Good day and thank you for standing by. Welcome to the LegalZoom’s Second Quarter 2022 Earnings Conference Call. At this time, participants are in listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Danny Vivier, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello and welcome to LegalZoom’s second quarter 2022 earnings conference call. Joining me today is Dan Wernikoff, our Chief Executive Officer, and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on today's call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend and similar expressions and are not and should not be relied upon as a guarantee of future performance or results. Results could differ 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 factors that could cause our 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 and we disclaim any obligation to update any forward-looking statements, except as required by law. In addition, we will also discuss certain non-GAAP financial measures. Our CEO and CFO use these measures to make decisions regarding our business, and we believe these measures provide helpful information to investors. 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 will turn the call over to Dan.

Thanks, Danny, and good afternoon, everyone. I came to LegalZoom almost three years ago to lead a product transformation. During the pandemic, that journey took a detour. We leaned in hard to the strong tailwind created by COVID and clearly benefited from it. As we look ahead to a different macro environment, it's a clear reminder that products win markets, and our product is needed more now than ever before. In today's call, I'll outline how we are sharpening our focus, along with clear actions to adjust to a different environment. I want to be clear in today's earnings call that while the comparables caused by lapping COVID are difficult, I don't place blame on the macro for our performance. Instead, I see our inability to gain material share in a very large untapped market to be the issue, and the accountability for that is squarely on me. Today, I'll spend a bit more time talking about how we are adjusting to the current environment in the short-term, while also reiterating our opportunity in the long-term. But first, I'll give a brief overview of Q2 results. Q2 revenue came in at $164 million, up 9% year-over-year. Transaction revenue was down 9% in the period, while subscription revenue offset this weakness, growing 32%. Our business formation declined 16% in the second quarter, while the U.S. Census information data was down 12%. During the quarter, we adjusted our marketing strategy, reverting to a more conservative, lower funnel-focused approach given the external environment. This intra-quarter shift drove inefficiencies in our spending. Adjusted EBITDA was $18 million in the second quarter. Similar to reverting to a more conservative marketing approach, we've been taking quick actions to manage expenses. We've completed a reduction of force and expect to eliminate hiring outside our most critical roles, primarily in product and tech in the near term. We're driving durable efficiencies, automating the order process, and driving down variable costs, leading to faster order fulfillment. In post-tax season, we brought staffing levels down, and going forward we're adjusting our mix of experts to a more variable cost structure that will align with demand. We continue to repurchase shares under our current authorization during the quarter. Given our confidence in the business, we are and intend to remain active in the back half of the year. During the quarter, we continue to make progress against our three growth factors: scaling the core business, building an SMB ecosystem, and integrating experts into the core experience. We know we need to meet customers where they are, especially in this recessionary environment. That means segmenting the lineup and innovating against the needs of cost-sensitive SMBs up to those seeking attorneys at an affordable price. Final testing remains on track. 20% of traffic is exposed to the test, and we have a pipeline of variant lineup tests in development. Our goal remains a national rollout by the end of this year, recognizing testing will be ongoing for some time. Although optimizing a new lineup will take some time, early results are promising, showing an increase in conversion rates, formation growth, and share gains. The results are strongest in mobile, and we'll continue to apply those learnings back into the desktop experience. We're also seeing the mix shift in favor of subscription revenue, aligned with our long-term strategy of reducing both the upfront cost to form a business and our dependence on a transactional business model. In the past, our product experience was limited to the formation workflow, an artifact of a transactional focus. Priority to address this is myLZ. myLZ is a newly created experience that will become the hub of SMB compliance, driving engagement and therefore retention, while also creating a channel to introduce new services when SMBs need them after or outside of the formation channel. In the second quarter, 98% of new formation customers created a myLZ account, up from 28% a year ago. Time on site is increasing as well. The integration with Wix is a great example of the opportunity with myLZ. LegalZoom customers