LegalZoom.com Inc. Aktie

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.

All right. We are on the clock. So great. We'll get started here. I'm Ron Josey, I cover the Internet sector here at Citi. And I'm really happy to have with us today, Jeff Stibel, Noel...

Watson.

I almost said a different name. So Noel Watson, of course, from LegalZoom. Jeff, you've been the CEO now, you stepped into the CEO role about year and a quarter ago. Is that about, right?

Yes.

Noel, you and I have known each other for a while now. I think you've been here since IPO.

That's right.

So actually, I'm really looking forward to this conversation because LegalZoom is a market leader. I think we all know that in online legal and compliance services. But we're expanding to newer businesses. We're doing a newer mix shift to subscriptions. And so hopefully, we'll dive into all this stuff. So Jeff, we'll start off with you, right?

So you're about a year and 2 months, year and a quarter in -- at this role. Of course, you've always been part of the company and aware of the company. But a lot has changed in the past year. And so I would love if talk to us a little bit about the changes that you've put through at the organization and sort of where we are in that journey of the evolution of LegalZoom.

Sure. And I think when you look under the covers deeply, you've been deeply involved with the business, so it looks like a lot has changed. But strategically, we've only made two relatively simple shifts and done that using a third to open up TAM. First, we started to reemphasize our subscription business. So we have an emphasis on driving that subscription business forward. And that's been punctuated over the last quarter with maybe showing accelerated 10% growth. We expect that to continue. And the second thing is leveraging this notion of augmented intelligence.

So LegalZoom being the leader, one of the things that we do better than anyone is provide premium legal and compliance services. But we were in our zeal to capture more of the market, we were going down market. So we moved back upmarket. We started launching another number of do-it-for-me products, both in compliance, legal and otherwise. And we did that by expanding our TAM by focusing on other channels outside of what was historically our top of funnel, which were in corporations. You look at those 2 plus 1 thing strategically, a lot underneath it, that's what's driven the transformation and the success to date.

So one of the things I think we -- when we went through the call and we spoke afterwards, there's sort of three key focus areas for the business. And you mentioned subscription, of course, but then also leveraging AI as well. And of course, there was the acquisition of Formation Nation. Let's -- maybe we can unpack of those three, so organized subscriptions, go-to-market strategy, leveraging AI. Let's unpack each one of those one by one and try to understand sort of help us understand where we're going.

So subscription business, back to double-digit growth ahead of plan, I think, was the comment. Compliance packages were highlighted as a strong demand, booking, et cetera, but do-it-for-me is sort of like going forward. So just walk us through the drivers of double-digit growth is fine for 2Q. But when you see this going out for the next umpteen quarters, like what's going to drive that subscription growth to this consistent greater visibility so Noel can sleep better at night, et cetera, et cetera.

And again, that really three-part strategy is what drives it. It creates durability because it insulates us. If you look at that push to subscription, why? Because a business that is oriented towards subscription drives durability, drives sustainability. Ultimately, if you're providing greater value for your customers over time, your cost of acquisition is lower and you retain those customers, and it's a lot cheaper to keep a customer than it is to bring in a new one. The notion around finding new addressable markets, right, different go-to-market channels. The idea there was we were so beholden to small business starts that we were only able to grow so much as that macro was growing by decoupling from it, which we have largely done at this point.

We're able to use that as a key channel, but not the exclusive channel. And we do all of this by creating a new product strategy around AI. And this is what I was referring to when I said augmented intelligence. What most people are thinking about when they think AI, they're thinking about using AI to replace humans and experts. What we're talking about is to leverage AI to make our experts and expertise more scalable. So what we were able to do with a lawyer covering 10 customers, we can now do with 1,000 or 10,000.

That's ultimately the goal in those umpteenth quarters because ultimately, that will drive scalable, profitable growth. And we're in the early innings, but we've already seen some pretty strong proof points. We're seeing long-term churn trends going down, particularly in our compliance products, we're adding value. We're seeing ARPU in those products going up. And the services that we're launching around do-it-for-me and concierge and these higher-level services that are leveraging both robust technology and AI as well as expertise, we've got more demand than we can fulfill right now. So it's pretty exciting.

And so let's unpack the -- a few of this. Decoupled from macro, hard to do. Talk to us, I understand leveraging AI to scale up and to do -- to be able to service so many more, but how do you decouple from macro?

So you can't decouple from the macro, but you can decouple from a macro. And our -- the macro that we were dependent on was formations and small business starts. And the reason was because our top of funnel was exclusively focused on driving new customers who just started the business. So when you think about some of these new products that we're building right now, so let's take our concierge compliance product. Historically, what we were doing was we were selling someone of formation and then attaching a compliance product because that's all we could do.

That was the only value that we add. Now with a true DIFM suite of compliance products, we go to existing customers and sell them compliance. So we can upsell and cross-sell. We can go to partners and leverage those partner channels, whether it's with one of our existing partners or a new partner and say, you have existing small businesses that we weren't able to penetrate into before because they've already incorporated. Now we have a suite of products that will make their lives easier, will be robust across the board and where you can earn a bounty.

And that's just on compliance, that changes our macro from being solely about small business formations to being about small business, longevity and success. But moving more into consumer is another good example. Right now, we have a relatively small trust and will set of products. And that suite is largely transactional. As we move that to subscription, that is yet another macro. So what we're trying to do is diversify across multiple macros, so we're protected from risks of cyclicality and seasonality that keeps us more insulated.

And so how are we merchandising our products? So as we move from a macro to subscription, so completely understood. And we have a good amount of subscribers already, a good amount of everyone -- the brand is very well known. And so you need the products to sort of decouple from a macro. So talk to us about the merchandising. So the -- I love the concierge comment earlier. But how do we -- how does LegalZoom better enable users to say, oh yes, I would like this product or the merchandising of it all?

So it's interesting. It starts before we productize, before we package, before we market with education. And it is one of the things that I think we have gotten better at, and we'll start to excel at. It's a filtering process. Rather than enabling the customer to filter themselves, what we're now doing is we're pushing education their way so that they can make informed decisions, and they can understand what it is that they're about to embark on.

And how are you pushing it their way?

Yes. So we're doing it in a multifaceted manner. So if you look online at our website, we're now orienting people to the areas where we think they will succeed best, not necessarily the cheapest product, not necessarily the most expensive product, but where they will succeed based on the category, based on their longevity, based on their experience. We're working with AI right now. We see the same risk that others see in AI. But for us, it is a far more exciting opportunity than it is risk. Rather than just market through performance marketing and Google and SEO, leveraging AI helps to expand our addressable market.

