Good afternoon, and thank you for joining the LegalZoom presentation today at the Growth Stock Conference. My name is Patrick McIlwee. I am the primary coverage for LegalZoom here at William Blair. For compliance purposes, I'm required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website, williamblair.com. We're very happy to have the LegalZoom team at our conference again this year. From the company today, we have COO and CFO Noel Watson. For background, LegalZoom is the market leader in online legal services for small businesses, offering a comprehensive suite of services and products to individuals and businesses across the country. With that, we're going to jump right into a fireside chat with Noel. I'll leave a couple of minutes at the end for questions from the audience. Just before I forget, the breakout for this is in Burnham A upstairs at 2:00 P.M. Noel, I'm sure there's a good amount of familiarity with LegalZoom here at the conference. But just given this is a generalist conference, for those not quite as familiar, can you kind of start with a high-level overview of LegalZoom, what you do, what products and services you offer for the uninformed in the audience? Yeah, sure. First of all, thank you for having us, Pat. LegalZoom has been around for quite some time. It's a very well-known brand. I think we're pushing 25 years at this stage and really created the online legal services space. It started with estate planning, bank wills and trusts, and other legal forms. It expanded into small business formation and the various transactions around that, getting an EIN, an operating agreement, amendments. Sometime after that, it was recognized that customers really needed support with compliance. This was the first foray of the business into subscription products, where they created compliance-oriented subscriptions for registered agents and general compliance. They started to build out an attorney network and offered legal service plans as well. Over the last five years, we've really just built on that, expanding the ecosystem of services that we provide to customers. Entrepreneurs, when they form, they do not think of it as a one-time event. They are forming a business. They want to operate it long-term. They want to grow that business. We want to be there to provide services to support them along the way. Whether it is owned services that we provide directly, think of things like the compliance services we just talked about, legal services, virtual mail, virtual address, business licenses, forms, and e-signature, or through curated partnerships, where we have gone out and found best-in-class partners that are service providers in areas that we know will benefit these businesses as they grow and evolve. That extends to products like banking. You are starting a business. You need a bank account. Banking with Bank of America, websites and domains with Wix, insurance with NEXT, taxes with 1800Accountant. Really a full spectrum of services. All these different services help provide a holistic solution for customers to provide them what they need as they operate. That is all wrapped in the expertise of the attorney network and our owned law firm that we offer to provide that wrapping that really differentiates us in the market from any other online legal service provider. OK, yeah, that's great. With that comprehensive offering, how do we think about the market opportunity you're addressing? In your investor presentation, I think a helpful metric, you say that only 4% of legal services are delivered online in the U.S. How do we and how do you think about the market opportunity you address? Yeah, it's no secret that technology investment in the traditional legal space has lagged and is underpenetrated. That is why we have this opportunity. I think that's because of a couple of factors. One is, historically, and even today, absent a couple of exceptions, non-attorney ownership of law firms is not allowed. It's hard to think about attracting software engineering talent to a law firm. As you move quickly beyond the really large-scale law firms and down the long tail, these folks are so busy acquiring customers, doing customer intake, evaluations, billing, collections, et cetera. They barely have time to do billable hours, never mind invest in technology. It does create an opportunity for us. I think in that regard, not only our current suite of services is making it really simple for a business to form and to get operational and stay compliant, but also as we enhance our service offering today and really expand into that opportunity, we're looking at more personalized, higher-touch, white-glove services that afford us the ability to charge more, but to provide that similar factor that traditional law firms provide, which is that personalized offering, but at a lower price point and with a different level of expertise because our focus is so narrow and specific that we think we can do a better job at it. A much stronger value prop. We can charge more, but less than the traditional attorney. We think that's an important part of the market opportunity for us. Got it. Got it. That's great. When you go after that opportunity, who do you see as your biggest competition? Is it the status quo, Main Street lawyers? Is it copycat offerings online? Is it more disruptive technologies? What's the biggest competition? Yeah, I mean, in our space, I think like everybody else's, competition's multifaceted. We generally categorize it into three components. One is the Secretary of State sites, which offer formation for free, so folks can go there. If they're extremely cost-conscious or they're really not in need of a holistic solution or suite of services, that may be a good option for them. Then you have the online DIY formation space. We're really one of the few that actually have attorney services that we wrap it in. To your point, there's a long tail there. We're by far the largest, by far have the strongest brand equity and recognition. In that space, most folks are just trying to copy what we do, but can't really match the full suite of what we offer. Then you have the traditional offline attorneys. That is still where the largest portion of the spend is. That is where we think these offerings that are enhanced services can help us start to move upmarket into that