Had your cup of coffee? That'll get you going. Good morning, everyone. Thank you for joining us at the Morgan Stanley TMT conference. My name's Elizabeth Porter. I'm an analyst on the U.S. Software Equity Research team, and I'm very pleased to have with us today LegalZoom CEO Dan Wernikoff. LegalZoom. What did I just say? ZoomInfo. Oh, my God. I'm going through my question list already for the rest of the day. Sorry about that. CFO Noel Watson. Thank you guys so much for joining us today. Thanks for having us. We are gonna take audience Q&A, and a mic will be going around at the end. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. With that, thank you so much for joining us. Just to level set, kind of bigger picture, LegalZoom IPO'd in 2020- LegalZoom. Oh, my gosh, I'm so sorry. I was reading my question list for this. IPO'd in 2021, you guys have been around for over 20 years. Can you just talk about how the business has evolved in providing online legal services and some of the changes you've made since joining? Sure. LegalZoom is a bit of a heritage brand in a way. was founded in 2001, really in the backdrop of the dot-com bust. At the time of launch, it was a really disruptive online legal form solution. It's hard to remember that, but at a time that was actually disruptive. For multiple years, it sort of had the lead in the legal space. At a certain point, really started to focus on small businesses and formations, also launched a subscription service which was tied to compliance. That was, you know, in the early 2010s. You know, also at that point, took private equity ownership and investment. I'd say it went a little bit more on a journey of monetization and building out the business model, which was actually one of the pieces that attracted me. You know, in 2019, when I joined, you know, I had thought at that time the markets were pretty frothy, and I really wanted to be at a place that had established a business model, had a real solution that customers used. I was a couple of years early on that frothiness, ultimately, when I looked at it felt a lot like an industry that I was used to, which was working with accountants. Attorneys were pretty far behind accountants, and small businesses really struggle with doing some of the simple legal and regulatory solutions that they need to do when they launch. We've been on a journey of really creating that ecosystem. We wanted to both reinvigorate with an investment in the product and build a true platform and automate a lot of the processes behind the scenes, so we could make the product scale. Then, when we did that, we also wanted to create a big ecosystem around it of all the services that small businesses need right when they launch. It's really shifted from being focused on, you know, purely on profitability, to a balance of being a profitable growth company with a real product strategy. On the new business formation side, that has been the primary acquisition channel for LegalZoom, and that naturally just gives you some visibility into the health of entrepreneurs and SMBs in the U.S. economy. What's your perspective on the demand backdrop from kind of that top-down view? Yeah, I mean, there are two different ways to look at that. One way is to look at it year-over-year, and there's some weakness. We came out of COVID and clearly benefited from a lot of demand in our industry; a lot of small businesses formed during COVID. There's a different way to look at it, too, which is against 2019, pre-COVID. If you look at those levels, we're roughly at about 40-45% above where we were at that point. One of the things that's interesting to think about when you think about formations. Mm-hmm It's a pretty stable macro typically. Mm-hmm. Over 20 years, it's been growing at a 5% CAGR, pretty consistently with a couple of hiccups at different points around the recession and obviously now post-COVID. What we're seeing is that it normalizes and just kind of reverts back to the mean. Mm-hmm. We expect that it'll revert to the mean in the next couple of years, with a gentle decline. When you say revert back to the mean, you know, is that going back towards that, you know? Up to 2019. We see it as going back to, you know, establishing and picking up the trend line that was a 5% CAGR. The reality is, you know, if you ask me my personal opinion on top of that, we're relatively conservative people at this point. Yeah ...in terms of trying to, you know, forecast out a macro. My personal opinion is that there has been a little bit of a shift, and you are seeing more businesses form primarily as a result of a lot of people working out of their homes. Mm. Some people ask me, "When people lose their jobs, do they form a business?" I think it's not like you have this immediate moment where you say, "Oh, I just lost my job, now I have this great idea. Mm-hmm. A lot of people have great ideas while they're working, and they've never been able to actually act on them. Yep. Now they're sitting at home and have a little bit of time. We do see a bit of a shift in the types of businesses that are forming. Mm-hmm. Is this more of a structural shift in how easy it's been to form a business online, or can you start one out of your home? Yeah ...that gives you confidence that we can sustain above that pre-COVID 2019 trend? Yes. Yeah. I think there are lots of components. The one is, you know, it's never been easier to start a business. Mm-hmm. Another is that people are literally sitting in their houses. As much as we think everybody's 100%, you know, allocated against their primary employer, I think the reality is a lot of people are actually doing a little bit of moonlighting during the day. Yep. I don't see that changing. I mean, there's a component of the industry that will remain working from