 2 offerings: first, business concierge, which serves compliance and business expansion needs; and second, business concierge plus legal concierge, which adds access to our independent attorney network for additional legal guidance. The strong early adoption of these products demonstrates our ability to address the needs of the roughly 36 million existing small businesses with DIFM solutions that provide legal, accounting and business guidance from professionals at a cost that is significantly lower than that of a traditional off-line attorney, accountant or business manager.

As an example, traditional lawyers can charge $500 per hour or more, whereas our DIFM products are typically under $1,000 for an entire year, even when they include access to an attorney. It is also worth noting that our 1-800 account partnership continues to surpass our expectations. Given the strength of this partnership, we are looking at ways to deepen the relationship. For example, we will begin to test bundling their tax advice with our legal advice to create a seamless, easy to navigate and economical way to support businesses. We expect this offering to fully roll out next year.

This provides a competitive advantage because we have learned that many of the questions asked of our legal advisers are actually tax related and vice versa. This speaks strongly to our ability to diversify our business model and capture more of our SAM by entering near adjacencies such as tax and accounting.

This brings us to our second strategic focus area, reorienting our go-to-market strategy. Our go-to-market strategy is focused on positioning LegalZoom as the trusted legal brand for small businesses. We launched a highly successful marketing campaign in May, technology when you want it, human support when you need it, reinforcing the principle behind AI augmented expertise. We believe this campaign helped to drive aided and unaided awareness, both of which improved sequentially from the second quarter.

We continue to shift our marketing spend away from SEM to brand marketing and other initiatives. By the end of Q3, we delivered a double-digit increase in return on ad spend or ROAS as compared to before the launch of the new brand campaign. It is clear that our message is resonating with SMBs and the strategy is working.

Building on this momentum, we plan to continue to reinvest cost savings we've realized elsewhere into brand marketing. And as we move toward activating a larger portion of our SAM opportunity through diversification, our new campaign scheduled for later this year will hone in on existing SMBs. We are also expanding visibility through strategic partnerships and driving new customers through growth in our channel partner program.

As a reminder, last quarter, we announced 2 collaborations of our legal support with Perplexity and OpenAI. This quarter, we are deepening our relationship with OpenAI and have become the first online legal services provider for SMBs to sign an enterprise deal with the firm. Among other areas, we will be collaborating with OpenAI to further integrate our product experience into their platform. So expect to hear more on this in the near future.

Our comprehensive efforts, including the modernization of our affiliate platform, the development of an embedded flow that allows partners to seamlessly integrate LegalZoom's business legal services and the establishment of new strategic partnerships has successfully fueled a roughly 25% year-over-year increase in our partner channel for the third quarter. Shifting to our progress in leveraging artificial and human intelligence to deliver expertise to our customers, our strategic priority is to use AI to augment human expertise and create a more personalized experience.

Our OpenAI deal mentioned previously is a step in that direction, as were our earlier collaborations with Profplexitity and OpenAI. One of the key tenets of this strategy is to leverage AI to create higher-value do-it-for-me offerings that improve compliance and efficiency. This area, in particular, is critical in our shift to addressing the needs of existing and established SMBs. Last quarter, we talked about introducing the capability to auto file compliance requirements. Our first release was a state annual report product. We've been rolling this out on a state-by-state basis, and we expect to have roughly 80% coverage by the end of the year.

We've also developed AI tools to augment our experts and to drive internal efficiencies. Our AI voice training call simulator increases agent efficiency and shortens onboarding time. We also deployed a legal and Salesforce Wizard to reduce customer response times. And our AI trademark classifier now automates processes that were previously manual. In addition, we've worked with 1-800 accountant to launch an AI-driven appointment center, which will deploy under our partnership for the upcoming tax year.

Lastly, as part of our commitment to our AI strategy, we made an organizational change that I believe will help us to advance product innovation through the integration of AI and human expertise. As part of this change, we are instituting AI mandatory standards, including training, testing and utilization across the entire organization. We've also reorganized our teams to ensure that AI sits alongside our human experts and becomes deeply integrated into how we deploy technology and product.

