Legalzoom.Com, Inc. Q2 FY2021 Earnings Call

Thank you for standing by and welcome to LegalZoom Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call may be recorded. I'll now hand the call over to Danny Vivier, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello, and welcome to LegalZoom's second quarter 2021 earnings conference call. Joining me today are Dan Wernikoff, our Chief Executive Officer, and Noel Watson, our 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," "confident" and similar expressions, and they are not and should not be relied upon as a guarantee of future performance or results. Results could differ materially from those contemplated by our forward-looking statements. We caution you to review the risk factors section of our reports and filings with the Securities and Exchange Commission for a discussion of all the factors that could cause the results to differ materially. The forward-looking statements we make on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures. 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. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now, I'll turn the call over to Dan.

Thanks, Danny. And welcome, everyone. Thank you for joining us today for our first earnings call as a public company. Noel and I enjoyed meeting many of you in the weeks leading up to our IPO and appreciated all the support along the journey. Before we discuss our second quarter results and review our priorities for the remainder of the year, I want to take a moment to reflect on our mission here at LegalZoom and remind everyone of the significant opportunity ahead of us. A little over 20 years ago, LegalZoom started with a vision to disrupt legal services by leveraging technology. We believe then, as we do today, that legal services need to be democratized so everyone can access and afford them. We take our responsibility very seriously, knowing that as we empower small businesses with the tools they need to thrive, we are in turn supporting the success of the U.S. economy; a purpose all the more inspiring as these small businesses continue to navigate a global pandemic. Our journey to democratize law brings with it a compelling economic opportunity. Despite the digital transformations we've seen across many other large and highly regulated end markets like tax prep, financial services, or healthcare, the $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation. In that, last year just 8% of legal services in the United States were provided online. The majority of legal services are still conducted through offline attorneys, many of whom do not have a functioning website, let alone software to automate routine tasks enabling a lower cost of service. In a system plagued by inefficiencies, small business owners are left holding the bag or just spend their limited resources on services that are very difficult to navigate at a price they often cannot afford. Ultimately, many choose to avoid accessing legal protection altogether, leaving small business owners and their families vulnerable to significant financial risk. LegalZoom is very well-positioned to serve this huge need in the market. First, we are relentlessly focused on the customer experience and have built differentiated products that make business formation and legal compliance simple. The LegalZoom product still converts complex government forms into easy-to-follow questionnaires that can be completed efficiently with little to no human involvement. Our product's ease of use and affordability has resulted in a Net Promoter Score of 65, more than double that of traditional attorneys. Second, we have a clear brand advantage with our unaided awareness roughly eight times higher than our closest competitor. The strength of our brand has been built over two decades of steady investment and cannot be quickly nor easily replicated. This gives us a meaningful head start. Third, we have a proven ability to navigate the complexity of the U.S. legal and compliance system across all 50 states and over 3,000 counties. We have a broad network of independent attorneys that are available to provide our customers with high-quality legal and compliance support when they need it. These attorneys have deep expertise in SMB-specific matters and geography, which creates a superior experience for our customers reflected in our promoter scores three times higher than a typical offline attorney interaction. While we operate within an attractive market that is both resilient and poised for growth, the rise of the gig economy and proliferation of SMB enabling tools are making it easier to start a business than ever before. We believe we are well-positioned to benefit from these macro tailwinds, which should lead to accelerated share gains as the leading digital formations provider. And finally, we've methodically built a best-in-class leadership team with an attractive mix of SMB domain expertise and experience leading high-growth technology companies at scale. I'd like to now highlight our results for the second quarter of 2021. In the second consecutive quarter, revenue growth accelerated, ending the period at $150 million, up 36% year-over-year. This was driven by the transactional side of our business, with transaction revenue up 45%, and a mix shift towards business formations which helped drive higher average order values in the period. This shift is a positive signal that our efforts to reposition the LegalZoom brand are resonating with small businesses. The top-line strength flowed through to our profitability metrics with adjusted EBITDA ending the period at approximately $22 million, or 15% of revenue. I'll let Noel unpack the quarterly results in more detail. It is important to remember that quarterly growth rates since 2020 are and will continue to be impacted by the effect COVID-19 had on business formation since 2020. In summary, we are very pleased by our second quarter results and believe we're entering this new chapter as a public company with momentum on our side. It's important to remember that we're building LegalZoom into the next great category leader. The executive team is focused on making the right investments today to support durable top-line growth into the future. I'd like to spend the