The TAM opportunity, particularly in legal with AI versus search is enormous if you think of it as a way to educate your customers. Most customers, when they go and they think about searching for something, don't realize initially that they have a legal problem. With search, you're going to get a result that is based on the query that you get. With AI, you're going to get a result based on a question-and-answer interface. And what we're seeing is that's actually a TAM expander for us. So it is one of the reasons why we decided to start collaborating with OpenAI and Perplexity because what they are doing for us is opening up the TAM.

And there is a last mile problem in AI, like there is with all technology. And we solve that problem in legal, and we can solve it for SMBs more broadly, which is when you need that human interaction, when you need that expertise, when intelligence fails to deliver expertise and you need to do a handoff, you need a company that is as versed on the technology side as they are on the knowledge worker side. Lawyers and law firms can't do the technology piece, and the technology-only providers can't and don't want to do the service piece. We do both.

That's a great way to say it. And I think having that interactivity with an agentic approach, you can get to the bottom line of what people are looking for as opposed to links that may not go anywhere.

100%.

And you don't know where that goes. So let's talk about your Perplexity. And I think we announced partnerships with Perplexity, with OpenAI. I think we have Doc Assist as a new tool. So where are we today on these tools? I think we're awfully early. And then say a year from now, we're sitting here, what are we talking about?

Yes. I hope we're at one one-hundredth of a percent of where we can be. And I believe that there is that much opportunity here. And I would argue that a lot of what we are doing is testing and signaling. We're open for business. We're leaning in aggressively. You've got the largest players in AI wanting to work with us because they see the same problem on their end that we see, which is that last mile of when you need that human interaction. And we're inserting both product and partnership to fill that gap. Very early. OpenAI, we announced less than a month ago and Perplexity, not much before that. We're testing and feeling our way through it. The one thing we're not doing is giving out data.

So that was the next question. So why would -- why do Perplexity and OpenAI want to partner with LegalZoom, why does LegalZoom want to partner with.

So they're doing it because ultimately, they'll fail their customers if they don't.

They don't have that deeper knowledge.

The deeper knowledge and the ability to connect in our cases with a lawyer, a lawyer, a paralegal, service rep because even when you look and prepare a document, say, a will, with ChatGPT, for example, and it looks good. And you say, wow, they do a pretty good job. You're doing that as a researcher. When you do it as a human being and you then print it and you hand it to your spouse and say, let's sign it and put in a safe. The next thing you do is say, I want to talk to someone because I don't know what that word means. I don't understand that paragraph. I don't know if we're doing it in the right state. And I don't know if Darren Beattie is the right person to be given my cat to.

So the reality is they're getting that feedback themselves, and they realize that we solve that problem with a smile on our faces. We're doing it because they're opening up TAM for us. We've got customers that didn't realize they had a need for a legal service that are going on OpenAI and Perplexity and others and saying, wow, I didn't realize that was even a legal question that I was asking. I better talk to someone. And their choice is going to be talk to a lawyer that's going to be $1,200 an hour or $10,000 flat fee or for $1,000, all you can eat, you'll get to work with LegalZoom who is technology enabled, but will also complete that last mile and when and where you need to talk to someone, we'll have someone available for you.

That's great. So a year from now, one 100,000 of a way there, right? We have a long way to go, but a huge opportunity, understood the macro and the subscription. Let's talk about a pretty interesting change that we had earlier in the year with the Formation Nation acquisition. So we're about 6 months into this. Still early days, but we're starting to see the benefits. And so walk us through just the vision here and more tactically sort of the integration and the change to the business. And then Noel, from an M&A standpoint, want to get -- to have you get involved here and sort of like how you view the M&A sort of deal strategy. But maybe, Jeff, let's start with you, talk to us about the vision and more tactically with...

Yes. And I'll answer that through that -- through the lens of those three strategic pillars because it fits perfectly, which is why this has been such a successful acquisition that we bought right? It was an accretive deal. And I'll start with the addressable market point. We were devaluing our brand at LegalZoom by selling transactions and going down market and selling free formations. It wasn't what we should be representing with LegalZoom. LegalZoom should be the premium in the space that is offering value relative to lawyers. Instead, we were competing with Secretary of States. So in part, we bought so that we had a second brand so that we didn't lose that market.

We didn't cede it to competitors, but we didn't dilute our brand value. Second, from a subscription standpoint, this business was predominantly transactional. It looks like LegalZoom did 8, 10 years ago, which means we know what we can do over the medium and long term to port those customers over to be a subscription-oriented business. And then from this notion of augmented intelligence, AI with human expertise, they were sitting on 120 experts. These are reps and customer service people who are each and every day solving problems for customers, and we effectively inherited that for free. So that was the core reason.

And we're now 6 months in, it's hit your three pillars...

And then some, although even there, early innings, we have been slow to push them on the subscription side. I would say we're lightest there. On the AI and service side, we have been really quick. In fact, one of their expert centers is now exclusively focused on legals and customers. And the addressable market situation happened day 1, meaning we were in a long-term M&A deal with them and felt right, looked right, and we started to reorient our marketing efforts even before we closed, which is great. So two out of the three. And the third, you've got to get right, having done a lot of subscription optimizations in my career, you want to be measured in terms of how fast you move.

Sure. Noel, on the build versus buy or as you evaluate M&A, what are the criteria that the team looks at?

Yes. I mean I think first and foremost, it's important that you put yourself in a position to be able to do that analysis, right? And we have developed a really strong balance sheet. We have over $200 million of cash on the balance sheet. We're debt-free. We're generating strong free cash flow. So that gives us a lot of flexibility. On the build side, it's more of a narrow scope. First, we look at what can we -- what do we need to fund the business organically. We feel like we're resourced in a way right now that we are funding some of the initiatives that Jeff just talked about within our existing resourcing envelope. And we're driving efficiencies in the business that are helping us to reallocate resources to do that.

On the sort of the buy and partner side, a little broader, where build kind of narrow focused core legal services. This we look at adjacencies, right? If there's something that our customers need that we're not providing today, then that's something we would look at. Customer acquisition, right, something even in our space, like a Formation Nation, we spend a lot of money with the Googles and the Metas to acquire customers. This is another opportunity to acquire customers. And we're definitely focused to Jeff's earlier point, on things that once we realize the synergies will be accretive to our business. So we're being smart with our dollars as well.

That's great. Do you think we -- are you constantly looking for acquisitions? Are we digesting Formation Nation? Like how do we think about...