To effectuate this, Aaron Stibel now serves as our Chief Business and Customer Officer, where he will oversee technology, product, sales and service, creating a division at LegalZoom that fully integrates the customer, the expert and our artificial intelligence work. We believe that under this unified vision from development to customer delivery, we can leverage Aaron's deep experience and comprehensive track record of building technology platforms that drive a rich customer experience throughout the product cycle. As a reminder, Aaron has held similar previous roles at Dun & Bradstreet, including Divisional Chief Technology Officer and Head of the small- and medium-sized business unit.

As part of this change, our former CTO, Pratik Savai, is no longer with the company. This was not an easy decision. However, we believe this is the right move to deliver on what we believe is an outstretched opportunity in human and artificial intelligence to transform our business long term. With our more direct focus on driving AI-specific technology into our products, we are also announcing that Matt Kumin has joined the company as Senior Vice President and Head of Product. Matt joins Legal Zoom from Amazon, where he served as Head of Alexa subscriptions growth, most recently leading the subscription launch of Alexa Plus, an AI-driven personal assistant. Matt brings more than 30 years of experience in the software and technology industry with deep knowledge of AI and customer-centric digital innovation. We believe his expertise will be instrumental in accelerating LegalZoom's ability to leverage AI and human expertise to increase value for customers.

In addition, to drive our momentum forward, we continue to bolster and expand our sales and service organization. To enhance cross-sell and upsell opportunities while elevating customer engagement, we've appointed Julie Mann as Vice President of Sales and Service. Julie brings nearly 20 years of experience building and scaling high-growth technology-driven teams, having led organizations at companies such as Tap Chat, Expedia and Optimizely. She excels at creating systems that drive velocity, operational discipline and world-class team performance. Her data-driven leadership and expertise at the intersection of human and artificial intelligence will further accelerate our sales momentum.

We are very confident that this organizational realignment will both accelerate and broaden our ability to deliver AI-powered technology when customers want it and high-touch human-powered service when they need it.

In closing, we've never been more energized about the future of LegalZoom. With a fully aligned organization, a strong balance sheet and accelerating growth, we are poised for even greater success and to unlock the next chapter of value creation. I'd like to thank the entire team for their efforts. Your dedication continues to drive our success.

I'll now turn the call over to Noel to discuss our third quarter results and outlook in more detail. Noel?

Thank you, Jeff, and good afternoon, everyone. As Jeff mentioned, we delivered another quarter of strong financial performance and operational execution. We continue to build a solid foundation for sustainable growth and profitability. We once again accelerated growth in our core subscription business while coming in above our expectations across key financial targets. We believe that the work we are doing positions us well to address the needs of existing and established small businesses and will enable us to broaden our customer base and capture greater wallet share.

Based on our better-than-expected performance in the third quarter and increased confidence in the remainder of the year, we are raising our 2025 revenue outlook. Before discussing our guidance in more detail, I will review our third quarter financial results. Unless otherwise stated, all comparisons will be on a year-over-year basis. We achieved record third quarter revenue of $190 million, reflecting 13% growth.

Subscription revenue also increased 13%, reflecting both accelerating growth and representing the second consecutive quarter of double-digit growth. Subscription revenue benefited from outperformance in our compliance and virtual mail offerings in addition to contribution from our important 1-800 accountant partnership and the addition of Formation Nation. We ended the quarter with approximately 1.96 million subscription units, a 14% increase as compared to the third quarter of last year. This growth was driven by the bundling of our bookkeeping solution and legal advisory subscription into certain business formation offerings, an increase in virtual mail subscriptions as well as the inclusion of subscription units from our Formation Nation acquisition.

