Dan Wernikoff and the CFO, Noel Watson of LegalZoom. It's a little loud. Try that a little better. So maybe we could start, if you could just give us a little bit of background. I know that you, you've made a lot of changes since you came to become the CEO of LegalZoom. And so I know the model's changed a fair amount, and also the customer targeting has changed a fair amount, and the financials have improved significantly. So that's all good stuff. So we'd love to hear your perspectives about, you know, where you are and what were the major changes you've made so far? Yeah. So, I joined LegalZoom 3 years ago. I had come from Intuit prior, where I'd been for 16 years. And in my time there, I'd run QuickBooks and run TurboTax, and really, that's what attracted me to LegalZoom. It felt like an industry and a software-type solution that could disrupt the way that people get legal services and compliance services, specifically. You know, when I joined, it had been in private equity ownership. We all agreed this was a time for growth, but it also meant that the first couple of years was really rebuilding the team, rebuilding a lot of infrastructure, making it a modern environment that you could attract the right talent in. And during that time, we also had COVID. We definitely saw a tailwind, and we started to increase the volume in business formations, which is our core business, which is helping businesses get started. And, you know, we decided to go public, which changed our financial profile pretty materially. We used to carry a lot of debt, but now we have cash. It was always a profitable business model, and I'd say the last two years has really been about doing three things. One is beginning to scale up our formations business. We feel like we should be the destination where everybody starts their business, and that means forming an entity and keeping the entity compliant. And then we also know that when people form with us, it's really the first advisor they've ever worked with, and there's an opportunity to get them established on the right software applications, at the exact same time, and so we've been building out an ecosystem. And then the third piece is, small businesses do need expert help at times, and the two key experts are gonna be a CPA and an attorney. And so we've extended into the tax space, and we've always been in the legal space. And those three things are really what we've been investing in. And at this point, we're doing a little north of 10% market share on the formation side. We think we should be at, like, 30 or 40%- Mm-hmm ... as the digital leader. And that's where we're really going now, is pushing more aggressively to begin to accelerate growth. During that time, in the last couple of years, we've increased the profitability. A lot of that has been tied to a change that we made in our business model, which you referenced, which is going free with our core formations product. How is that possibly gonna increase profitability? Yeah. Great question. So if you think about everything that we do as a company, the formation itself was actually a very small portion of our economics, but it's the lead-in to the relationship. And so we thought, if we can offer this product for free, we could probably get much more efficient in our marketing spend. And actually, our marketing cost per customer went down faster than the total value of the customer that we were bringing in. What, what are you offering for free to start? It's really just the formation of your legal entity. But as soon as you form, you realize you have to keep it compliant as well, so there's subscriptions for that, and then we offer legal advice, we also offer tax services, we do things like virtual mails. We have a whole ecosystem that's very well-constructed for right when you form. So almost think of that formation transaction as a marketing cost. Mm-hmm. It's made us more efficient from a marketing standpoint. Awesome. So what about the other 90% of people? What, what are they doing? How are they starting their business- Yeah ... without your help? The bulk of people actually go directly to the Secretary of State site and muddle through their own forms, and then cobble together a solution around how they're all the, all the services they have as a small business. It also happens to be our biggest channel because the Net Promoter Score is negative if you form through the Secretary of State sites. Oh. So it's a pretty bad experience. The second most likely instance is going to an attorney. And in the attorney case, the Net Promoter Score is better than the Secretary of State, but the cost is, you know, anywhere from, you know, couple a thousand dollars up to $5,000, depending on what type of business you are. And so we, we sort of sit in the middle. The digital side is probably about 30% share of the overall formations market, which is roughly 5 million businesses forming every year, as measured by Census EIN Data, which isn't a perfect proxy, but it's, it's a good proxy. Awesome. So can you talk about new formations? I imagine, you know, during COVID, obviously, I would expect they slowed, and now they're increasing. You know, what are you seeing around new formations? Yeah, actually, going into COVID, at the beginning of COVID, like everything else, it came to a screeching halt. And then, like