Well, there's -- we have an active pipeline. We're out there having lots of conversations. There's lots of activity. So we feel like we don't need to necessarily do something. But if we find something that checks all the boxes, we're going to be opportunistic and lean into it. And we look at Formation Nation as a successful indicator on how we might go about it.

Got it. Perfect. That's really helpful. Let's dig in a little bit more on the do-it-for-me approach. Compliance Concierge, that was certainly highlighted. I think we're testing four other premium services that are do-it-for-me products. Would love just the strategy and the road map or just the strategy, like why are we talking about do-it-for-me now? And I think your answer is upper -- moving upmarket. But talk to us about the journey to get to DIFM, right? And then what the -- any insights on what these four other products might look like?

You bet. And you nailed the answer in your question, right? The need to move upmarket is critical. We have always known that as a company. But the way in which we did it was through a funnel approach, which meant we started at formation and then we moved with our customers upmarket. The problem is you've got a throughput problem if you do that. There are north of 30 million businesses that are already in existence here in the U.S. If you can't actually penetrate into those businesses, what you end up with is a market of new businesses that are quite small and risky.

The vast majority of our churn in the first year are businesses that go out of business. It is still worth it to play in that market if you have a good filter because you don't want to take a business' money and make it more punitive and harder for them to actually survive. So the idea is, in some respects, to use this to self-select. A business at the start who wants us to do something for them as opposed to them doing it themselves says that my time is worth more than my money right now, which means they have a viable likely going concern.

It is the same thing that we see when we look at businesses 12 months out that have survived that most difficult period, which is you see time and elasticity going way down and price and elasticity going way up, meaning they're willing to open up their wallet if you can save them time on things that they don't get value out of. That's where DIFM comes in. That's where these concierge level products become so critically important. And it's also a market that no one serves in the middle. You see it at the extremes, which is DIY on one end and then full service on the other.

Very few people, especially in the legal tech and legal space are doing these technology-assisted expert models. So as we got in and we started looking at the real opportunity, I was jaded because I came here because of AI because I saw the tremendous opportunity that we could leverage AI in a way where we couldn't unlock technology for anything other than pure automation before. But the exec team sort of sat there and said, how do we take advantage of this? How do we capitalize on it? And we realized if we can take our 1,200-plus lawyers, our 1,000 footprint or so sales and service force, and we can double, triple, quadruple their capacity and throughput, that type of unlock allows us to drive margin expansion and do so by driving better results and value to our customers.

And that's where we came up with the Compliance Concierge product. And we started testing. I'll give you one more teaser for a product I actually don't like because it's transactional or at least it's reoccurring, not recurring. We have a Dissolution Concierge product. We realize that there are a lot of successful entrepreneurs who start a business, it hard fails. And then the business just sits out there because they don't have the time, they're thinking about their next business to actually shut it down, but they're accruing fees and taxes and all kinds of penalties.

They don't want to use a DIY service, and they definitely don't want to spend $10,000 on a lawyer. It turns out they want to spend a few thousand dollars with LegalZoom to do it because, again, we have more demand than we have supply because we don't want to be doing a lot of work on the transaction side for a company going out of business. We also know that these are the ones who are going to start businesses, which is why we did it. But it just shows you that in every facet of business, there are compliance and legal needs that we can serve our customers better as they grow.

And the four -- as we see newer products come on, there'll be sort of the concierge like help me do X, help me do this.

Yes. Reinstatements is another one that we talked about, right, where...

It's a great one, yes. It's the inverse.

Yes, exactly. Customers that have gotten out of compliance aren't aware of it. We let them know. And they essentially -- they say, hey, I want to get back in compliance. Can you help me? Can you do it for me? I want to continue to run my business. And that leads to a product that helps them get reinstated, but then an ongoing relationship in managing their compliance for them moving forward.

And Ron, we even talk in a couple of weeks, so there's more than four.

All right. That's exciting.

And the reality is that that's true, right? We're doing rapid deployment to see what works and what doesn't. And even things as simple as like automated annual reports. The amount of companies that don't even file an annual report as an SMB is huge, and those are real fines in states that require it. We've done a very good job of telling people to file an annual report. It doesn't mean they actually file the annual report. So even with our DIY compliance products, you see a large number of people who've never filed. Now we're able to actually say, we're going to do this for you. We're going to charge you more. And that's also going to drive engagement and reduce churn.

So tech, when you want it, human support when you need it. Sounds familiar. The new brand campaign, new tagline or whatever. I think that rings true to everything we were just talking about here. Talk to us about the goals here. And specifically, like what -- it's sort of like a reintroduction of what LegalZoom is doing as we go up of the stack or up the funnel a little bit here. So tell us a little bit more about the new brand campaign, about this -- about the new LegalZoom, what else is coming out of it? Would love to hear how we hear more about this in trade and everywhere else.

Yes. And it's interesting. The new LegalZoom is also the old LegalZoom. I'm falling in the footsteps of my predecessors like Dan Wernikoff and John Suh and Brian Liu and Brian Lee. They all had the right vision, and they all were successful in their own right, we're just reorienting and repackaging based on things that we can achieve now that we couldn't then. They had the vision, thankfully, because I can barely see in front of my feet, so I don't have that vision. But I don't mind borrowing from these guys who were great.

So step one is reorienting to take advantage of the latest technology, which is artificial intelligence and being able to integrate that with our experts, proof that model out, this augmented intelligence in legal. There is no reason that step 2 couldn't be proof that now outside of legal. If we can show that we can dominate in a world where we combine experts and AI, there's no reason we can't do that in other spots and spaces as well.

And while that is longer term and more visionary or aspirational, if we will earn that right as we demonstrate that we can do this better and more effectively than others and demystify kind of this notion that with service comes cost and comes margin compression, right? We're not seeing that. In fact, if anything, we're accelerating margin by driving expertise into our products.

That's great. And so this is launching now or coming out in the fall, the new campaign? [Technical Difficulty] brands out there now. And so I think we're seeing early proof points on traffic. But maybe talk to us how we might be better tracking or seeing the results of this campaign.

Yes. We're super excited with the results that we're seeing thus far. We launched it in the second quarter. We started to see improvements in direct traffic to site, branded searches, great indicators that it's working. We did this within the -- largely within the spend envelope. So we're looking back on some of our performance spend, spending into brands, so really optimizing across channels.