home. I mean, we're probably in the, in the heart of that when you think about engineers. I don't think a lot of the bigger companies are actually getting those engineers back in the office. In 2Q 2022, you guys announced a shift in the strategy around the new business formations product, which included kind of lowering the price of the product for free. Most recently, in the latest quarter, you said that you actually think that dropping that price to free overall is gonna have a neutral impact. Yeah. -to the financials. What's the trade-off or benefit that LegalZoom gets in lowering the core product to free? What are some of the dynamics and assumptions that underpin your confidence that you can have a neutral revenue impact? Yeah. Our goal as soon as I got here was to really go after share as the leader in the market. We have 75% awareness, and our next closest competitor is sort of in the under 20% range. As the most scaled player, we wanna go after share. Especially in an environment like this, when some of our competition has been fueled by VC funding. Mm-hmm. -sort of been spending what I would say is more inappropriately, and this is the time to go after it. We've been thinking about how we do that, and the reality is there are parts of our business that are commodities. I mean, actually registering your business as a company with the Secretary of State, it's not that difficult. You know, things that aren't difficult always go to zero. That's just the reality. We have to think about what value we provide. It provides much more guidance. It's an ecosystem of all the other services that people need right at formation. Like, these are not vitamin-type solutions. These are things that are required for a business. We have an entree into them. The more that we bring in, the more we have that entree. Yep. We've been testing this, you know, the confidence part, we've been testing this for too long. Mm-hmm. It's been over six months. You know, we have measured about 50 times, and we've cut once now. We know the result. Yeah. It's that sig, and it's revenue neutral, but it did what we wanted it to do, which is it actually pushed what transactional revenue into subscription revenue was. The LTV component of it is positive. I wanna go back on the share gains. You initially expected to grow share by about 15%. Mm-hmm. The progress that you've shown thus far has been really impressive on that share gain front. What's the latest thinking on this target? Are these share gains coming from other online competitors, or is it the offline attorneys? Good question. I mean, our industry is probably still majority non-consumption. By non-consumption, you know, I mean either people going directly to the Secretary of State and then cobbling together a suite of services that they need, or going to an offline attorney. The offline attorney is extremely expensive. People leave the attorney confident that they paid $3,000-$5,000. People leave the Secretary of State completely confused. You know, we measure Net Promoter in both ends of the spectrum, and what we're trying to do is kind of straddle that middle piece. That middle piece is that we can give you access to an attorney at a lower price and very efficiently, and we can also provide you with low-cost guidance along the way and introduce you to the ecosystem. I mean, the bulk of what we really do is go after non-consumption. Mm-hmm. We do have competitors in the DIY space, but I don't consider them to be the main opportunity. You also just mentioned on the subscription side, part of this whole shift has been pushing away from transaction towards subscription. If I think back to the IPO, about 60% of customers purchased at least one subscription at the time of their initial business formation purchase. The portfolio of subscription services has also definitely increased with kinda Earth Class Mail and LZ Tax. How has this attach rate changed, and where do you see that trending longer term? Yeah. The attach rate is remained pretty stable. It may change a little bit. Mm. As we go to free, because you see lower attach rates, but you see a higher absolute number of subscriptions as a result. Mm-hmm. The way we really think about it is that we have introduced a lot of subscriptions. One of the things that was a precursor to going free is making sure we had an ecosystem that had an LTV that none of our alternatives could compete with. Most used partners, they're very low cost, kinda, transactional bounty type relationships, and we wanted to have the lifetime value associated with it. When we think about what we've offered, I mean, we've introduced LZ Tax, we've introduced Earth Class Mail, which is virtual mail, and now we're gonna be introducing e-signature. The goal for us is not necessarily just attach rates. It's gonna be what's the dollar attach. Mm-hmm. You know, some of these are much higher value, like LZ Tax, which could have an impact on some of the other subscriptions. The goal again is, you know, all about absolute subscription growth, and that can come in a lot of different ways. Yep. I think just to jump in. Yeah. Equally as important is the type of subscriptions that we've introduced, which are higher engagement, subscriptions. You think LZ Tax, Earth Class Mail, and e-signature, which allows us to keep a close relationship with our customers. As we use freemium to drive customer growth, we're attaching subscriptions at that point of formation, but now we have higher engagement, which allows us to attach additional subscriptions, have additional monetization opportunities as those businesses grow and evolve. With some of those subscriptions being much higher priced, you know, the overall subscription average price is around, you know, $250, $260, but things like LZ Tax can be north of $1,000. One kind of first question is, when that product first came out, it was new for you guys. There was a lot of learnings. What did you learn kind of from the last tax season to this tax season? Second, you know, how should we think about the impact to blended ARPU? Yeah. We launched. We said we were doing this. We launched very fast, and we formed it with bodies last year. I'd say I would give us a C-minus. Like we didn't deliver an efficient service, and because it wasn't integrated into our product, there were lots of steps for a customer to work with an accountant. There were 2 really interesting. Well, 3 things we learned. 