everything else that was sort of digital, we saw a fast acceleration in the peak of COVID, where business formations at one point were growing, you know, 50% year-over-year. Wow! When it started to lap the early- A lot of side hustle-type businesses? A lot of side hustle, when you think about the macro of business formations, we tend to think it's got a very favorable tailwind in terms of gig platforms, different industries that have been created, like creators and, and content, and NIL, and athletes. There's a lot of different things that are being spun up. We also feel like the platforms themselves make it drop-dead easy, and there's no capital outlay, and so there's zero risk to form and fail. And then probably the piece that's put a little bit of accelerant behind it is, most people form a business when they're working. And now most people, or a lot of people are working from home. And so they're able to spin up a side business, and they're really realizing that just like Airbnb kind of gave you the sense that your house was an asset, if you weren't using it, you could pull more money out of it. People are realizing they're an asset. And when they're not on the clock somewhere else, they essentially can pull value from themselves by doing something on a platform, or they can do something that's leveraging all these different e-commerce solutions that are pretty easy to get spun up. That's awesome. Okay. So now- I should've mentioned today- Oh. This year, that the macro has been strong. Good. So, Q1, you know, business formations grew 4%, Q2 is 7%, and Q3 is 12%. We've taken share each of those quarters, so we've grown faster than the, that growth rate. But it's still showing some pretty remarkable resilience, given everything you hear, you know, from, from small business owners today around concerns about inflation and hiring and things like that. Yeah. Yeah. So Noel, can you give us a little bit of background just on the financials, like, kind of size of the business? You know, Dan says it is nicely profitable. I think you have about 20% EBITDA margins, but maybe just scale it for people. Yeah. So this year, our full year guidance is around $660 million for the year, so a pretty sizable revenue line. Our profitability is a 17% margin target, so well over $100 million in Adjusted EBITDA for the year. We've really been focused on kind of balancing the focus between driving our top line, as well as showing improvement in profitability, so that 17% margin for the year represents about 700 basis points of improvement- Wow! ... year-over-year. So a really solid improvement there. A lot of that goes back to the infrastructure investments that we've been making over time in the business. So the last few years, a lot of investment in automation, a lot of investment in technology, rebuilding our tech stack, so we can be a lot more efficient from a development standpoint. So all of those things starting to bear fruit, and actually, visibility into additional opportunities to continue to do that. So we're happy with the progress that we made, particularly on the profitability side, with the, you know, the 20% margin this quarter, 17% for the year. And our focus is really on continuing to find that right balance moving forward. You know, we feel like it'll be more gradual, but we feel like we can still continue to progress and show more leverage as we move forward and work towards, you know, a much higher margin target. How about maybe CapEx or interest expense? Like, if you were to do $100 million in EBITDA, how much do you get in free cash flow, would you say? It converts at a really high rate to free cash flow. Really? Yeah. You know, call it, you know, 90%. Wow! So it converts at a really high rate and, you know, we don't have any interest expense because we don't have any debt. We're debt-free. We have a couple hundred million dollars plus of cash on the balance sheet right now, so we're actually generating interest income. From a CapEx standpoint, it's really just capitalized software costs. So it's a really efficient model and, you know, the healthy balance sheet gives us a lot of opportunity to look at our capital allocation framework and feel comfortable that we can fund the various aspects of it, which is one, you know, organic investments, and you can see that we've made... We've been able to fund a wide range of technology investments that are yielding new products that we've seen come out here in the last quarter or so, as well as M&A, where we've been opportunistic around M&A. We've found some nice tuck-ins that have expanded our ecosystem of services that we offer, and then at the same time, we've been able to return a fair amount of capital to shareholders. So we just exhausted a $150 million share repurchase authorization that was approved about 15 months ago or so, and we just had a fresh approval of another $100 million for share repurchases, and we'll continue to take that same opportunistic approach there. So the good news, it's really healthy and allows us to kind of fund all aspects. That's great. To really quick add to that too, with that margin expansion, we've been growing our tech and dev roughly 20% year-on-year, and so it's not coming at the cost of investing in the product. What's nice is over the last couple of years, we're starting to see the fruits