And so while we -- back half of Q2 and into the start of Q3, we really started to see some improvements in traffic trends and also very importantly, improvements in return on ad spend in aggregate. So generally, when you're launching new brand campaigns, it's a little bit of a slower return profile. So to see that happen pretty quickly in the aggregate profile was really reassuring in that we've kind of gotten to a more optimal mix across channels.

We have to remember, I mean, the company spent over [ $1 billion ] branding this business. And LegalZoom is a pretty indelible brand right now. So we're, to some extent, punching below our weight operationally and need to grow into our brand. Most people I talk to have heard of LegalZoom and what it stands for is pretty potent. So we're leaning back into that.

That's great. We have about 5, 6 minutes left. Any questions in the audience before I move on?

[Technical Difficulty] how do you think about [Technical Difficulty] just generally, but also in terms of what to expect.

So it's an important component. And we look at that in the same way that we look at partnerships, our brand campaigns, our performance marketing, AIO. It is both important to have diversification. So you're not dependent, too many companies are just dependent on Google Search. So reducing that dependence is really important, a; and b, promotions, if you have the right fit, someone like an Amex, who we work with for quite a long time, you have that right fit working with Citi too.

We'll talk about that afterwards. You're building both brand identity, right, because you're drafting off of a strong brand that speaks and resonates to your customers and also driving performance. So we've leaned in more heavily in terms of promotion and sponsorship and direct partnerships for driving business to us than I think we have probably ever in the past.

Maybe as a follow-up to that, let's talk margins here. Well, so guidance, we raised '25 revenue guidance, I think, because of the mix shift to subscriptions and greater visibility. But margins sort of stayed the same, around 23%, I feel. So would love to hear the focus on growth, the focus on investments. And then as we think about -- maybe we don't have -- as we think about margin expansion, maybe in the shorter term, we're investing in growth here. But talk to us about how you think about margins longer term.

Yes. So we're super excited about the performance year-to-date and kind of our forecast for the year and being able to take up our revenue guidance. And obviously, with the higher revenue expectation and reiterating our margin target from an absolute EBITDA standpoint, we expect to drive more than we had laid out initially. So all good things. There's lots of work that we're doing around infrastructure. We've made a lot of infrastructure investment over the last 5 years. We're leveraging AI now to help drive efficiencies. So we're still in that middle innings of some of the efficiencies that we think we can generate within the business.

So that helps us -- that gives us some visibility and some confidence into leverage moving forward. We've been really focused on balancing growth in margins, margins. We're in the single digits just a few years ago, and we're -- the last couple of years. I think this year; our target is increasing margins by 1 point. It was 4 points from the prior year. So we've been on a steady course. So definitely taking a balanced approach to it. We want to try to reaccelerate revenue growth. You're seeing that now but maintaining that margin profile. And so as I said before, a lot of it we're solving within the existing resource base. And so that creates some natural leverage as we grow the top line.

And now that we have that margin, I mean, solidly in the 20% range, I think LegalZoom does have a buyback in place already. I wanted to understand just the capital allocation strategy as you try to -- as you balance the cash balance, to investing in the business, potential M&A and of course, the return of capital.

Yes. I think the investing in the business, we talked about kind of check. There's no big sort of near-term investment that we see that's needed to continue on the path with the initiatives that we have today. As we think about M&A, we like the flexibility of having this amount of cash on the balance sheet so that we can be opportunistic. And then we've been doing some buybacks. We -- at this level, we expect to continue to be doing that. A little more moderate relative to what we did in prior year, but we expect some consistency because we are generating plenty of free cash flow, and we do feel like we have a sufficient amount of cash on the balance sheet. So we expect that to be part -- a continued part of our overall capital allocation.

That's great. Last question. Any other last call for questions in the audience? All right. Well, Jeff, Noel, anything else we should talk about? I mean we covered a lot. It's eye opening on a lot of things.

[Technical Difficulty] we're excited, if it's not clear, hopefully, that's at least what...

Most definitely. Great. Well, Jeff, Noel, thank you so much for joining us.

Thanks, Ron. Appreciate it.

My pleasure.

Good day, and thank you for standing by. Welcome to the LegalZoom's Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Tyler Drew, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LegalZoom's second 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, and thank you for joining our second quarter earnings conference call. We are very pleased with the accelerated progress that was made this quarter and believe it will benefit us going forward. As I complete my first full year as CEO, I want to take a brief moment to reflect on the accomplishments we have achieved at LegalZoom.

When I stepped into this role, my objective day 1 was clear: to build a more consistent, predictable and profitable business. One that could support sustainable long-term growth resilient to changing economic cycles. Our second quarter results demonstrate the work we have done to achieve these objectives, notably ahead of plan.

First, we've stabilized the business and reignited subscription revenue growth. Second, we're building a premium brand and new suite of products that cater to the diverse needs of high-quality small business owners and individuals. Third, we're delivering operating efficiencies and expanding margins, strengthening our financial profile. All of this rolls into our second quarter strong results.

Total revenue reached $193 million, up 9% year-over-year, ahead of expectations. Subscription revenue grew 10%, marking our second straight quarter of sequential growth and early achievement of our double-digit growth target, 2 quarters ahead of schedule. It is worth noting that our subscription revenue growth was led by our compliance offerings, including our new Compliance Concierge product suite, which we will talk about later.

Further, our compliance offering showed encouraging improvement in first year retention, indicating that customers are appreciating the incremental value that we are delivering. With respect to our new concierge solutions, we launched and saw strong adoption of products that have shifted upmarket by adding additional value, leveraging artificial and human intelligence to allow us to offer the highest service levels to customers.

On profitability, similar to Q1, we continue to deliver strong margin performance. Our adjusted EBITDA margin reached 20%, a 400 basis point improvement year-over-year, reflecting strong operating discipline and strategic efficiency gains. We also continued to generate healthy free cash flow, reaching $32 million in the quarter, further strengthening our balance sheet.

Given our strong performance and momentum, we are raising our full year revenue guidance from 5% growth to 8%, while maintaining our 23% adjusted EBITDA margin outlook. We attribute the achievement of these milestones to the work we have done to realign our organization to focus on subscription-based growth and improve operational efficiencies to create a more profitable business model.

As part of this strategic realignment, we executed across the 3 key focus areas we outlined when I first joined as CEO: one, optimize our subscription business; two, reorient our go-to-market approach; three, leverage artificial and human intelligence to deliver expertise to our customers. We made solid progress across these 3 areas over the last year.

In addition, we made a strategic acquisition, Formation Nation that was not only accretive and enabled us to bring in a world-class team of sales and service experts, but also sets us up to further advance our market position and realign our premium brand messaging. Let me now walk through updates across our 3 key focus areas.