We expect moderation in unit growth in Q4 from lower renewal rates of these initial bundled cohorts. ARPU was $256 for the quarter, down 3% year-over-year and flat with the second quarter. The year-over-year decrease was driven by a continued mix shift towards lower-priced subscription offerings related to the bundling of Form and eSignature, bookkeeping and legal advisory subscriptions into our higher-end formation SKUs.

Of note, we continue to see ARPU gains in our compliance offerings. Transaction revenue increased 12% to $65 million, driven largely by the acquisition of Formation Nation, along with growth in annual report and trademark filings. This was partially offset by the expected decline in BOIR revenue. We expect transaction revenue to grow at a similar rate in the fourth quarter. We recorded a 2% increase in transaction units to 259,000 due to the inclusion of Formation Nation transactions and higher annual report filings, partially offset by a decline in BOIR transactions.

We processed 126,000 business formations in the third quarter. The 12% year-over-year increase in business formations was primarily due to our Formation Nation acquisition. Average order value was $251 for the quarter, up 11% versus the same period last year, driven by the elimination of low-value BOIR transactions, coupled with a volume increase in our higher-priced concierge services. Finally, deferred revenue decreased by $0.1 million from Q2, reflective of the typical seasonality in our business.

Turning to profitability. All of the following metrics are on a non-GAAP basis. Third quarter gross margin was 71%, flat versus prior year. Sales and marketing costs were $61 million or 32% of revenue, an increase of 40% from prior year. Customer acquisition marketing costs increased $10 million or 30%. You may recall last year, we tested lower performance marketing spend levels to evaluate efficiencies. Non-CAM sales and marketing expenses increased $7 million or 75%, which is primarily a result of the addition of the Formation Nation sales team.

Technology and development costs were $15 million, down 2% and general and administrative expenses were $13 million, a decrease of $2 million or 11%. Our strong execution drove adjusted EBITDA of $46 million, representing a margin of 24%. Free cash flow was $47 million in the quarter, up 114% compared to $22 million for the same period in 2024. Our free cash flow improvement was in part due to an improvement in change in deferred revenue, lower capital expenditures, lower severance costs versus the third quarter of 2024, where we executed a restructuring and lower cash taxes from the impact of the One Big Beautiful Bill Act.

We ended the quarter with cash and cash equivalents of $237 million. Our cash position increased by $20 million versus Q2 '25, benefiting from strong free cash flow generation, partially offset by share repurchases. During Q3, we repurchased approximately 1.8 million shares at an average price of $9.91 per share for a total of $17.6 million. As of quarter end, we had approximately $112 million remaining under our authorization. Our $100 million revolving credit facility remains undrawn. With our strong cash position and healthy free cash flow generation, we plan to continue investing into our business in areas with strong growth potential while also evaluating strategic M&A opportunities.

Now turning to our outlook. We are pleased to have outperformed our third quarter expectations. As a result of our performance over the year and momentum in the business, we are increasing our full year revenue outlook for the second consecutive quarter. For the full year 2025, we now expect revenue between $748 million and $752 million, representing growth of 10% at the midpoint of the range. For the same period, we expect to achieve adjusted EBITDA in the range of $168 million to $170 million, which reflects approximately a 23% margin at the midpoint.

For the fourth quarter, we expect revenue between $182 million and $186 million, representing growth of 14% at the midpoint of the range. For the same period, we expect to achieve adjusted EBITDA in the range of $46 million to $48 million, which reflects approximately a 26% margin at the midpoint.

In closing, we continue to demonstrate progress against our 3 focus areas as we set the foundation for future growth. We have effectively repositioned our business to drive predictability, sustainability and profitable growth. We continue to be excited by the long-term potential of our business as we now focus our efforts towards serving both new and established small businesses. Thank you for your time today.

I will now turn the call over to the operator for Q&A. Operator?[ id="-1" name="Operator" /> [Operator Instructions] Our first question comes from Ella Smith from JPMorgan Chase.

Welcome back, Madeleine. So first, I was hoping to ask about pricing and bundling. To what extent is pricing and bundling contributing to your subscription growth? And how important of a lever is that as you think about your forward growth?