1 was that the channel itself is super powerful. Like, we're able to sell an LZ Tax solution. People at formation, they generally are confused about what the tax implications are. We proved that out. We also proved that if they worked with 1 of our accountants, they loved the experience with the accountant specifically. We also learned that we have a different segment of customers. When we talk about some of our customers, you know, almost half of them they're pre-revenue. They don't really need a filing transaction; they just wanted advice. We didn't offer an advice SKU, so what they did was they purchased the filing SKU, and then after a couple of months of working with the accountants, they attrited. Which, you know, made a lot of sense, and we just kind of embraced the learning. Yeah. Now we have an advisory SKU that's lower priced and a monthly subscription that goes side by side with these other ones. The interesting thing is, you know, that it becomes a feeder for filing. Mm-hmm. It's a pretty natural channel. It's a way that embraces the customer and kinda how they approach taxes versus kind of us forcing a filing transaction initially. Probably the bigger thing is we're building an online, you know, assisted tax experience. In the off-season, we built, you know, onboarding in our products. We built tax intake, which is really all the questions. If any of you use the DIY solutions, all the questions that lead up to uploading your forms, and it kinda helps set you which forms have to be uploaded. Ultimately, you know, it's interacting with your accountant directly through our application. It's as good as any solution that's out there from a product standpoint at this point. This tax season is dramatically different because now we can watch every customer go through the funnel, and we know exactly. We're continuing to learn. Mm-hmm. There are things that we're gonna screw up, but we learn where they get stuck, when we need to insert the accounts, and we're just driving them down the funnel to a good tax return. Noel, I'd love to hit on some financial questions. When I think about the initial 2023 guidance, calls for about 1.5% revenue growth at the midpoint. There's also some headwinds in there from exiting some legacy partnerships. But kind of embedded within that full year guidance, it does assume some improvement in the back half of the year, particularly related to subscriptions. Can you just help us unpack what are the assumptions and the sources of confidence that give you that visibility into subscription revenue growth being stronger in the back half of the year? Yeah. I think importantly is everything that Dan- Yep. Was just talking about in terms of the rollout of freemium. You saw the share gains that you alluded to in Q4 weren't fully rolled out in Q4. Our plan is to have it fully rolled out pretty imminently here. We've said. A couple of days. We've said, you know, by the end of the quarter. Great. We're targeting earlier than that. What that does is in driving that customer growth, there's a trade-off of average order value. Mm-hmm. You don't necessarily see the growth on the transaction side from a revenue standpoint. We're driving more customers, expanding the targeted audience, a little bit more of a price-sensitive customer. You do see some at-attached degradation. As Dan mentioned earlier, overall, many more subscribers and subscription units, and that allows us to get to that re-acceleration in the back half. It's also worth just mentioning that embedded in our assumption is a pretty bad macro in the back half of the year. Mm-hmm. We are assuming a full-on recession and deceleration in the macro. That while it may not look like a large growth in the back half, it's sort of baking in what we're not yet seeing, to be honest. In fact, if you look at January, the macro is just down, you know, a couple of points against prior year. February, we do think it'll be up the prior year. Every month where we see some slight benefit relative to our forecast, it sort of accrues throughout because you won't see a drop, you know, on a dime. Yep. You'll see it sort of gradually bake in. On the margin side, the initial guidance calls for about 600 basis points of year-over-year expansion, despite the fact that you are absorbing some of those top-line headwinds. First part is, where are you most focused on taking costs out of the business to achieve that target? Second is, how much of the reduction is structural versus more just navigating the tougher macro that you embed in the guidance? I would say first, you know, revenue is growing next year, this year. 2 is a lot of the cost savings were realized throughout this year. Mm-hmm. with adjustments that we made in the business and efficiencies that we realized in our operations. We're annualizing the benefit of that in this year. We continue to look to automate manual processes, and we've said before, we're kind of still in the middle innings of that and have more opportunities. Overall, the business is becoming more efficient. We've also hired the last few years, we've hired a lot in our corporate functions and kind of fully nourished them. We'll