First, subscription model optimization. To put it bluntly, our subscription strategy is working. We drove a 22% increase in total subscriptions in Q2, powered by enhancements in packaging, pricing and personalization. We continue to bundle services that deliver incremental value like forms, eSignatures and bookkeeping into premium tiers, driving stronger early engagement and longer-term cross-sell opportunities.

Last quarter, we launched our most comprehensive subscription suite of products to date, the Concierge Plan, a full-service white glove suite of solutions driven by artificial and human intelligence designed for the sophisticated small business owner that prefers a hands-on solution.

The first product, Compliance Concierge, has been a strong success and includes a do-it-for-me solution to filings, permits and alerts alongside a dedicated adviser at a price that's still significantly lower than traditional legal services. We also soft launched 4 other concierge products that are currently being tested. Each affords customers the ability to offload their business' legal and compliance work to our team.

Strong initial traction from our do-it-for-me products, including early adoption and customer response, validates demand and reinforces product direction as we scale through expanded offerings and long-term capabilities. Importantly, DIFM products garner significantly higher prices or ARPU, attract higher-quality customers and we believe create greater customer stickiness. This is central to our strategy of delivering intelligent, expert-led, proactive legal support at scale, which we believe will support renewal and retention trends over time.

Second, evolving our go-to-market strategy. Our go-to-market strategy is focused on positioning LegalZoom as the trusted legal brand for small businesses to drive awareness and consideration. This spring, we launched a new brand campaign that frames LegalZoom as a legal companion for every step of customers' journey. Our message, technology when you want it, human support when you need it, reinforces the principle behind AI augmented expertise.

Without increasing our overall ad budget, we delivered a multichannel, full funnel brand media campaign driving awareness, consideration and conversion under a single brand narrative. The campaign deployed across connected TV, digital and mobile with strong early results that we expect will build steadily over time.

Of particular note, we saw sequential improvement in site traffic and engagement trends in June and July following the launch. We maintained a healthy return on ad spend, or ROAS, despite a longer brand payback curve and we maintained marketing discipline with low commitments to brand spend and return hurdles for performance channels. We plan to launch additional phases of the campaign across social and offline channels to build on that momentum.

In addition, we will continue to deepen channel tests and diversification to optimize full funnel performance. Given the early success, we may consider incrementally adding to our marketing budget, but would do so within the confines of our overall expense schedule and margin profile.

We are also expanding visibility through strategic partnerships and driving new customers through growth in our channel partner program. Most notably, we teamed up with 2 AI pioneers. First, with Perplexity. We launched a tailored legal support program for Perplexity Pro users, an innovative move that places LegalZoom at the intersection of legal expertise and emerging AI-led search behavior.

More recently, we've announced a new relationship with OpenAI. OpenAI is launching Agentic capabilities inside ChatGPT, which they will be rolling out to 30 million users. Our collaboration enables ChatGPT agents to access LegalZoom's robust legal resources through advanced AI capabilities to ensure users are given high-quality legal information and insight. The system can intelligently navigate legal resources, run analysis and even deliver editable documents and spreadsheets. We believe collaborations such as these will be instrumental in boosting LegalZoom's brand presence and driving new customer acquisition.

Finally, AI augmented innovation and service delivery. AI is becoming a fundamental differentiator for us, particularly as we build out our DIFM product suite that I spoke to earlier. We see a strategic opportunity to lead by combining proactive legal insights with automated execution, leveraging 20 years of robust data. Our AI tools will enable customers to address their needs faster, more efficiently and with greater personalization.

With AI being utilized throughout many parts of the organization, we have enabled higher speed, satisfaction and scalability with shorter fulfillment times and improved resolution rates. With this foundation in place, we're turning our focus toward customer innovation, applying AI to create higher value, do-it-for-me offerings that improve compliance and efficiency.

A recent example of that is automatic annual reporting within our compliance offerings. With this new launch, all compliance customers as well as concierge customers can have their annual reports filed automatically using intelligent software with little to no need to intervene.

The net result of our push toward deeper engagement thus far has been significantly more annual reports filed and more businesses remaining compliant, which we believe has contributed to the improved retention previously discussed. We have a pipeline of DIFM and do-it-with-me products being launched as we accelerate our offerings with improved AI, automation and service levels.

This is in keeping with our focus on quality share, finding the best customers and providing the best subscription offerings available. AI, to be clear, is not optional at LegalZoom, and we're just scratching the surface here, and I'm personally excited about the AI product road map.

Lastly, I'd like to touch on our recent acquisition of Formation Nation. This strategic acquisition brings complementary brands and core capabilities that align seamlessly with LegalZoom's vision. We are extremely pleased with the transaction for several key reasons. First, integration efforts have been swift and successful. We've onboarded a sales team of more than 130 experienced professionals as of Q2, significantly strengthening our customer service capabilities and leveraging a brand strategy to differentiate between value and premium product offerings.

We've also initiated cross-sell and upsell opportunities within our respective customer bases. Notably, we've repositioned one of the Formation Nation's sales centers, representing approximately 17% of the sales team and who are now focused on selling LegalZoom products, enhancing our ability to deliver higher-touch formation and compliance services, an important part of our strategy to attract and retain higher LTV customers and sell more DIFM products.

Second, our strategic marketing investments are already yielding results, driving increased traffic and engagement to the Formation Nation platform while reaffirming LegalZoom's brand ethos. Finally, we acquired an amazing team. The leadership is bar none in sales and service and the broader team continues to teach us best practices. In short, this acquisition is already delivering meaningful value and we are comfortable stating that we are now one team with a singular mission and focus.

In summary, we are ahead of schedule on our strategy and the business is on a stronger foundation than it was a year ago. Looking ahead, we remain confident in our growth trajectory. I would like to also take a moment here to thank our tremendous team, whom I personally owe a large debt of gratitude.

This has been a difficult year with a lot of transition and change. It has also been a hugely successful year and I'm proud of that. The speed at which we've executed is a testament to the strength of the team here at LegalZoom. And this team, I firmly believe, is still being underutilized. They are that good. I deeply believe in all of this and that with this team, I'm convinced we can do even more together.

With that, I'll now turn the call over to Noel, who will take you through the Q2 financials and updated guidance in more detail. Noel?

Thanks, Jeff, and good afternoon, everyone. We are very pleased with our second quarter results, which reflected continued progress in our key focus areas. As Jeff mentioned, our business has stabilized. We're seeing solid growth in our core and we've reached key financial targets ahead of schedule.