I'll take that, Ella. It is an important lever. It is by no means the only lever, but it's a contributor. And it's something that we're pleased with because it is in our control. And candidly, we have started to act like market leaders again. And as we look at even what's happening in the competitive landscape, we're seeing pricing going up with our competitors now as well. So they're following our footsteps. So we feel like we are doing our job as leaders in this space and continue to drive both price and value in the right place.

Got it. That's very helpful. And maybe we're throwing in a question about the -- sorry, did I cut you off?

No, I said thank you.

Okay. Great. For my second question, I was hoping to ask about the white glove concierge offering since it's newer. You employ and have a network of combination of attorneys, accountants and lawyers. Can you tell us how all these different players factor into the offering?

Yes. It's a great question and a broad one that starts with us really coming into our SAM and TAM. The idea here is we've got this massive addressable market, and we have been so myopically focused on a small piece of it. Those customers who are new formers who want to do everything themselves. So what we've done with these concierge-like products and our do-it-for-me offerings is we started to reorient the conversation around how do we solve the last mile for technology in a cost-effective way.

So whether you're coming in through traditional means, through search, through our brand advertising organically or now through artificial intelligence, as you gain increasing sophistication in terms of what you need done, at the end, you're going to want some type of expertise. And it's that combination of human and artificial intelligence that is going to be driving our products forward faster. Artificial intelligence, giving us leverage and scale and human intelligence giving us the difference maker that allows us to satisfy our customers over and over and over again in a recurring revenue model.

So where we're seeing strength back to the specifics of your question isn't just with concierge, but a concierge suite of products, finding those areas where things either are too expensive for a small business to use a lawyer or too difficult to do with technology alone. So we launched our first product which was concierge revolving around compliance, compliance concierge, had great success over the last couple of quarters and have now launched a series of others in that same category, nonprofit concierge, reinstatement, dissolution, entity conversion, and we're in the process of doing one with tax in partnership with 1-800 Accountant as well, which will launch likely next year so that we can embed their experts into our product line. The idea here is to give customers excess value at a reasonable but higher price than our typical ARPU.

[ id="-1" name="Operator" /> Our next question comes from Pat McIlwee from William Blair.

Great results this quarter. Jeff, I believe your prior connection with OpenAI was deemed a collaboration. But this quarter, you mentioned that you signed an enterprise deal with the company. I know you said more details to come on that, but would you be willing to elaborate at all on how that partnership has developed or any indications of what that deal entails?

Sure. And good question, and thank you for the kudos on the quarter. We're pleased as well. Appreciate it. I'll break it up into 2 areas in terms of where we think this can head and why we're so excited. I will caveat it by saying we signed that this week. So it's new, and we're going to build off of it. And it is an archetype for how we're thinking about these partnerships go forward. So the general idea is really twofold.

First and foremost, we want artificial intelligence to be ingrained in everything we do at this company. And we are making a statement and mandating that all of our employees are using AI deeply. But at the same time, we want to be tracking tangible returns and results. So importantly, some of the things that we plan on doing with OpenAI and with others is doing integrated product launches. And that was what I was referring to with respect to more to come.

We need to deliver results both on cost efficiency internally as we hand over some of that AI throughput to our experts to Ella's point, as well as be able to drive products that actually allow us to expand our go-to-market and expand TAM by embedding into some of these engines of growth and generalized TAM expanders as more and more small businesses grow more sophisticated about what it means to run and build a business.

So it is those 2 areas that we're really excited about. Again, we're in the early innings, but we're now partnering with some of the best and brightest and becoming more integrated. I've spent time over at OpenAI. We've had people come and sit down and work with us, and we've got our teams working together more and more closely. And I expect to see more things to come.