remainder of my time providing an overview of our three key growth factors with an emphasis on areas of focus for the latter half of the year. The first factor is scaling our core formations offerings through marketing and core product experience. As the clear digital leader in a massive vertical with very little tech adoption, we believe now is the time to accelerate our growth and take share from offline competition. We started ramping our marketing investment in 2020 with customer acquisition spend up 77% year-over-year. We were able to grow spend significantly while maintaining a tight 90-day payback period with most of our acquisition cost covered by the upfront transaction revenue alone. We are confident that there is room to continue scaling our immediate spend, particularly as we add new cohorts at higher LTVs driven by additional monetization opportunities and improved customer retention. We are also entering new channels such as digital video and paid social, leveraging media mix modeling to optimize spend allocation and improve overall returns. In addition to our performance marketing efforts, we are focused on making the right SEO and brand investments to drive a larger share of organic traffic. Today, despite our brand leadership, the minority of our traffic comes from earned channels. This is both a problem and an opportunity. In the near term, we'll continue to add depth to our in-house team and equip them with the tools they need to build a best-in-class SEO function. Another lever to drive core share gains is product. When I first arrived at LegalZoom in late 2019, our technology stacks severely constrained our testing capacity. We quickly set in motion our plan to modernize our platform, making the critical investments we needed to scale. Today, the company has a product-centric mindset and we are rapidly A/B testing our products to drive improvements to conversion, subscription cross-sells, and customer satisfaction. In the near term, we'll be focused on improving the formation process by refining our questionnaires, streamlining the purchase experience, and optimizing our lineup of subscription bundles. Our second key growth factor is building an ecosystem of SMB subscription services. We note that in 2020, approximately two-thirds of our customers had not begun upgrading when they formed their businesses through LegalZoom, giving us a unique position very early in the SMB lifecycle. At formation, we have an opportunity to earn our customers' trust by introducing them to the right set of products and services they'll need to operate their business. Certain of these services we will deliver ourselves. LZ Tax, which launched in October of last year, is a good example of how we want to build in-house expertise within compliance. The most frequent support questions we received at the time of formation relate to tax implications, and over 70% of small businesses do not have an existing accountant relationship at the time of forming their business. LZ Tax offers an accounting and bookkeeping bundle on a monthly subscription and access to CPAs that can provide tax advice and complete annual business tax filings. It's early days here and while we do not expect LZ Tax to be a material revenue driver near term, we remain very bullish on the long-term opportunity and are investing aggressively to accelerate its growth. From the second half of this year, we expect to roll out a tax solution across 100% of LLC formation traffic. With more traffic, we'll be able to accelerate product testing to help fine-tune our commercialization strategy. In parallel, we will work to build out our operational infrastructure and scale our CPAs to meet anticipated future demand. We also plan to expand the services we bring to our customers by partnering with best-in-class third-party solutions to offer business checking accounts, payments, website hosting, and other relevant adjacencies. In 2020, we made a significant change in our strategic approach. We are actively transitioning our existing one-way partnerships with bounty payment structures in favor of two-way strategic and well-integrated partnerships built on recurring revenue share models. We expect this transition to weigh on our partner revenue line in the near term, but we are confident this change in approach will lead to better customer retention and drive higher ARPU over time. Our third and final key growth factor is integrating attorneys into our products so that small businesses can feel confident expert support is just a click away. Delivering this integrated service can help us in three ways. First, we believe it will increase our share of TAM by attracting new customers that never would have considered the digital category without knowing an attorney is available if needed. Second, when we bundle independent attorneys into our core offering, it will increase our AOV as a premium-priced digital solution but still be at a cost lower than existing offline alternatives. And third, we expect it'll drive higher conversion rates and provide opportunities to cross-sell subscription services at the time of formation. Earlier this year, we introduced our first attorney-assisted solution as part of our trademark product. Users can now choose to file a trademark themselves for $249 or file with the help of an attorney for $599. Since launch, we've seen a significant percentage of our customers select the attorney-led option, driving a meaningful uplift in AOV. Late this year, we'll begin testing new ways to integrate attorneys into our customer journey with a focus on the most popular on-ramp, LLC formation. Similar to our LZ Tax initiative, integrating attorneys is a long-term play and we fully anticipate our go-to-market strategy to evolve as we test and learn. Let me end by saying we are incredibly excited for the journey ahead as a public company. I'm very proud of the team for delivering such a strong quarter while also meeting the many demands of an IPO process. We believe that the LegalZoom story is just beginning and this company has incredible growth potential for years to come. We have high conviction that the investments we are making will achieve that potential. With that, I'll hand it over to our Chief Financial Officer, Noel Watson.