I'll now turn to a review of our second quarter financial performance. Unless otherwise stated, all comparisons will be on a year-over-year basis.

Total revenue was $193 million for the quarter, up 9% and ahead of our expectations. Looking at our revenue performance in more detail, we generated 10% subscription revenue growth, which resulted in roughly $120 million from subscription revenue in the quarter. Achieving double-digit growth in subscription revenue 2 quarters ahead of schedule is a strong indicator that our strategic shift is gaining traction and delivering results.

Subscription revenue benefited from higher compliance-related subscriptions as well as the Formation Nation acquisition and our 1-800Accountant partnership. We will maintain our focus on our core strengths in legal and compliance services while also leveraging partnerships with top-tier providers to address the additional needs of our customers.

We ended the quarter with approximately 2 million subscription units, a 22% increase. In addition to the inclusion of Formation Nation, the strong unit growth was driven primarily by higher forms, eSignature and bookkeeping subscriptions as we bundle these products into certain business formation packages. We continue to expect this growth to moderate as we have seen lower renewal rates with these initial cohorts.

ARPU was $256 for the quarter, down 6% year-over-year and up 2% from the first quarter. The year-over-year decrease was primarily the result of the aforementioned mix shift of lower-priced subscription offerings related to the bundling of forms and eSignature and bookkeeping subscriptions into our higher-end formation SKUs. We expect to maintain similar ARPU dollar levels in the second half of the year.

Turning to transaction revenue. We saw an increase of 6% to $73 million. The increase was due to an $8 million improvement in transaction revenue from our acquisition of Formation Nation, largely offset by a decline in BOIR revenue. We also saw a decrease in business formations in line with our shift in focus towards higher-quality customers. We expect similar transaction revenue growth rates in the back half of this year.

We recorded a 5% decrease in transaction units to 278,000, primarily due to a decrease in BOIR filings, partially offset by Formation Nation transactions. We processed 131,000 business formations in the second quarter. The 2% year-over-year decrease in business formations, again, reflects our ongoing focus on targeting quality share, partially offset by the addition of Formation Nation. Average order value was $262 for the quarter, up 12% versus the same period last year. Finally, deferred revenue increased by $2.8 million from Q1, reflective of the typical seasonality in our business and the success of our subscription initiatives.

Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Second quarter gross margin was 69%, up from 68% in prior year. Sales and marketing costs were $63 million or 33% of revenue, an increase of 9% from prior year. Customer acquisition marketing costs decreased $0.4 million or 1%.

Non-CAM sales and marketing expenses increased $5.7 million or 56%, which is primarily a result of the addition of the Formation Nation sales team. Technology and development costs were $15 million, down $3 million or 15%. General and administrative expenses were $15 million, a decrease of $1 million or 6%. Both technology and development and G&A costs were primarily driven by efficiencies built into the business that started in the third quarter of last year.

Our execution drove adjusted EBITDA of $39 million. This represents a 35% year-over-year increase as compared to adjusted EBITDA of $29 million for the same period last year. Adjusted EBITDA margin of 20% increased 400 basis points year-over-year. As a reminder, our adjusted EBITDA margins are generally lower in the first half of the year due to higher CAM spend levels that align with our business' seasonality.

Free cash flow was $32 million in the quarter, up 82% compared to $17 million for the same period in 2024. Our free cash flow improvement was primarily due to the increase in adjusted EBITDA and increased subscriptions as well as lower cash taxes.

While we are in the process of fully evaluating the implications to our business from the recently passed One Big Beautiful Bill Act, our initial expectation is that we will see a positive impact on our cash flow for the year. This is primarily a result of the provision enabling accelerated tax deductions for research and development expenditures.

We ended the quarter with cash and cash equivalents of $217 million. Our cash position increased by $7 million versus Q1 2025, benefiting from strong free cash flow generation, partially offset by share repurchases.

Subsequent to quarter end, we renewed and amended our credit agreement, which, among other things, extends the maturity date to July 2030 and lowers this revolving credit facility to $100 million. The facility remains undrawn. As a reminder, last quarter, our Board of Directors approved a $100 million increase to our existing share repurchase program. During Q2, we repurchased approximately 2.2 million shares at an average price of $9.33 per share for a total of $20.4 million. We now have approximately $130 million remaining under our existing authorization.

As we look ahead, we continue to believe our strong cash position and healthy free cash flow generation will enable us to continue to invest in our business as well as evaluate strategic M&A opportunities.

Before turning to our outlook, I want to take a moment to discuss how we think about the macro environment. Over the past year, we've made a deliberate effort to decouple our business performance from the unpredictability of the broader industry trends. While business formation trends continue to be volatile and difficult to forecast, we've taken proactive steps to build greater resilience into our model.

Our strategy centers on doubling down on our core strengths, legal and compliance subscription services tailored to high-quality customers with long-term value potential. Through this focus, we aim to reduce our exposure to short-term macro fluctuations and instead build a more stable recurring revenue base. We believe that the company is executing well against this strategy and it can be seen in our stable results during an otherwise volatile macroeconomic period.

Looking ahead, as we shift away from one-off free formation transactions toward durable premium solution-based subscription services, we also anticipate a stabilization in market share trends. Ultimately, our goal is to deliver durable results through the strength of our offerings, the loyalty of our customers and the operational flexibility we built into the business regardless of macro trends.

Now turning to our outlook. We are pleased to have outperformed our second quarter expectations and with the clear progress we are making across our key focus areas. As such, we are raising our full year revenue guidance. For the full year 2025, we now expect revenue to grow by approximately 8%.

We continue to expect an adjusted EBITDA margin of 23%. For the third quarter, we expect revenue between $182 million and $184 million, representing growth of approximately 9% at the midpoint of the range with similar growth rates to the second quarter across both subscription and transaction revenues. For the same period, we expect to achieve adjusted EBITDA in the range of $44 million to $46 million, which reflects a 25% margin at the midpoint.

In closing, despite the uncertain economic environment, we're demonstrating clear progress against our key focus areas, including achieving double-digit subscription revenue growth ahead of expectations. With strong execution and a focused strategy, we're well positioned to continue delivering results through the remainder of the year regardless of macro conditions.

Long term, we remain confident in our ability to deliver sustainable, profitable growth for several reasons. We are the market leader in online legal services with unmatched brand recognition. Over 60% of our revenue is subscription-based, providing predictability and resilience. We are just beginning to tap the potential of AI and data to deliver smarter, more personalized legal solutions. And we have a flexible operating model and a strong balance sheet, giving us the ability to invest while staying nimble.