territory. OK, great. Historically, you've served that market with a little bit more of a transactional tilt. It's kind of a transactional SaaS model, if you will. In recent years, there's been a very clear and conscious push to drive towards a subscription offering. Can you talk about how you've done that, why you've done that, what success has looked like so far on that front? Yeah, I mean, I think the why is start with that is easiest. One, for our customers, they expect it. They want it. Like I said earlier, they're operating a business in continuity. They want partners that are going to be there to support them along that ride. We have structured our services so that we can continue to be there to support them. For us as a business, it allows us the opportunity to have more predictability and more visibility into our revenue streams, the opportunity to create efficiencies around the way we deliver those subscription services to generate margin improvement, and to help insulate us from some of the volatility that you may see in the macro from quarter to quarter. It's been a multi-year effort. I think several years ago, the business looked very different. It was much more transactional. We're now pushing to the point where we're approaching two-thirds of the business being subscription. It really takes a culture and a mindset around subscription first. That's one of the things that Jeff has a strong background in and really brings that religion, for lack of a better word, to the organization. We're very much looking at all opportunities to try to optimize towards subscription where it makes sense for the business. OK. I think it's germane on that front. Can you talk about, for those that haven't been following as closely, some of the structural changes you've made to the business in recent years, winding down the tax offering, shifting to the free formation flow, some of those things you've done over time, and what the changes have looked like in terms of your business model? Yeah, we've made a lot of changes in the last five years. I think they all kind of fall on two different veins. One is to improve our customer experience. We're making changes to be optically focused on improving the customer experience. Then secondly, improving operations, trying to operate more efficiently and more effectively. Importantly, a lot of the investment we've made in the five years has been on infrastructure, just improving the systems and the process that we use to deliver our services and up-level that. It has allowed the organization to move a lot faster, to be more nimble, to deliver our products more quickly to customers with more accuracy. It really improves, it does the double duty of improving the user experience and creating efficiency. Moving to free, our sales team reorganization, those things are all different components of either driving operational efficiency or improving customer experience. OK. Something that Jeff talks a lot about is operating or providing products where you have a core competency, where you're competitively differentiated. Part of that strategy, it seems, has been leaning more into partnerships. Can you talk about some of the partnerships you've leaned into over recent years, some of which have actually replaced products that you used to offer, and how that changes the economics of the business model? Yeah, it's a great question. Yes, I think that's one of the changes is that we've really kind of narrowed our focus and created clear demarcation lines on things that we should own and deliver and things that would be better provided by a partner. That's gone both directions. We've had partners where we've actually then moved the product in-house because we thought we could deliver a better user experience. There was no brand out there with strong affinity where we couldn't replace it with LegalZoom as the brand. Business Licenses is an example of that. On the other end of the spectrum, where we've gone the opposite direction is with our tax offering. We had a tax service that we were growing internally. The good news is we proved out that there's demand for it. Our customers want it. The amount of operational attention and mind share and scaling that was needed was going to be a long-term prospect for it. We thought it better to use a partner that had been in business for a long time, had really streamlined the delivery, had a broad set of SKUs that they could offer to customers beyond what we could. We moved that partnership to 1800Accountant. Both parties are really happy with the start to that relationship and what we're seeing so far. We're seeing really good kind of NPS scores from customers early on. The financial impact is, as we were scaling our owned tax business, that was putting pressure on margins, both on gross margins and operating margins. When you shift that to a partnership, all that operational cost goes to them. We actually are on a rev share with them. We're recognizing the revenue only. That helps with both gross margin and operating margins. Worth calling out, with partnerships in general, we are really focused where we can on also structuring, talking about subscription mentality, on structuring those as recurring revenue relationships and trying to make them bilateral, where not only are we bringing products to bear from our partners to our LegalZoom customers, but also finding opportunities where our partners can be lead generation for us from a business formations or certain of our other products. OK. I think it's worth getting into the numbers a little bit on that because you kind of wound down the LegalZoom tax offering. You're guiding to 5% top line growth this year. There's some moving pieces within that. Can you talk a little bit about that part of things, parse that out? Yeah, there's some headwinds and tailwinds as always. I think on the headwinds part, BOIR, Beneficial Ownership Information Reporting, was a key contributor on our transaction line last year. That requirement went away at the end of the first quarter this year. That'll be something that is a headwind. The good news there is that from a product suite standpoint, from a customer lens, it reminds customers on just how complex and evolving the compliance landscape can be and then how valuable our product suite is overall. Tax, I mentioned we moved