Thanks, Dan. And good afternoon, everyone. Since this is our first earnings call, I'm going to start with an overview of our financial model. When we review our results for the quarter and wrap up with guidance for Q3 and full-year 2021, we'll start with our financial model. We're driving a high-growth business that scales and we're operating with positive adjusted EBITDA which allows us to reinvest operating leverage to drive durable long-term growth. Our business starts with a new business formation which we use as an opportunity to introduce customers to the LegalZoom ecosystem, allowing us to offer ongoing subscription services and achieve higher customer lifetime values. Our revenues are split between transactional and subscription components. In our customer acquisition model, acquisition spend is covered by the upfront transactional purchase alone, leaving behind a growing base of high-margin subscription revenue and driving attractive unit economics. About 85% of our subscriptions are built upfront on annual terms, providing a favorable working capital dynamic. In the near term, we are laser focused on growing our share of overall business formations leveraging our market-leading position, brand equity, and superior customer experience to further penetrate the large opportunity in front of us in the legal services vertical. For the balance of this year, we are prioritizing growth over short-term profitability and are focused on making the right marketing, infrastructure, and people investments to drive sustainable top-line results. In the long term, as we achieve our market share objectives, we expect strong improvements in cash flow metrics supported by a larger mix of subscription revenue. Now, I'd like to take you through our second quarter financial results. Total GAAP revenue in the period came in at $150 million, up 36% year-over-year. Transaction revenue, representing 49% of total revenue, was up 45% year-over-year. We report three transactional KPIs. The first is business formations, which includes LLC, Inc., and nonprofit formation events. Turning to our share of business formations has been a major strategic priority. The businesses formed through LegalZoom are then able to purchase our value-added products and services, establishing ongoing relationships with the customer and driving higher lifetime values. We completed more than 123,000 business formations in the second quarter, up 34% year-over-year. Our second transactional KPI, transaction units, in addition to business formations, also includes other transactions involving intellectual property and estate planning. In the second quarter, we completed 260,000 transaction units, up 12% year-over-year. The strength in business formations was offset by a year-over-year decline in estate planning, which we expect given the spike we saw last year in demand for wills and trusts following the onset of COVID-19. When we shifted weight from estate planning into business formations, it had a positive impact on our third KPI, average order value, which represents the average revenue contribution for each transaction unit. In the second quarter AOV came in at $280, up 30% year-over-year. We expect continued strength in AOV as business formations continue to account for a larger share of overall transaction units; we expect AOV growth to accelerate in the back half of the year. Subscription revenue, representing 46% of total revenue, was up 29% year-over-year in the second quarter. For subscriptions we report two KPIs: subscription units, which include compliance-related solutions, the primary being our registered agent service, and adjacent offerings such as LZ Tax. Approximately two-thirds of these subscriptions are built around our registered agent service, making us one of the largest registered agent providers for small businesses in the country. As of June 30, 2021, we had over 1.2 million active subscription units outstanding, up 69,000 units from the end of the first quarter. On a year-over-year basis, subscription units were up 25% in the second quarter, driving the bulk of our subscription revenue growth. The second subscription KPI is ARPU, or average annual revenue contribution per outstanding subscription unit. We measure ARPU using the last 12 months of subscription revenues given the vast majority of our subscriptions are built on annual terms. For the second quarter of 2021, ARPU was $230, up 3% year-over-year. Our final revenue line item, representing 5% of total revenue, comes from our partnership channel which was up 14% year-over-year in the second quarter. In the near term, we