As always, we'd like to thank the entire LegalZoom team for their efforts this quarter. And with that, let's now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Brent Thill of Jefferies.

This is John Jin on for Brent Thill. So a lot of positive comments there. I wanted to see if you could maybe dig in a little bit more on the confidence in raising the growth for the full year by 3 points. Obviously, the trends are good, but the macro is still somewhat volatile. And so I don't know if you could dig into a little bit in terms of the drivers behind your confidence.

Sure. And thank you for that, John. Why don't I start at the high level and then turn it over to Noel to dig in on the details. But we're now running a more predictable subscription-driven business that isn't fully beholden to small business starts. And you're seeing that with some of the trends that are developing within the business. And that gave us confidence at the beginning of the year. It gave us confidence that the Q1 trends would continue and persist. It allows us to maintain margins and accelerate growth.

I won't say irrespective of the formation macro, but with a much wider range so that we're not so limited. We are range bound now such that we can operate our business within our control in a way that we couldn't previously.

Yes. And I would say, importantly, the increasing guide is driven by performance that's sort of multifaceted if you look underneath the covers. We saw strength -- as we mentioned in our remarks, we saw strength in our core compliance subscriptions, which is really important and that's partly due to pricing the value, but also we're starting to see some positive signs on retention here as we look at year 1 renewals, and that's tied to a lot of the work that the team has been doing to improve engagement with our compliance hubs.

We've seen strength in our virtual mail offering, specifically with renewals outperforming our expectations. We continue to be very happy with our 1-800 partnership and that's driving growth. We have some added benefit for Formation Nation, and that still continues to represent a near-term opportunity as we look to shift a largely transactional business to subscription.

So importantly, it's coming from a bunch of different areas. Some, to be frank, of the raise is built into performance that we've already delivered year-to-date, but we're seeing consistent, visible and predictable improvement in the initiatives that are underlying the guide increase.

Great. That's very helpful. And maybe a quick follow-on. On your announcements with Perplexity and OpenAI, I don't know if you're able to discuss any of the financial aspects or benefits that could be given there without getting into the details that you can't disclose.

Yes. Great question. Without getting into the details, I mean, what you're seeing here is a signal that AI is incredibly critical to what we're going to be doing going forward. And if you look from those companies' perspectives, they're choosing the market leader, which is us. And with 20 years plus of data, robust history, strong brand and this ability to move upmarket, it's a natural fit for us to start working with the best in this field, OpenAI, Perplexity, there are others that we're going to try to continue to work with.

Probably more importantly, as we look to the future, it's a strategy that lends itself to what we're doing with do-it-for-me, DIFM. And this concierge model of being able to leverage AI not to replace, but to augment our expertise is something that we believe is unique to LegalZoom and something that only we can deliver.

And then the last thing that I will say is that it speaks to a last mile problem, which most technology has. We believe AI does as well, which is something we've been talking about for a number of quarters. AI has the ability to do a lot of things in our space and in legal tech generally. But when it comes to that last mile, the just before a contract is signed, that's when you need to introduce some level of service and some level of product that is very tailored to the individual customer.

We're uniquely positioned to drive that forward. And some of the pivot that we have made over the last year and most of what we're doing go forward is designed to actually align with that because we think that as the market evolves, that's where we're going to be able to sit and create real differentiation for LegalZoom.

Our next question comes from the line of Patrick Mcllwee of William Blair.

Nice results this quarter. So my first question, I may have missed this, but I didn't catch you mentioned your retention rates this quarter. So first, if you wouldn't mind sharing those, that would be great. And then second, can you provide an update on how the retention or attrition rates you've seen in some of those initial bundled cohorts has progressed now that I believe you're kind of lapping some of the changes you made to those SKUs last year?

Yes. Pat, this is Noel. Thanks for the question. So our aggregated retention rate for the quarter was 59%. That's down from prior quarter of 60%. So we've signaled this, I think, on prior calls, and we've mentioned a few times that it really relates to the fact that we started bundling these lower-priced, lower retention subscriptions in our pro and premium SKUs, specifically forms, eSignature and bookkeeping.

So we've lapped forms and eSignature rollout, which is really in the first and second quarter of last year and we'll be lapping the bookkeeping rollout, which was more kind of end of third, early fourth quarter of prior year. And that we'll start to see absent further changes in commercialization, retention rates stabilize thereafter.

I will say when you look at -- it's largely -- the change in retention is largely this mix in product. And when you look individually at our respective products, we're actually happy with the retention rates that we're seeing. And as we mentioned in our prepared remarks, we're seeing some positive signals within our core compliance subscriptions, which are the products that matter most to us.

Yes. And specific to those compliance products, which are the majority of our revenues in subscription, we're seeing positive trends, both in retention and in engagement. So it gives us a proof point on retention, which speaks to what we've done in the past, but that engagement number speaks to our ability to drive retention higher, churn lower over time in those core products, which are the products that we want some of these bundles to graduate into anyways because what we're trying to do is actually cross-sell and upsell them ultimately into those compliance products.

Right. Okay. And then my second question, Noel, I think you mentioned that Formation Nation contributed $8 million in revenue this quarter, if I caught that correctly. But I believe there's a decent amount of seasonality in that business. So I just wanted to ask if you could frame expectations for that in the second half, just so we can kind of back into a more organic growth rate.

Yes. So Formation Nation delivered $8 million in the transaction revenue side of the business for the quarter. In total, it was a little over $12 million that they contributed. And you're right, because it's more heavily transaction oriented, there's more seasonality in the business than LegalZoom. We're not breaking out the guide, but you would expect that seasonally, the first half of the year is stronger than the second half of the year generally in our category. So we would expect the contribution to be somewhat similar to slightly lower than what you saw in Q2.

And I'll just caution you on a couple of things because we've been doing deep integrations with Formation Nation. So number one, we've been accelerating our marketing efforts towards Formation Nation. And that complicates that decoupling if you're trying to do that. Number two, we have been rebranding LegalZoom and then Formation Nation's lead brand, Inc Authority, with LegalZoom being premium, Inc Authority being discount and free.

And then number three, we've now taken a sales center and -- from Formation Nation and redeployed them on LegalZoom's higher-end products. So it is not a clean look when you're trying to do an apples-to-apples.

Our next question comes from the line of Elizabeth Porter of Morgan Stanley.