Okay. Great. That's very helpful. And while we're on the topic, just can you share how the early indicators of traffic and/or volume coming through those partnerships with Perplexity and GPT been? And I think for Perplexity, their Pro users are actually being offered discounted access to LegalZoom products. Can you talk a bit more about how exactly that works, what products they have access to discounts for and if you've seen any interesting disparity between the 2, given that I think one is discounted and the other is not.

Sure. And what I'll do is rather than speaking to any one partnership, I'm going to speak to the strategy and impetus, and then I'll provide some bread crumbs in terms of the success that we're having. Effectively, what we're doing is we're looking at the trends and seeing a massive shift, a, in traffic; and then b, in terms of quality of traffic coming from traditional means such as search to these more generative and agentic technologies. And what it is doing, and this is very much in line with what we are trying to do with our service and sales folks is it's moving from a search and answer to an education model.

So what we're doing with these partnerships is we're trying to get deeper and deeper embedded and build relationships with the variety of groups that we know we can drive real traffic that is qualified and that can turn into both sales and then ultimately higher quality customers that are staying with us longer. And what I will say is we have seen a significant shift in terms of our growth of traffic from these AI engines as well as conversion rate. And the customers that are coming to us are in our parlance, better customers than we see that are coming from traditional sources.

They have a higher propensity to pay. We believe that they have a higher propensity to stay longer. They are better educated so that when they get to us, they need us to complete the last mile, not the first mile. And we are starting to see customers come who have already formed, who have existing businesses but are looking for us to solve problems. So across the board, in effect, what we do as we sprinkle our opportunities across that broad mandate, we're actually able to push to a broad number of sources, which allows us to diversify our go-to-market.

[ id="-1" name="Operator" /> Our next question goes -- comes from Trevor Young from Barclays.

Great. First one for Noel. Can you share the Formation Nation contribution to revenues in both subscription and transaction revenues, respectively?

Yes, absolutely. So Formation Nation, first, I should say, we're really happy with the results that Formation Nation is helping to drive in our overall equation. And we've made a lot of effort to integrate them quickly and really think about it as part of the LegalZoom brand and ecosystem. And we're sharing knowledge and we're making decisions between the 2 operations that help drive the overall growth. And so one of the things we've been spending up in marketing there, making some operational investments as well.

And so during the quarter, they were able to drive $9 million -- approximately $9 million of revenue on the transaction side and a little over $5.5 million on the subscription side. So nice sequential improvement there. They're meeting the expectations that we had for them as part of our acquisition thesis and even exceeding that. So it's a nice contribution, but it's certainly driven by that collaboration.

And the nice thing, just to add one important piece as we get back to diversification, which helps to insulate us from risks, you see that strategy working well, which is our value-oriented program now. But outside of that, we're also seeing strong organic growth. So we're seeing wins come from both channels now.

I appreciate all that color. And then, Jeff, one for you. On the deeper integration with 1-800, that partnership and the bundling that you alluded to next year, how do you envision the economics to work there? And how do you think about kind of the shared burden of cost to serve as well as customer acquisition costs, for example?

It's a good question that is more complicated to answer than just give you a direct one because I think it depends on the product offering and the launch and the way that we're going about it. But the core business, we've thought about it as a minimum so that we know that we have a certain threshold of revenues and profitability coming in and then a rev share on top. And then some of these ancillary products, we're looking at on a case-by-case basis. Most of these tend to be highly accretive to the bottom line.

So it's really a function of making sure that we participate on the accelerated growth where we have these deeper integrations. Not lost on you, I'm sure. This is part and parcel to the knowledge we gained when we launched our own tax products, both the success and the challenges that we had. And I think we're taking the best of both worlds as we integrate these new products. So I suspect we will see us getting closer and closer to 1-800 and any other partner, frankly, where we have the kind of success that tells us this is what our customers are looking for.

[ id="-1" name="Operator" /> Our next question comes from Michael McGovern from Bank of America.

Congrats on a great quarter. There have been some headlines this week even about to the extent that LLMs will provide legal advice or services based on their current terms of service. Do you have any insight into the future of that and how your products can help balance meeting customers where they're at versus potentially needing some level of additional certification or credential when customers receive legal advice produced generatively?