of that. You know, that we've launched five new subscription services in the last two years, which is really rounding out that ecosystem. The freemium model, the whole approach to it was not just to reduce costs and increase our share, but also to shift some of that cart, that initial purchase, from transaction to subscription and then have the longer tail. It should hopefully compound over time, and you start to see the acceleration growth on that subscription portion of our business. One more bill, because- Yeah, good, good. Keep going, keep going. That customer growth is important as well because we've also built out our post-formation capability with our, you know, the My LZ account experience, which gives us an opportunity to monetize customers kind of beyond that formation, where historically, all of our subscription and monetization was really generated at the- The first time ... formation. Yeah. So it's, you know, we're still at the early stages. We need to prove out that muscle, but that's a, we think, a pretty big opportunity to continue to cross-sell to our customers six months, 12 months down the road as they engage with us, because we have higher engaging subscriptions today. Where, you know, if you have a virtual mail subscription, you may be engaging every day or once a week, or if you have LZ Books, similar type profile versus- ... our legacy compliance subscriptions that were more lower engagement, set and forget. Yeah, can you talk about some of the products you have? I saw you have this LZ Books. I saw even, like, LZ Sign. Is that similar to DocuSign? How are people using it? Yeah, there's just a lot of things when you start a business that you need relatively quickly. And so, you know, one of the first things is the bulk of our businesses are actually working out of their house. So oftentimes, you don't want to have your business address be your home address, and so we offer something that's, it's called virtual mail, which gives you a business address, and we digitize everything that's sent to it and display it for email. I see. The moment that you start as a business, you start to receive contracts or send contracts, and so you need a signature, you need forms, and so we offer that as well. When I joined, I was really shocked by this, but we get more tax questions than we do legal questions at formation. And part of that's because when you form an entity, it's a taxable event, and it's, you know, like, the first thing you think about as an owner is: how do I pay myself? Like, and what should I be an S Corp, or wow, should I be Inc.? Like, what are the tax differences? Mm-hmm ... between them? And so we offer tax, you know, nine- Is that, is that a consultation fee or? It's with a CPA. Yeah. But it has sort of a hybrid experience, where you're doing a lot of the onboarding online. It's self-serve, and then as you get into the return, you have the interactions with the CPA. But as we did the LZ Tax launch, we realized, you know, the reality is it's a lot easier to do taxes if people keep their books. And so we launched LZ Books, which is an accounting solution. Oh, it helped. You came from Intuit on that one. Yeah. Yes, but it's one of the interesting things about LZ Books that differentiates it from others in the market is we're really purpose-building it for solopreneurs. So it's a simplified version, and it's also built as a platform that converts directly to tax. So even most of the players out there have a legacy, books solution and a legacy tax solution, and those two things are almost different platforms that need a translation layer in between. Mm-hmm. In our case, like, we expect to be able to just flip books on its side and tell you, "Here's all your tax forms completed." So there's a lot of things that we're introducing as an ecosystem. In this quarter, we just introduced business licenses as well. Most businesses, once they have to operate, they could have up to 20 licenses and permits they need to get at the, you know, county, state, city level. If you're in San Francisco trying to do business- Oh! ... it's or New York, very difficult. You could be up to 25 licenses as a restaurant. And it's right in our sweet spot of helping you with the things you don't want to do as a business- Yeah ... which is deal with all the regulations and all the government agencies. I imagine if I were to use the service to incorporate a business and then do LegalZoom books, and then do LegalZoom forms or LegalZoom sign, like, churn rate, unless my business goes out of business, I'm probably not gonna be leaving, right? That's our hypothesis, as you continue to extend the relationship... And at some point, you know, we'll commercialize this more in a bundled way, I'm sure. We're sort of like you're a micro business; you get all of these services bundled together, all the way up to, like, a larger established business- Mm-hmm ... you get all of these services. But yes, as you- Can you talk about the plans? I saw there were various plans. You had the freemium, and then- Yeah. There's three plans, and really, one is the free; it starts for free, but there's add-on services that are attached throughout. Another starts with a bundle of the core documents that you need to file that go beyond just the entity creation, like getting an EIN or an operating agreement, or getting