start to see leverage there. Importantly, from the marketing side, with the freemium rollout, we're converting a lot more of the traffic that we currently have on the site. Our marketing dollars are working harder for us, so we're expecting to benefit from that in terms of paid marketing efficiencies. We said we're pulling back on our brand spend, which, you know, from a marginal return standpoint is our lowest returning dollar, which helps efficiencies. Then as we roll out freemium, even through the testing, we haven't really been able to test the messaging around free. So as soon as we go to 100%, through all of our different channels, we'll be able to change the content and the deliverables in there so that we can really espouse the free messaging. That will help not only on our paid efficiencies, but in the free traffic we're able to drive to the site as well. And then- You didn't ask it, but I'll answer it. I'll answer myself. One place that we didn't cut from in any way, and that we're nourishing pretty aggressively is the product investment. Mm. If you think about the last couple of years, you know, admittedly, there was more of an infrastructure and foundational investment than even I expected when I joined, and we're pretty far through that at this point. I mean, I'll give you an example. We were completely on-prem. We had, you know, no data warehouse. There was no infrastructure. You know, you have to rebuild a team, build infrastructure, and now we're doing the fun part. I mean, we're building product. I came to build product. That's what I do. And we're now building things that I think when people see it snap together, which you'll start to see at the end of this year, it's basically the destination for small business compliance. That doesn't exist as a category. Small businesses, they actually keep all of their information in disparate places. They have a different insurance broker. They have their licenses in a folder. They have tax stuff in a shoebox. They get their mail, and their mail has important documents. They don't look at it. They get notices from the Secretary of State. They miss it. This is what we're pulling together, and it just doesn't exist as a category. That product investment is critical and if anything, we're probably growing our product team much faster than the industry. When we're going a bit, a little bit more pushing the gas on that product- Mm-hmm ...maybe more of a little bit more of a product-led growth motion, rather than relying more so on marketing dollars to be that traditional way that you attract customers in. Another opportunity is partners. You recently have announced Wix as a go-to-market partner in order to acquire new customers. What's the opportunity to add more partners? Yeah ...like Wix, and can that kind of be a change in the longer term necessarily how much... Yeah need to invest in marketing? I mean, there's two ways traditionally, partners have been something that's opportunistic. Let's just market something that customers don't have. The reality is that when small businesses come to us, for instance, 80% don't have a domain. Like, which was pretty amazing. I was actually shocked by that. I assume a lot of people start with a site and then eventually form. There is an opportunity to market services like that. That we never wanna play outside of the compliance space directly. What we look for now is not just to market that third party, but look for the brands where people might start with them before they actually create an entity. It's not a massive set of people at the end of the day. We know sometimes people will get insurance because they get a job, and the person who's hiring them says, like, "You need to carry insurance." During that process, they might find they need to form. We're working with Next Insurance, and we market them, and they're gonna ultimately market us. You know, Wix is a great example. I mentioned 80% don't have domains. They have so many customers that don't necessarily, you know, ever even consider creating an entity. They need an education as well. They have 20% that are in operation. That's a channel. We wanna work with them as well. We just struck a deal with Chase. When people go get a bank account and they're starting to really consider the separation of their personal and their business financials, like, that should be a channel. We're already a big channel for getting people their first bank account. We wanna work with a premier partner there. It's a handful, and we don't want to be spamming our customers. We want it to be highly targeted, and that's part of that platform investment we're making, where, you know, we have so much information that we collect at the setup of a business. We essentially have a profile, and we wanna get smarter about what are we offering them. Like, is this tailor-made to this specific customer? That's the strategy. I'm gonna open it up to audience Q&A. Before I do, I wanna ask about generative AI. Mm-hmm. It's been top of mind for many... That's shocking. Yeah. First time this room wasn't expecting that. Yeah. See See the panel yesterday, what we have coming up later today. Yeah. People are just trying to think through the ramifications of this new, just capability, that you can do and how that impacts existing software solutions. How do you think about the potential implication for the online legal services space? Well, I'm highly qualified because I'm old and I worked in product. I've seen a lot of platform shifts. You know, everything started in the desktop and then moved online and then moved to mobile. You see different technologies that really can change an industry. It's clearly one of them. Our industry is unique. It's almost like medicine that, you know, it's highly regulated, so you have to be