Thank you for that because it's probably the most strategic important question for us and one we have thought about deeply, one that has driven some of our organizational changes and one that's been informed by talking to and working with some of the partners that we have as well as some really bright minds in the space.

The short answer is we also believe that will happen. We expect it to happen, and we're embracing that happening. And it is part and parcel to our go-to-market and go-forward strategy. The idea here is just like why we thought in the beginning, we needed to have our salespeople owned and operated and why we need a broader base of experts. The most important thing we can do as a community is to educate these customers. These small- and medium-sized businesses need to be educated about their legal needs.

So as LLMs make these potential customers more sophisticated, it effectively massively expands the market because what ends up happening when you look at the questions that are coming into LLMs is people are coming in thinking that they are asking a nonlegal question and leaving and going, I have a legal problem. I have a legal matter. Some of that can be solved through Q&A with technology if people are patient and willing to do it and know whether they have something that is an aberration or phantom or whether it is actual real strong advice. But most of it needs some type of validation, and that's where we come in.

So when we talk about solving the last mile problem, what we mean is the connected tissue between the Q&A and the intelligence that is needed to solve a legal problem is narrowing with technology. But that gap will not close. You will still have some need for service, whether that's an expert, a paralegal, a lawyer or some type of integrated LLM product that can be backstopped by those experts so that there is oversight. That's where we come in. And that's why most of the AI and LLM community is embracing us because whether it's agentic or generative, there still needs to be some sort of feedback loop that has human intervention.

And that's where LegalZoom can play and where I think we are differentiated to a point where no one can compete with us because we have always been technology native and technology forward. And we are sitting on an expert war chest of thousands of partner lawyers and owned and operated law firm, experts in our sales and service team, and we are expanding into other categories where the legal to whether it's accounting or business manager or business expert bridge starts to blur so that we can provide broad-based advice because half of the time someone comes in with an accounting question and it ends up being a legal question and vice versa. It's the most exciting opportunity we have.

[ id="-1" name="Operator" /> Our next question comes from Matt Condon from Citizens.

My first one, just obviously, over the past several months, the business formation environment in general has been a very healthy environment. Just, Jeff, you've obviously been driving on subscriptions and trying to decouple from the macro environment. But just can you help us understand how much of the outperformance over the past couple of quarters has been just macro driven versus the things that you guys are doing internally to really drive performance?

So on small business starts, you've heard this repeatedly from us. We are weaning our way off of that as the dominant form of how we take in, in particular, new businesses. And this is all focused on our ability to not just grow our business, but to grow in a diversified and insulated way. That doesn't mean we're not still highly dependent on small business formations. We will be for some time, if not for a very long time. It will be a key component of our strategy.

And to the extent that the macro is up significantly or down significantly, right now, of course, we don't know. But where we have tailwind, we're going to use it to our advantage. Where we have headwind, we're going to start diversifying. But the key thing here is we're working on more of the TAM than we ever have before. And this is how we drive into our serviceable market. So when you think about what we're doing on diversification, we're now starting to do brand marketing, not just performance marketing. We're now leveraging partnerships to drive subscribers, not just revenues.

We're now leaning in on existing businesses, not just new businesses. We're leveraging AI in a way that we weren't a year ago, not just search to deliver new business. And we're building out product suites on the DIFM side, not just DIY. So I think that this is really critical to understand. We're not ignoring the macro. What we're saying is it will no longer be an excuse for us. We will have enough levers and leverage in the business so that we can manage through macro uncertainty as we're in right now or negative macro situations, whether it's the small business formations one that plagued us previously or the next one that comes up as we diversify and become more dependent on AI or something else for growth. We're managing our business as a diversified insulated growth-oriented business now that we have stabilized it.