do expect a lower sequential performance in our partner revenue line as we transition away from legacy partners that are not aligned with our strategic direction. As Dan described earlier, we are focused on the long-term opportunity to build an ecosystem of multi-brand partners complete with recurring revenue structures. Now turning to expenses and margins, all of the following metrics are on a non-GAAP basis unless otherwise stated. Cost of revenue, which includes government filing fees and other fulfillment and share costs, was $48 million in the period, up 41% versus last year. Gross margin came in at 68% of revenue, down from 70% in Q2 of last year as our revenue mix shifted towards transactions which carry a lower gross margin profile. In our operating expenses, the largest line item is sales and marketing, representing just over 70% of spend. Sales and marketing cost came in at $59 million in the second quarter, or 39% of revenue. Within our customer acquisition spend, $45 million was up 61% year-over-year as we continue to aggressively scale our media spend to grow business formations volume and to build on our digital and brand leadership. Our strategy is governed by a performance-based approach that is ROI-driven and can be quickly dialed up or down as market conditions warrant. In parallel, a portion of spend is allocated to brand-building initiatives and new channel testing which we view as ongoing investments that will improve overall efficiency over the long term. Technology and development spend was $10 million in the second quarter, or 7% of revenue. In future periods, we expect this line item to grow as fast as revenue as we invest to build out a best-in-class product and technology organization. General and administrative costs were $12 million in the quarter, or 8% of revenue. We had approximately $2 million of one-time cost that we do not expect to recur in the third quarter. In the long term, we expect G&A to grow but at a slower pace than our other Opex line items. In total, non-GAAP operating expenses were about 42% of revenue in the second quarter of 2021, slightly below our transaction revenue growth of 45%. Adjusted EBITDA was $22 million in the quarter, or 15% of revenue. We continue to build a growing base of deferred revenue as cash from our subscription offerings is collected upfront and recognized as revenue ratably over the term of the subscription. In the second quarter, we grew our base of deferred revenue by $5 million. Free cash flow was $6 million in Q2, down from $25 million in the same period last year. The decrease in free cash flow was primarily due to working capital movements, including an $8 million reduction in accounts payable. Cash and cash equivalents were $167 million as of June 30, 2021. On July 2, we raised $667 million net of underwriting discounts and commissions from our IPO and repaid in full $522 million of our 2018 term loan. As we look ahead and think about our capital allocation and use of cash, our priority is to use our strong balance sheet to position us to invest in organic and inorganic opportunities that drive sustainable long-term growth. Now, turning to our outlook for the remainder of the year: total growth rate in 2021 will be impacted by the effect COVID-19 had on business formations in 2020. In Q2 of 2020, at the onset of the pandemic there was uncertainty in the economy and depressed business formation activity in the early portion of the quarter. Conversely, during the end of the second quarter and throughout Q3 of last year, business formations accelerated in part due to an unlock in pent-up demand from the prior quarter. For the third quarter of 2021, we expect revenue of $143 million to $147 million. For the full year, we expect revenue of $570 million to $578 million. We will not be providing specific quarterly adjusted EBITDA guidance because we believe that in a dynamic environment such as the one we currently see, there are opportunities to pursue additional share and we believe we have an efficient approach to scaling our customer acquisition spend. For the full year 2021, we expect adjusted EBITDA of $55 million to $59 million or roughly 10% of revenue at the midpoint. Before we move to the Q&A portion of the call, let me end by reiterating that our leadership team is squarely focused on driving long-term results which we believe will translate into outsized shareholder returns. We believe that second quarter results reinforced the underlying health of the business and we look forward to continuing to execute against our growth strategy. And with that, let's go to questions.