your forms and licenses or e-signs to get started. And then, there's a third that also adds access to an attorney because many people want to make sure they're setting up their business the right way, and so they get access to the attorney for the time of their formation. And then on top of that is where we do commercialization of all the other subscriptions. Yeah. I mean, it's, it's really interesting. It seemed like you're so much more of a focused business, one on the solo entrepreneur, two on the, you know, new business formation. I, I remember, you know, we were a lender to the company seven years ago with Primera, and at that time, you were doing a lot of... Or, the company was doing, like, wills, they were doing divorces- Yeah ... they were doing all sorts of other things. It was like anything legal, and now you're really kind of laser focused. Yeah. How did that happen? Yeah, I mean, the business has been—the majority of the economics have been on the small business side- Mm-hmm ... and the majority of the customers used to be on the consumer side. I think it also drove higher awareness of LegalZoom as a brand that serves, you know, the consumers. Yeah. What's really interesting when you step back, though, is you realize those economics really hadn't been realized, and we hadn't really tried to scale and focus on the small business side. Yeah. So we've really diverted and focused our energy there. We still do the other components, but they add up to, you know, between 5% and 10% of our overall business on the consumer side, and it's more in the context of when someone forms a business, that is a life event that requires updating your estate plan or- Yeah ... or creating an estate plan to make sure that passes through if there was anything that happened. Yeah. So it's got a relationship, but we've really tried to focus our energy. Like, even our mission now is, you know, it's really about unleashing entrepreneurship and just taking away all the burden of forming a business and letting the entrepreneurs go. And so can you talk about the recurring nature of this? I mean, what, what percentage of people just sign up and do it originally, but then maybe don't feel the need for a continuation of services, or, or, almost everybody really needing to continue? If they have the business, they're gonna need your, your help. Yeah, the majority are taking a subscription- Mm-hmm ... the bulk of which are gonna be on the compliance side. 'Cause most people, as you form a business, you're going through it for the first time, you really don't understand that that also means you have an obligation to have office hours in a physical location where a service of process can be delivered, or tax notifications, or anything that's coming from the court system. Mm ... can be delivered to you. So we help them understand that, and if they're doing business outside of that state or if they work from home, we take that burden on for them. We also educate the customer that the moment you have an entity, you have to keep it compliant on an annual basis with the Secretary of State, and that means any updates have to be amended. It means you file—you're filing annual reports. There's always changes in the regulations that we'll watch for. Right now, there's one coming from the federal government, which is about beneficial ownership of an organization, which is a federal mandate that's gonna hit at the beginning of next year. And we just try to abstract that from people. We say, "If you're part of this subscription, we've got you covered on anything that you have to do from a compliance standpoint." Those get attached at a very high rate. The rest, we're still commercializing in different ways. You know, some of them are sold during formation. Noel mentioned it. We haven't really had a post-formation experience or a good understanding of our customer data up to about six months ago, and now we're starting to think about, okay, let's grow with you and provide the other services you need, like, right at the moment you need them. So we're not gonna sell you LZ Tax in May. We're gonna have you on bookkeeping, and then, as it comes to tax season, we're gonna tell you how easy it is to convert that to a tax return. So it's a pretty novel model. I mean, I've seen a lot of businesses and, you know, you can almost think of this formation as a channel into a deeper relationship. Yeah. We're the first advisor, and we're there super early. I mean, we also have partnerships where we distribute, you know, products like Wix or, you know, bank accounts for Chase and B of A. And they'll all tell you, we're probably their largest, you know, channel, because we just have such mind share with the customer at that moment, right when they're getting started. Yeah, I would think also many of these businesses might need a domain, right? So you need a domain- Yeah. - You need a website, and then you need probably some kind of an email marketing platform. Yeah. So- We need insurance. Are you guys providing... And what are the economics behind that? If you, it sounds like you went with Wix- They're all different. ... versus Squarespace, versus Weebly, versus somebody else. Yeah, yeah, they're all different, and what we try to do is partner with the best-in-breed platform that also has access to a large base of small businesses. 