to a partner. We have this legacy subscriber base that will roll off. Both of those are about four points of revenue headwind this year. In total. In total. We acquired Formation Nation in the first quarter of this year, which we're really excited about that acquisition. We brought over a very seasoned leadership team. There's a bunch of synergies and complementary aspects of that deal that we're excited about. That is going to help our revenue forecast for this year. They're more transaction-oriented than subscription. It gives us an opportunity to run the same playbook that we've been running with LegalZoom on a shift to subscription. It may create some short-term noise, definitely better over the medium and long term. Long-winded, but getting to subscription revenue growth within underneath that 5% was 8% in the first quarter. That was a re-acceleration after four consecutive quarters of slowing growth in our subscription line. We're really excited about that. That was against the macro that was down 5% in the quarter. It's really started to show how this mix shift to subscription and focus on it is helping to insulate us from short-term volatility in the macro. We guided to double-digit subscription revenue exit rate growth for this year. We see that 8% improving as we move throughout the year. OK, great. That's a great segue into my next question. There was a very clear step up in the growth trajectory in the first quarter. I think a big part of that was you grew subscription units by 20% year over year. Understanding that there was a part of that that was some bundling strategy you implemented last year, a little bit of pricing impact, can you kind of talk about what drove that, I guess, against the grain of a tough macro? Yeah, I think both of those things are factors. Both of those things are kind of levers that we're using in our shift to subscription. On the bundling side, what we've done is we've incorporated additional subscription offerings into our higher-end SKUs, into our pro and premium SKUs, to really try to differentiate the value prop further of those higher-end SKUs from our basic or free SKU. That's actually helping to create a mix shift in SKU selection from our customers. We know that customers that are willing and able to spend more with us upfront are able to spend more over time. They're generally more stable. They last longer. We can service them longer and then ultimately achieve greater monetization. We're excited to see that mix shift. Some of those subscriptions that are in there, they're lower RPU subscriptions, lower cost, and lower retention. Our opportunity with this is to create, now that they have access to them, create the activation, create the engagement so that we can start to improve that retention profile of those subscriptions over time. As we lap the inclusion in those bundles, we'll start to see that subscription unit growth moderate. Correspondingly, some of the pressure that it's put on RPU, given their lower value subscriptions, we'll see that start to subside at the same time. OK, got it. Can you talk about the pricing side a little bit as well, some of the changes you've made to the compliance products? Yeah. In the late third quarter of last year, we reverted pricing on our registered agent product back to $249. It historically had been $249. We then moved it to $199. We moved that back. Thus far this year, we've actually been testing some pricing increases on registered agent on the renewal, on our base. While any price increase drives greater attrition, it's within our expectations. It's really proven that that product is pretty inelastic from a pricing standpoint. It's a needed, required product. We are in the process of, while we continue to test, starting to roll some of those pricing increases out to additional cohorts as we move through the year and those cohorts renew. That's a part of what's helping to drive growth in that line as well. OK. Needless to say, quite a few moving pieces in the top line. A lot of moving pieces and more to come. That is just one product. We think there are opportunities. We want to match pricing to value. We want to continue to increase the value that we provide in our subscription so that we can increase pricing. Wherever it is mismatch, we want to correct those things. We will be looking across our full product suite as we move through the year. OK. I think we've covered pretty well on the subscription side of the business, the transactional side. I know you all have kind of moved away from the KPI of business formations because the goal is for that not to necessarily drive the performance of the business going forwards. Just for the audience context, can you talk a little bit about how formations have trended in recent years? Obviously, they jumped a little bit during the pandemic, where they've settled out and where you think they could go over time. Yeah, I mean, we saw a step function improvement in the macro for business formations. And we use Census EIN filings as a proxy for business formations. I think that's a function of a few different secular tailwinds. One is remote work. As people shifted to home, a lot of folks started side hustles. But there's other things like the gig economy and NIL and influencers. Everybody at some point is going to be forming LLCs around themselves. That paired with it's never been easier to form a business through a company like LegalZoom, but to also get it operational with very low cost of capital and have enterprise-like capabilities almost overnight. And so that spurs entrepreneurialism because it's so easy to get started. So we saw that spike. And today, the macro is still healthy. It's still at levels significantly above pre-pandemic levels. We're talking 50% higher than 2019, although a little bit softer to start the year. It was down 5% in the first quarter. We had planned for something flat. I think you mentioned earlier we were still able to overachieve in terms of our Q1 results relative to our guided expectations and consensus. Business formations, they're still important to us. We'd much rather see the macro up 10% than down 10%. We're really focused on quality share. How do we bring in those quality customers? How do we grow that quality share? That profile is going to drive a better outcome for us over the long