Thank you. Our first question comes from Sterling Auty of J.P. Morgan. Your line is open.

Yes, thanks. Hi guys, welcome to the public market. My first question is actually tying a little bit off of what Noel was talking about in terms of the guidance and COVID. With the Delta variant coming to the forefront, have you seen any impact here so far in this quarter? And I know nobody has a crystal ball, but how are you thinking about the potential impacts to the business in the back half of the year?

Thanks for the question, Sterling. First off, I want to acknowledge a very strong quarter — great work by the team to deliver it while we were going public. We're seeing a bit of summer seasonality and a somewhat more normalized pattern this year relative to last year. If we reflect on last year, we saw COVID arrive and a shutdown that impacted us at the end of Q1 and the beginning of Q2, which historically is our peak. Instead of staying at those levels, formations increased later in the year, which is the opposite of the normal seasonal pattern where you'd see a peak at the end of Q1 and drop off in the summer months. We aren't all that surprised to see a normalized pattern returning, and July had a bit more softness, which was not incredibly unexpected. As you noted, it's a unique backdrop — people traveling more for the first time and then the Delta variant concerns arising. So while we're pacing well, we have to acknowledge the uncertainty. Small businesses are resilient; formations have remained relatively strong historically, and we're watching the next couple of months closely. At this point there's no large surprise in what we're seeing.

I'd add, Sterling, that we're pleased with the Q2 results and feel they represent continued strong execution by the team. There are a number of variables at play and a certain level of uncertainty, but we believe the ranges we provided reflect a fairly broad set of outcomes and we're confident we can continue to execute and deliver results within the ranges provided.

That makes a lot of sense. And then, my follow-up is a little bit of a loaded question — it's one of the most popular I get. When you talk about the opportunity with tax, getting your former customers into it, how should we think about whether you compete or partner in the marketplace for your tax opportunity?

Thanks for the question — it's an important one to clarify. Intuit does not provide tax services directly through experts in the same way; they have a channel called the ProAdvisor channel where practices work with Intuit to both establish customers on QuickBooks Online and provide advice on top of it, completing taxes leveraging products like Lacerte or ProSeries. You can think of LegalZoom as a large practice that partners with Intuit. We have a wholesale relationship on the QuickBooks Online side. We internally have our own CPAs and provide full end-of-year tax filing for our small businesses. The critical point is that when a small business forms with us, they often have as many tax questions as legal questions. Seventy percent of them come to us with no existing accountant relationship and are looking for a trusted partner. It's a natural place for us to play, and we did not want to recreate the wheel — QuickBooks Online is an excellent product, so partnering with them makes sense for distribution and serving our customers.

Okay. Thank you, guys.

Thank you. The next question comes from Elizabeth Elliott with Morgan Stanley. Your line is open.

Hi, thank you so much and congratulations on a strong second quarter. I was hoping you could help us, either quantitatively or qualitatively, understand some of the signs you're seeing on how marketing can translate to better digital penetration. Understanding that it has been a slow-moving market, what other signposts are you seeing that marketing is really poised to drive better digital penetration?

Thanks, Elizabeth. A few things: we talk about three growth opportunities — growing the core, expanding adjacencies, and attorney assist. Much of the growth you're seeing now comes from improving the product experience, which in turn helps conversion and marketing efficiency. We started with a strong position: a 90-day payback with lifetime value thereafter gives us a lot of leverage. We're on a journey to scale that substantially — we're targeting meaningful increases in customer acquisition spend year-over-year. You can see us do that through tools like media mix modeling to understand the interplay between channels. We're entering new channels like digital video, OTT, and social, and increasing our investment in SEO. As we scale new channels, there will be an iterative process where we step in, measure, and then reallocate. Overall, we have many levers and believe they can drive improved digital penetration over time.