Maybe just double clicking on one thing you said there, just going after the existing businesses. Just are there any things that you could call out today that you see that are working? And just maybe just talk about the strategy more broadly and how do you bring those businesses onto LegalZoom platform?

Sure. I actually think using our concierge products, in particular, compliance concierge is probably the perfect case study. We launched this as an MVP. We started going after existing businesses that were in our ecosystem. We started to listen to our service folks, and they told us which products were of need for our customers. We effectively built a broad matrix that we looked at for determining what next products that we would launch.

We went from compliance to nonprofit, reinstatement, dissolution, entity conversion. We're now launching something in tax, all because the demand was there on the high end and for the most part, because these were subscription. We're now pushing this over to Kathy and her team on the biz dev side to say, go to existing partners and figure out where we can solve and satisfy their needs. Let's listen, let's learn from their customers and start going into those channels.

And then Daniel and our marketing team and saying, where can we go to market directly and start marketing to existing businesses, whether that's through AI, through some of our brand campaign, which we're going to be shifting towards the latter part of this year to speak to existing businesses. And ultimately, you can imagine we're going to go further and further down that path because these are businesses that are more stable, that are more insulated from risks of recession and ultimately have and are willing to give us a higher share of wallet.

[ id="-1" name="Operator" /> Our next question comes from Ron Josey from Citi.

This is [ Jake ]. I'll try. So just the questions. First was really just on the partner channel. The 25% growth seems like a strong acceleration. How much of that was driven by the new embedded flow versus the traditional affiliate platform? And maybe just spend a moment on that flow. I mean it was pretty recent launch. Could you elaborate on what the economic model looks like? Is that kind of part of your strategy to target existing established businesses?

Sure. Happy to take that, Jake, and thanks for the kudos on the quarter. I'm going to start to sound like a broken record. This strategy is about diversification across the board. We want to make sure that we're insulated. So first off, that 25% year-over-year growth, we put that number out there because we think that, that is a new baseline and that we can continue to grow it. We're very pleased about what our partnership team and business development team have done to date.

But it is underwhelming, in my opinion, compared to what they're going to deliver in the future. And the reason is because we are now launching products for products -- sorry, for partners, and we're listening to what their needs are. Embedded is a key need. And yes, that drove a portion of that growth. Leaning in on our affiliate channels and treating these partners, not just as low-level affiliates, but as true partners and building out solutions for them was another key thing.

The deeper integrations that we've done with companies like Design.com is another good example of a success point that we will continue to lean in on as well as working with some of our existing longer-term partners who we continue to think highly of, and they've been moving mountains to help us such as Wix as an example. And then, of course, what we've done in our AI ecosystem.

So when you look at this, the percentage increase is coming from a myriad of sources. And each one of these is working to a varying degree. Not everyone will ultimately be successful. But the idea here is we're trying to put out multiple singles and doubles and triples. We're not looking for grand slam home runs. If we get one, we'll take it. I'm not adverse to getting a little bit lucky, but we will acknowledge when we're lucky and get back to work.

[ id="-1" name="Operator" /> Our next question comes from Elizabeth Porter from Morgan Stanley.

This is Lucas Cerisola Morgan Stanley on for Elizabeth Porter. You spoke to the success of the new brand campaign earlier this year and the double-digit ROAS. What other impacts have you seen so far, both in terms of awareness and conversion metrics? And what learnings are you carrying into early next year when new business formation activity typically picks up seasonally?

So really across the board, we've seen success in this brand campaign. So both aided and unaided awareness and ROAS. I mean, you can run the metrics down from there because that means it's going to be helping with conversion. It's going to be helping with traffic. It is going to help our performance campaigns to perform better. And then ultimately, it helps us garner more partners because it reminds the world that we live in and that we work in that LegalZoom is the dominant brand for new, and this speaks to your next question, existing and established businesses long term.

So first and foremost, it reminds us that we need a diversified approach to marketing. We were highly dependent on performance and in particular, Google marketing previously. We have significantly diversified away from performance and away from Google into brand, into AI and into other areas, and that's paid dividends.