'Cause one of the crazy things about small businesses is roughly half of them form their business before they're in operations, and then roughly half of them figure out after they're well established as a business that, oh, I'm introducing personal liability, and I need to form my business. And so we try to find the big aggregators and partner with them, and the larger brand names, which is new for us, over the last two or three years. And it's emerging and new, but it's sort of a, we think is the right strategy because we don't want to be offering, you know- You can't do everything. ... LegalZoom-branded LegalZoom-branded websites- Yeah ... or LegalZoom-branded banks. Yeah. Yeah, yeah. So what's the marketing funnel now? Sounds like freemium, but how do you even get people to know about LegalZoom? Yeah ... and you can do this? Is it, is Google keywords mainly, or what are you doing? This is the kind of the other awesome part of LegalZoom and why I was attracted to it, is if you think about the space we're in, we've, you know, mid-70s awareness, brand awareness. Anybody else who's in this space is sort of, you know, down in the low 20s at a max, and most of them in kinda like the 10-point range. Wow! So probably, you know, still one of our biggest channels is just word of mouth, and direct type-in, and brand searches for LegalZoom. Outside of that, we are pretty heavily invested in SEM, and performance marketing. But we're in a bunch of other... You know, we're in all the channels that you'd expect us to be in, and probably, you know, are less invested on the brand side just because we have that recognition relative to our competition. But I think you'll probably see us, once we get our business model completely tuned and optimized this year, layer some back in because we know it'll help from, like, even a performance marketing standpoint on the conversion side. Now you're offering all these other products, and you're lengthening the average customer relationship. How does that tie into, you know, what you can spend? Most of the companies similar, you have, like, a CAC to LTV equation. How are you guys thinking about that? We typically spend to, like, a one-year gross profit. And then we take the tail, and it's sort of, it's incremental for us. Now, the dynamic in our base is different than a lot of other bases in that these are micro, micro businesses. Some that have formed may never even get off the ground. Mm-hmm. During COVID, we saw that. We saw some episodic businesses, you know, formed and then closed. And so the tail on some of our entity compliance subscription is gonna be a shorter tail. So we're pretty - we measure pretty - You're gonna make sure you get paid back. We measure, you know, 12 times and cut once. The good news is, you know, that typically, and we shared it during the IPO, the payback, you know, we see, like, a 3 times on 36 months. And then it sort of... And then our base hardens, by the way. So, like, when you get past the... I'm sorry, I said three. I meant three years. 3 times in three years. That's it. I did say it. It hardens at that point, and then we see the retention rates start to look like other, like, more mature small business- Yeah ... subscription providers, so that base is pretty stable. It's probably similar, where not many are leaving for another provider, but they may just be going out of business. That's right ... or their credit card doesn't work, or something. That's the bulk of our first year, is- Yeah ... is going out of business. You know, business failure is typically 20% first year. Think of ours, as some of them didn't even get off the ground, so they wouldn't count- They didn't start, yeah. They wouldn't be in the business failure number. Yeah. Okay, do we have any questions from the audience? All right. I guess, as you think about yourself in a couple of years, will you sort of just look like, as growth maybe eventually slows down, will you kind of just look like a GoDaddy at some point? Like, how is the business model kind of different? Yeah. No, it's, there's a couple things in our business model. One is, again, we, we wanna get everybody to form through us, and so it's... imagine 30%-40% share. And then, two, we're putting them into an ecosystem offering. There's a couple different things. One is compliance, and then one is- Sure ... financial compliance, which is all the tax and books. I'd say there's one other big component that we didn't talk about, which is the need to access an expert. If you think about a small business today, and if they have a legal need, there is no small business legal franchise in the country. And most people have a very negative experience with an attorney as a small business because they can't find the right person who understands the matter. It's an opaque process, and it's very expensive at the end. And so one thing that we're also working on, which is, I think, more transformational, is how do we, you know, change that experience? And part of that is something we just launched called Doc Assist, which is a gen AI capability, where you upload a document, and you get insights along that document. But what we can do differently at that point is connect you then to an attorney. What we're also working on is collaboration on forms, and so that attorney and you can collaborate on the form