Jeff, I wanted to follow up on your comment about moving some of those sales heads over at Formation Nation. I wanted to touch on just the success you may be seeing thus far around attaching subscriptions to Formation Nation's higher-value customers. So I know it might be early, but what are the signs of success you're seeing so far? And what products do you think may have the highest attach rates to this type of customer base?

Sure. Good question, something we are deeply focused on. Let me unpack it a little bit. What we've done is deployed a sales center focused on LegalZoom selling model, which is disproportionately more subscription than what Formation Nation's was historically and even is today. That, by default, by pulling those customers through our funnel will immediately move people into a subscription base more quickly than with Formation Nation.

In terms of where we think we can take these Formation Nation customers over time, I think it is very similar to what we have done historically with LegalZoom. So first and foremost, it's our core product offerings, those compliance offerings. Some of which Formation Nation had but didn't lean on because they were more focused on being cash generative day 1 because they were run with being cash constrained.

Number two, some of the products that they didn't have. So some of the things that we're creating around DIFM, some of the compliance calendaring, some of the automatic filings that we're doing now and then some of the product lines like virtual mail that they weren't able to offer prior.

So I think that there are a lot of areas where we will be upselling and cross-selling both the existing base and porting over new customers. But I'll reiterate, we're very, very early in that process. We're going after low-hanging fruit right now because it's there, it's available and that integration is already proving very successful. But over time, I think that there's a lot of opportunity and it points to our ability to do that with potentially other M&A opportunities and within our core base as we grow as well.

Great. And then maybe a follow-up for Noel. Great to see the revenue upside. I was wondering if there are incremental areas that you're pushing the lever of investment on that just may be mitigating some of the upside to margins that we have for the full year outlook.

Yes. I think Jeff hit on one of the areas that we're pretty excited about, which is in the, call it, concierge or do-it-for-me offering, which is much more of a hands-on white glove service that we're providing and this is part of our march towards focusing on higher-value subscriptions toward higher-quality customers. We're having really good early success there.

And as you start to scale new products like that, it generally takes a larger investment. And so that's the mode that we're in right now and you're seeing that in the results, but we're expecting it to continue to scale quickly. And so we'll invest behind it. And as we build the tools and automation to create efficiencies in supporting it, we'll see leverage from a margin standpoint as we move forward. So that's a particular area of focus for us right now in terms of investment.

Yes. And I'll give another one as well, which is less clear from a financial perspective, but I can give something very tangible, engagement because we know engagement will reduce churn. And if you think about what we do on the compliance side, if you have everyone trying to do it yourself, it's like herding a bunch of [indiscernible] and cats. I mean it just doesn't happen.

So what we have done is we've started to build a bunch of technology-oriented automation that allows us to do this deep engagement in our compliance products. And we're already seeing proof points that, that is reducing churn. And the example, I think that we mentioned in the prepared remarks, was what we're doing for annual reports. And we've seen a dramatic uptick in annual reports.

Ironically, that falls in our compliance line, the dollars because there are filing fees associated with it sits over on the transaction side. But what it does is we deliver those transactions in an automated way and they reoccur naturally, it ends up reducing churn in our subscription products.

Yes. I think one other important piece...

And -- sorry, that is an investment that is lower margin because of the filing fees.

Yes. One ongoing investment that we've been making and we continue to see bear fruit is just around our operations, the tools, the automation, some of it leveraging AI to help our team deliver our services to customers. It's just driven a lot of efficiency in how we deliver and improvements in customer experience. And so that is an offset to any investment that we're making as we're driving more efficiencies there.

Yes. And that's also an important point just to put a pin on this because we're leveraging the economies of scale. So we're still working on margin improvement. We're not talking about deterioration here, which is why we reiterated our margin target.

Our next question comes from Michael McGovern of BofA.

When we think about your AI partnerships and even agents creating documents for users that aren't necessarily in your ecosystem yet, can you just discuss what the playbook looks like for creating a longer-term customer there or monetization of that use case?

And then second question, with that last mile delivery piece from your prior answer, does that lend itself to adding more AI partners in the future if you're really focused on that last mile?

Yes. Great question. And I mean, this is a real opportunity to expand our addressable market. I mean AI can be a very big TAM expander if you have something differentiated. And in this case, what we see is many people have legal questions and legal problems that they don't know are legal in nature. So by leveraging these partnerships, they will lend itself to prompts that the customer themselves might not think is legal. And that can pivot them to you need to get legal help for this. And that's where LegalZoom comes in and that really is our differentiator.

So the short response to your question is, yes, we expect more of these. Part of the reason why we did press releases for these is we want to signal that we are open for business. We see the opportunity and the value of doing this. And what we give away to the extent that we give away anything is an opportunity to expand TAM because that's a marginalized part of what we do. It is not core to our business.

What is core to our business is solving that last mile problem that we don't think anyone but LegalZoom can solve. And what that ends up meaning is we open our aperture for -- from the addressable market standpoint. And then we start going after the old line lawyers and law firm market that we weren't addressing prior because we were focused on top-of-funnel formations. So we think this is a really exciting new opportunity for us. We've even seen this in some of our marketing efforts to date.

Our next question comes from the line of Matt Condon of Citizens.

My first one is just on -- Jeff, you talked about engagement multiple times on this call. Can you just talk about maybe how the improvements in engagement with your products is informing your future product road maps and how you can cross-sell into that base of users? And then just a follow-up also on cross-sell. Can you just talk about how you're optimizing the purchase flow to just increase attach rate and what's really working there?

You bet. And good insight here in terms of how our customers more than anyone are driving our product experience and where we're headed. I mean this concierge suite of products was an out [ drop ] of what we were hearing from customers and what they needed. What we realized was a surprisingly high percentage of small businesses are out of compliance. And unfortunately, that includes customers who have our compliance products.

And the reason is because this isn't easy. This isn't fun. This isn't anyone's expertise as a small business owner. Instead, we're giving them the tools to do something that they don't have the time, wherewithal or inclination to do. So they just fall out of compliance until fees build up and say, now I have to do something.

So what we have realized is if we make it simple and seamless for real functioning businesses to remain compliant, they're willing to pay more for that because they see value in getting back their time. And as we begin to tease this out, we're going to learn more and more about what it is that customers need.

And we've got a very good model for testing very cost effectively, the next do-it-for-me product, determine whether it works, then build automation and AI to make sure that it's streamlined and margin accretive and then relaunch it as a fully-fledged product. So I think you will see much more here in that respect and DIFM will be a larger and larger percentage of total revenues over time.

I am showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.