credentialed to provide advice. The way it'll probably work in our industry is, you know, helping us invest in a platform that makes attorneys much more effective and efficient. Now what's interesting, I said this before, you know, our big competition is the Secretary of State. I don't consider them competition, I shouldn't say that. That's an alternative. The Secretary of State, you know, if someone really knows what they wanna do, it's a great way to go. Just go directly to the Secretary of State and form. I don't think they're gonna make massive innovative investments- Yeah. -in ChatGPT or in, in generative AI. Then on the flip side, the main attorneys for small businesses are like neighborhood attorneys. You know, onesie, twosie shops. They don't go to a big law firm. The bar association is a guild, like let's just be clear, and they're there to protect the status quo. They even have rules that you cannot give any equity to a non-attorney. It's not like there's a tech investment happening in these little shops. You know, in a lot of ways, I think you can look at this and say, it's probably a huge benefit for the market leader, to think about how we integrate it into our platform, and then, you know, distribute it to all those people that need it on both sides of the equation. Obviously we're thinking about all of that, and we're not gonna share any plans yet. I don't think it's a race, by the way. Like, it's not a race. You'll see all types of crap essentially deployed, I'm sure our competition will do some sort of tactical thing that's non-impactful. That's not how we play. Like, we play very long term. Do we have any audience questions? Come on, give us a hard one. I'd love to switch a little bit on the M&A side. You guys have done some acquisitions, whether it was Earth Class Mail or Revv, which was the most recent one for the e-signature capabilities. Specifically on Revv, you know, how do you imagine that fitting into the broader portfolio? Also in terms of like pricing and how you're bringing it to market. Yeah. How should we think longer term about the approach to M&A going forward? Yeah. We I mean, we have pretty clear capital allocation principles. We focus first on our own internal investment. We're pretty nourished there. Then we do think about the way to accelerate it is small tuck-ins. So we've done a couple of those this last year, Revv being the most recent one. Then after that it's share repurchase, and we think about, like, how can we distribute back. There's really an interesting part of Revv that, you know, I'm glad you brought that one up specifically. If you think about us, like we started, I talked about our heritage, we were an online forms company. You know, this is somewhat bizarre to me, but, you know, somewhere along the way, there was no investment in online forms. If you think about the main use case for an online form is it's sent to someone, and they sign it. I mean, it's just obvious. We are a place that has a repository of all of your legal documents. Mm-hmm. What we know is about 40% of our customers have subscribed to a subscription or to a signature service. What we also know is that they're like overcharged because they're buying an enterprise solution because no one's really designed and priced it for small businesses. That's really the objective there. If you think about virtual mail, the objective there was that, you know, most small businesses that form now are home-based business. I talk about work from home. Very clearly, when you form your business, you have to provide a business address. If you use your home address, all of your customers know where you live, and you're in a public database. Right at that moment, we help them understand that that's a really important decision and they should consider virtual mail. There's also many use cases where your business is in a different state. Let's say you have real estate, so you can't even get that mail. These are all things that, you know, just accelerate our roadmap of being this compliance back end for customers. They're, you know, this is a really this is a great time to have cash, and we generate cash and have cash. This is, this is an area where I think you'll see us continue to try and do small tuck-ins, nothing big. We are a platform, we don't buy platforms. That's one of our principles. That's, that's really, been something that's been super helpful for us. With about the minute that we have left, we covered a lot of great topics, whether it's the adjustments to the go-to-market strategy with the freemium rollout, the expansion of the portfolio. You know, as you look into 2023 and even beyond, you know, what are you most excited about, and what do you wanna leave with investors with today? Yeah, I mean, it's product, product. If you haven't heard, if you're not following. This has been a strange journey for me coming to LegalZoom. You know, I joined in October 2019. We changed the management. Well, I exited the management team, and then COVID hit. As COVID hit, you know, we had to scramble because volumes went up. Then we benefited from it a little bit and did an IPO, and the IPO cleaned up our balance sheet, put cash on the balance sheet. In the background at all times, we're building a platform, we're building a foundation. What you're gonna start seeing is that being realized. You know, by the end of the year, our goal is that it's very visible to everyone. Right now, it looks like point solutions because we're deploying lots of functionality. It will come together and we're super excited. We know it doesn't exist in the industry. Mm-hmm. We're creating something pretty new and pretty novel. Great. Dan Wernikoff, thank you so much for sharing your insights on LegalZoom with us today. We look forward to watching the story.