run. OK. So safe to say you think you can grow kind of regardless of that macro? But obviously, it helps if it's moving in the right direction. It helps if it's moving in the right direction to the extent we can grow quality share within that macro. When you think about the volatility and the puts and takes to macro, a lot of times you're shedding those low-calorie, empty-calorie folks that were thinking about forming a business and say, hey, I'm going to put it off because sentiment's a little soft, versus the folks that are really engaged and really confident in how they start the business. Those are the customers that we want and where we need to grow our share of. OK. Last clarification on that. You're guiding to, I think, a mid to high single-digit decline in macro formation this year. You don't believe at this point that we're going to see a big reset back to the pre-COVID levels in the formation, just given structural changes? I don't think so. I mean, we're far enough away from the pandemic at this point where I don't see that happening. If you think about the historical CAGR for growth in formations and you just roll that forward through that pandemic to today, it means you would need to see a little further regression to get to that mean. I think we're beyond the complete reset stage in my mind. Although it's hard to predict. You never know. There's tariffs and all this other uncertainty abound. That's not a scenario that we expect. OK. So you hired a new Chief Technology Officer in March. Can you talk about some of their early priorities and specifically how you hope to leverage AI within the platform? Yeah, absolutely. We're super excited to welcome Perfect to the organization. We think he's going to have a big impact. Right now, I mean, spending time getting to know the technology organization, understanding what folks are working on, how resources are prioritized, making some tweaks there, finding where there are elements of the technology that need to be addressed quickly and can provide a strong ROI in addressing. More importantly, really focused on AI and how AI can be a lever for our organization. We've started down that path. There's a number of work streams that are happening internally. I think he can really help accelerate what we're doing there. We're excited. We think there's a pretty big opportunity to leverage AI to enable our experts to be much more effective and efficient. When I talk about experts, that could be our customer service team. It could be our fulfillment team or the attorneys in our attorney network or in our law firm. Across the board, there's opportunities to really leverage it to help us provide a better experience to our customers. OK, great. You had an interesting announcement talking about AI this morning with Perplexity. Can you talk about what that brings to the platform? Yeah, we're excited about that relationship. We think we're one of the early partners with them, certainly, if not the first in the legal services side. For us, I think we've all realized the search landscape is changing. And anybody that's used one of these AI-driven search engines understands that and can see the shift occurring. For us, it's an opportunity. We want to make sure we are the leader from a legal services space as it relates to being that preferred result or that preferred provider when folks are searching for legal services. We hope this is the first of many. We're super excited. Perplexity is a big player in that space. It's a great brand. They're growing like crazy. We expect it will be meaningful for us. We're not stopping there. Our goal is to really make sure that, again, we continue to command a leadership position as that shift occurs, given we are the largest and best player in the online legal services. OK, that's great. Very exciting. I see this flashing. We only have a few minutes left. That means does anyone in the audience have a question they want to ask Noel? Otherwise, I can ask one or two more before the breakout. OK. The business is generating a lot of free cash flow at this point consistently. Over the past year or two, we've seen you lean pretty heavily into share repurchases. Obviously, you allocated some capital to an acquisition earlier this year. What are the priorities going forwards, if you could kind of rank order them in terms of capital allocation? Yeah, we're super excited about the strength of our balance sheet, the cash flow that we're generating. We have over $200 million on the balance sheet today. Like you said, we're generating strong free cash flow. We expect that to continue. It gives us a lot of flexibility. We did a significant amount of share repurchase last year. We repurchased $165 million worth of shares. I would expect this year to be a bit more tame. I do expect us to be active, especially at these levels. We believe we're undervalued. We want to make sure that we maintain flexibility for the M&A side. We have a strong pipeline. We're still engaged in lots of conversations. To the extent that something ticks the right boxes for us, we don't have to do something. If we find something that's compelling, we want to make sure we have the liquidity to make that happen. We're balancing across both of those capital allocations. OK. Quickly, before we finish up, if you were to look into that M&A side of things, what's interesting for you all at this point? Yeah, I mean, I think it could span a couple of things. Certainly, if there is some type of service or a product that we think our customers would really want, and it feels like it's something that we should own versus partner with, that is something we would consider. If we find another smaller formations player that has its own channel, that has a subscriber base, we look at that as a cost of acquisition comparison. We spend a lot in our customer acquisition marketing and other channels. We can see that as a channel. We want to make sure that there's other kind of complementary things and that financially, with a modest assumption for our synergies, that it's going to be accretive. That would also be something that's interesting to us. OK, great. I think that about wraps it up. Thank you, Noel, for being here. Thank you, everyone, for coming to the presentation. A reminder, the breakout will be in Burnham A upstairs. Thank you. Thanks.