Okay. And then, longer term, thinking about business formations, understanding that there may be some tough comps related to COVID, but COVID has also changed how people operate and that creates opportunity. Structurally, how do you think about the rate of new business formations over the next couple of years relative to pre-COVID levels?

We believe it will trend above pre-COVID levels. People are adopting digital enablement tools, and many have realized they can form a business quickly and from home — in some cases they've been forced into it. There are also regulatory tailwinds: some platforms require people who work on them to form an entity for liability or contractor classification reasons. We see continued demand and expect normalized levels that are significantly higher than 2019.

Thank you. Our next question comes from Mario Lu with Barclays. Your line is open.

Great, thanks for taking the questions and congrats on the first quarter as a public company. My first question is on retention. Could you provide additional color on how retention has trended in recent months, particularly for the newer cohorts that came on during the pandemic a year ago? I know it's a bit early, but has the addition of expert services aided retention thus far?

Thanks, Mario. We look at leading indicators like 13-month retention on annual subscriptions, and that's primarily driven by business formation cohorts. It's probably too early to fully assess the pandemic cohorts because many of those customers formed in July and August of last year, and we need a bit more time post the annual subscription mark to have full visibility. We haven't seen anything in interim periods that concerns us; Q2 subscription unit data was essentially in line with expectations. Regarding expert services, we know that when people work with an expert — attorney or accountant — they have a higher likelihood of success, so over time we expect retention to improve as adoption of expert guidance increases. That is why our strategy emphasizes both adjacencies like LZ Tax and attorney assistance: helping customers get off on the right foot with expert support should improve long-term retention.

Great, that makes sense. And on the competitive landscape — as you reinvest into marketing in the back half of the year, are peers doing the same, and what are you seeing from competition?

I don't think we've seen major changes in the competitive landscape yet. Over time, others will emulate the model, but the biggest competition today is offline attorneys and offline accountants who do not leverage digital. Only about 8% of legal services are delivered digitally today, so our focus is on converting offline share. We feel comfortable with our superior solution relative to offline alternatives — reflected in our promoter scores — and we expect competition from companies that try to emulate our business model. We're focused on building differentiated product, brand, and an integrated expert experience.

Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open.

Thanks, and congratulations on the quarter. Following up on the earlier tax question: you launched new subscription products like Tax Advisory last October. As you widen your product offerings, what has the adoption rate been so far? What kind of attach rates or incremental ARPU are you seeing?

Thanks, Stephen. We generally don't disclose specific attach rates for individual products because there is interplay between cart composition, attach, AOV, and ARPU that changes depending on what we're optimizing for. That said, we've been pleasantly surprised by the attach rate for LZ Tax — it's roughly on par with the attach rate we see for our legal attorney subscription, which is notable for a company named LegalZoom. We're feeling confident about where we are. We started with outbound sales to access the customer base and now are testing product-integrated approaches, which are showing early promise. There's a symbiotic relationship: when customers adopt one expert service and see the value, they are more likely to adopt additional expert services over time. We are very early in the journey, but the initial signals are encouraging.

To add on that, our focus for tax right now is very operational: scaling operations to meet demand coming through our formation flow while protecting the consumer experience as we do that. Right now we have no demand issue — in many ways we're actively throttling demand in some cases to make sure the experience is perfect before we broaden distribution. You'll see us test channels to ensure the experience is right, and once it's dialed in we'll go broader.

Okay, thank you.

Thank you. The next question comes from Matt Pfau with William Blair. Your line is open.

Hi guys, thanks for taking my question and great results. I wanted to ask on the partner program — can you give an update on where you are in that revamp and when that line item could become more of a contributor to revenue growth?

Thanks, Matt. We've made a lot of progress, though the line may look weak in the near term because we're revamping everything we've historically done with partnerships. Historically, partnerships were tactical, one-way bounty relationships. We're rethinking this to create bidirectional partnerships with brands that can market to their customers as well as integrate with ours. Last quarter we signed four different partnerships with strong brands; all are in pilot mode and early results are very strong. We're also leveraging data to target offers and improve conversion. This area has been flat to down year-over-year as we transition, but we expect it to be accretive over the next couple of years. It will be a gradual rebuild because these are more ratable, reciprocal relationships and require testing to ensure the customer experience is excellent.