specifically. And then what we want to do is standardize that whole experience and put price transparency against it, which gets you to a place where now you've kind of rethought everybody's interaction with attorneys. In the small business and consumer space, it's about $100 billion of spend, highly fragmented, and no other brand that has the awareness or the marketing channel to pull it in. And so that's another growth lever that I think would take us, you know, well past the next couple of years if we do it right. So I think it's a little bit different, and actually, I probably would even think about our financial platform, you know, differently than how GoDaddy is, because that's maybe it's similar to their e-commerce platform, but not their core business on sites and domains. So yeah. Any other questions? I'll keep going. So, how do you think about the sort of the long-term potential margins? Sounds like you made a lot of progress pretty quickly. Are you, are you thinking more better to reinvest now, or do you think you can just keep getting 100-200 basis points a year in terms of operating margin improvement? How, how do you think about it? Yeah, I think we'd like to. You know, our guiding principle is to focus on some steady improvement, so that 100-200 basis point that you were just talking about there. But at the same time, we're really just focused on making the right decision for the business in the medium to long term. So we have a lot of new products out there. We're testing commercialization, and if we see daylight, we're not going to be afraid to invest aggressively behind it and either pause margin expansion or even take it down for the right opportunity. But that all fits into the, "Hey, this is clearly a good decision for the business long term." Outside of that, we're focused on kind of that steady margin progression. It is worth saying, I mean, margin growth isn't what we're solving for. Mm-hmm. We're solving for EBITDA and free cash flow. And then to the last question, like, I think we have a lot of growth opportunities that could drive the absolute EBITDA number. Mm-hmm. I think at that point, people would be fine trading off the margin for the growth. And again, we need to build into that, and part of this premium model transition was deferring revenue, and then getting it to compound over time. So the next year or two is really the time to show that that business model is working. And if it turns out that it is, we may want to spend more into that because, you know, all of a sudden, we're building up free cash flow primarily from growth. Yeah. I mean, because you were pretty closely tied to business formation, but to the extent that you can keep the customers on the platform and sell them more things, then you're going to be less tied to new business formation. I mean, it brings new clients in the door- Yes ... but you can grow revenues quite a bit faster than new business formation, probably. Yeah, especially when you even start to think, yeah, post-formation, all the new subscriptions, and then you layer in the opportunity with attorneys. It's all different opportunities that haven't been realized yet. And then, if you compound it with getting to 20, 30% share, 40% share in the market as the digital leader- Mm-hmm. -that's our goal. Like, again, I don't want to go back to the question on GoDaddy, but like, I look at it and I say, "This should, this should look no different than Intuit at maturity. Yeah. That's- Which is a nicely profitable- Yeah ... highly recurring revenue business. Yeah. Yes, and this business has been profitable before. So we're not worried about getting to profitability. Like, we have levers there. It's more about, can we kind of change this industry completely- Mm-hmm ... and create a new standard for how you get access to compliance, legal, financial compliance as a solopreneur? So last question: Can you talk a little bit about the culture that you've built here? I know there are quite a few executives from Intuit now, so it feels like you're probably pretty happy with the Intuit culture. Have you brought some of that here? Have you changed it? What do you guys stand for? What do you represent? Yeah, we have. We've brought some of it. I mean, I think the, you know, when I joined, it was a quite familial culture. Yeah. Like, a lot of long- Everybody in Pasadena, Glendale. Glendale- Yeah ... and then Austin as well. Austin, and now we have a big office also in Mountain View. And so I think we wanted to maintain that familial culture. I mean, we work well together, but we definitely have put a little bit more of a focus on results. And the place I'd say where we try to diverge from large companies is keeping it really simple. Mm-hmm. You know, like, decisions can be made very quickly. Like, I'm in every product review and design review. That's my background. Like, I want to see the product. I want to be down in the details. But how can we make sure that if people have ideas, they come all the way straight up to... Like, this is not a big company. Our corporate employee base is around 500 employees. Mm-hmm. You know, to put it into context, it's a relatively small company at that revenue level, and so everybody has a pretty broad purview in the organization. Awesome. All right, well, thanks a lot. Appreciate it. Thank you, guys. Yeah.