Second, in terms of those learnings, we've realized that as the brand leader, building out our brand, strengthening that reinforces both our messaging, our brand prowess, but also our authority. And authority matters in a big way when you see something like you're seeing with AI happening right now, which is a fundamental platform shift. And you don't see that very often. And to capitalize on that, you've got to get there very early, very aggressively, and you've got to maintain market leadership. And that has driven us, I think, to some early wins that we're going to be able to carry forward next year.

Got it. And then just one more on subscription growth. It's been really solid last couple of quarters.

Thank you for that.

Yes, of course. Comps get pretty tough into next year. I was hoping if you could touch on what other key factors we should keep in mind for modeling subscription growth from here, in particular, how you're balancing volume growth versus ARPU and whether there's going to be any near-term headwinds from lapping M&A, prior price actions or product launches?

So you're wondering if we'll become the victims of our own success. I mean, look, I'm glad that the comps get harder next year. It means we performed this year, and that means we performed worse last year. Our expectation is we're going to continue to perform, and we're going to continue to accelerate. We are, at our heart, a growth-oriented business, and we believe that we can deliver results. And on the subscription revenue side, we've continued to see progress both year-over-year and quarter-over-quarter. And that is a key focus area for us on a go-forward basis.

On the unit side, it's a bit of a different story. We've communicated that on the unit side, we are using unit growth through bundling to drive tests. So that will jump around. But when you look at our core products, and I think Noel can speak to this more, we're seeing the right things and the right signs. With our core compliance products, we're seeing subscription growth. We're seeing churn reduction, and we're seeing ARPU head in the right direction. And those are all trends that speak to a really solid roll forward as we head into next year.

Yes, that's right. Just to build on that. I mean, these are the trends that Jeff was just speaking to and the initiatives that are driving our current growth. We like what we're seeing. We have high confidence in them, and they represent durable growth opportunities for us. So that, to Jeff's point, is driving performance today, but will carry forward into the next year.

[ id="-1" name="Operator" /> Our next question comes from Brent Thill from Jefferies.

This is [ John Bien ] for Brent Thill. Question is around the sales side. So I think last quarter, you mentioned you had some reps from Formation Nation moving over and selling some of the core LZ products. Wondering how that worked out? What was the productivity? And then on some of the executive changes and strategy changes that you mentioned earlier in the prepared remarks, I mean, wondering how you're thinking about how that will translate into go-to-market changes for next year, anything in the sales or incentive structure?

Sure. I'll take those in order, and then Noel, feel free to add anything when I miss it. On our sales throughput and velocity as a company, we've seen steady progress, and we're actually pretty pleased. We have now taken an entire sales center from Formation Nation and shifted it over to LegalZoom, in part because they have so much embedded knowledge and learnings in terms of how they educate their customers and onboard them. And we're actually very pleased with the progress and success.

In the same vein, and this leans to what we've done operationally, we brought Julian because of the ability to really integrate sales and service into everything that we are doing from -- to be a customer-centered organization. Speaking to what we can deliver and the organizational changes that we made, I'm not even going to speak to next year. I'll speak to this year. You heard in our prepared remarks, we launched 3 or 4 AI products this quarter. We wouldn't have been able to do that if we didn't do this reorganization. We were able to very quickly deliver on those AI products and integrate them into our back office, whether it's to our experts or to our service folks.

In the same vein, we launched almost a half a dozen concierge products. Again, in the same vein, you wouldn't be able to do that if we didn't have our technology teams sitting hand-in-hand with our service folks. And then finally, I'll say we're able to lean in on savings that we're generating internally now from technology efficiencies and then port that over to building products, leaning in on AI and driving our marketing forward as the throughput increases without any margin deterioration. Same thing. Without that operational change, I don't think we would have been able to do that so quickly and so seamlessly.

[ id="-1" name="Operator" /> Thank you. I am showing no further questions. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.