Great. And just a follow-up on business formations: can you confirm whether LegalZoom continued to take share of business formations in the quarter or first half of the year in your estimation?

One note on data: the common EIN census data is a directional macro indicator but it's noisy — for example, obtaining an EIN can be driven by PPP loans, bank account needs, or hiring an employee, which don't always reflect entity formation. Our internal secretary-of-state formation data is more directly tied to actual entity formations, and we track that proprietary data closely. We don't release it regularly but may consider annual reporting. Our strategy is to take share and drive long-term value, and we feel good about how things are going this year.

Got it. Thanks a lot, guys. I appreciate it.

Thank you. The next question comes from Andrew Boone with JMP Securities. Your line is open.

Hi guys, thanks for taking my question. Understood we're in a dynamic environment and that marketing spend is wide-ranging, but it was up about 61% year-over-year and is probably the biggest swing for profitability. Why didn't you spend more? How should we think about that?

Thanks, Andrew. Our customer acquisition spend was up 61% year-over-year, which is a substantial increase. The vast majority of that allocation is performance-based and ROI-driven, and we set guardrails for spend. We will dial that up or down as we see opportunities to be more aggressive while maintaining efficiency. We also maintain an allocation for testing new channels to ensure long-term growth opportunities. Importantly, we’re expanding monetization opportunities — LZ Tax and partnerships — which improve LTV and give us more confidence to invest further. So our approach is deliberate: step into channels, learn, and scale efficiently.

I'd add that because we're entering many new channels, we measure twice and act. We look at marginal returns and interplay between channels. You'll see a gentle increase in marketing spend on a dollar basis that may look smaller as a percentage as the business scales. We're also pursuing more brand partnerships and broader awareness investments: while we have high brand awareness, understanding of our product is lower among some small businesses. We're focused on positioning LegalZoom as the platform and destination to start a business, and you'll see more activity in that area in the back half of the year.

Great. Thank you.

Thank you. The next question comes from Brent Thill with Jefferies. Your line is open.

Thank you. I have two questions. One, can you remind us of the peak seasonality pattern in a normal year and how you expect it to be different this year due to COVID or other factors? And then, in terms of product investment, can you delve into what the biggest priorities are in the near term? Thank you.

Great question. Seasonally, we typically see an aspirational peak at the beginning of the year when people start businesses and receive consumer tax refunds that sometimes fund ventures. Historically, the peak is at end of Q1 and beginning of Q2, with tapering through the rest of the year and Q4 being the lowest quarter for formations. Last year was different because of COVID: Q1 was weak, Q2 and Q3 accelerated as pent-up demand was released. We've been off-cycle until April of this year but have seen normal seasonality return at a much higher level relative to 2019, which is encouraging and reflects secular tailwinds. From a product investment standpoint, there's a lot we can do in our core platform. This year we launched a site redesign and made it fully mobile responsive, quickly improving conversion. We've invested in the purchase experience and commercialization of ecosystem products like LZ Tax. We're focused on the post-formation engagement experience as well: creating a hub like "My Account" where customers can schedule or message experts, track compliance events, and see ongoing value. Right now, a major investment focus is LZ Tax — we're building an extensive tax business that offers full-service tax filing and integrates with QuickBooks Online wholesale relationships. We'll get that right before expanding further into other adjacencies, but it's a significant area of investment today.

We're currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Dan Wernikoff, Chief Executive Officer, for closing comments.

Yes. I want to thank everyone. It's been a lot of work to get to this point. Noel and I, and the broader team, feel like we're really just at the beginning of the journey here. I want to thank all the LegalZoom employees who've done the hard work on the road to going public, and I'm excited to get back into the business in a deeper way. We're really excited to keep innovating for small businesses. We look forward to catching up with all of you next quarter. Stay safe, everyone, and we'll be talking soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.