can now create a custom website by linking directly to Wix from their myLZ accounts. And soon our customers will see a personalized site directly from their myLZ account without any effort, leveraging the data they provide. And finally, a quick update on LZ Tax. We exited the second quarter with over 22,000 paying subscribers generating over $35 million of annualized recurring revenue. Having fully launched 12 months ago to our LLC base, there's a clear synergy between our core legal services and tax. This service is very early in its life, and there is significant room to improve. Our channel outperform during peak season, but the tax rates have now stabilized at pre-tax season levels. Given what we've learned, we have opportunities to make the service more accessible and relevant to SMBs that are pre-revenue through pricing and packaging changes. Additionally, we also have operational challenges in our first year that made engaging with accountants and completing a return challenging for owners. To be clear, the Net Promoter Score when engaging with our experts, is the highest of any experience we deliver, but the process outside of that interaction was too complex. As a result, we're seeing higher attrition than forecasted. We can do better and are turning our attention to the next evolution of this service. The need is there, the channel is incredibly powerful, and it's ours to win. Stepping back and taking a longer view from the end of 2019 when I started, we are a vastly different company and business. Over 75% of our employee base and our entire leadership team is new since I arrived. We've gone from forming under 300,000 SMBs to being on pace to do greater than 450,000 this year. We had just over 900,000 subscribers, and we now have close to 1.4 million, with subscription revenue 80% higher than it was in Q2 2019. Part of that is due to the launch of LZ Tax and the acquisition of Earth Class Mail, further building our ecosystem of services and incrementally reducing our dependence on the formation macro. Business formations are still healthy and have stabilized at more than 50% above pre-COVID levels. Remote work is enabling side hustles and new SMB tools and platforms are lowering the barrier to create a business. We're confident in the health of business formations and we will also continue to expand our services beyond the formation stage. That said, since we went public about a year ago, conditions have changed. As the macro moved from a tailwind to headwind, we have to acknowledge that we still have a largely transactional business model. While we continue to drive improvements in mix, roughly 60% of our total revenue is still a result of transaction volume and the new subscriptions attached to a formation. While we made progress detaching our performance from the macro, we haven't made enough, and our back half 2022 guidance will illustrate that. During the IPO, we talked about expanding our brand position and scaling our marketing efforts. That's going to change as we begin leveraging the brand we have and doubling down on the product. Leaders consolidate in down markets and the key measurement for us will be demonstrating material share gains. Reducing brand spending commitments will also allow us to be more nimble. The reduction in media spend will impact our transaction and first-year subscription revenues. Additionally, as the economy contracts, we anticipate SMBs will spend less and scrutinize existing spending more, which affects our attaching renewal opportunities, particularly for our registered agents and compliance products. Given these adjustments, we are reducing full-year revenue guidance by seven points from a midpoint of $655 million, or 14% year-over-year growth, to the midpoint of $614 million or 7% growth. With this topline reduction, we are managing expenses closely. As I mentioned, we are reducing CAM, we're limiting hiring to only the most critical roles, primarily in products, eliminating discretionary spend, and accelerating our platform investments that drive durable efficiencies. Despite our topline revision, we are increasing our full-year adjusted EBITDA guidance to $55 million, or 9% of revenue. For the rest of the year, our focus will be on product-driven share gains, more efficient growth with a reduction in expenses, and lowering CAM, primarily in brand spending, allowing us to err on the side of being nimble and responsive to this environment. Given these changes, in 2023, we expect to grow share by 15% as a result of the new lineup, while also delivering an adjusted EBITDA margin of 15% as we begin to rely more on a product-led strategy to drive growth. The last two and a half years have been a dynamic period for small businesses. We've seen the fear of the unknown due to COVID unlock into strong formations growth, small business innovation, and industry and sector rotations that continue to evolve with our understanding of and policies related to COVID. We've seen SMBs transform their businesses, filling in critical gaps in the economy, all while changing how they work. It's been an unprecedented time, and we're inspired by the ingenuity of the entrepreneurs that continue to build. We try to run LegalZoom with the same mentality. We're evolving our business model, innovating in new adjacent spaces, and doing it with a team that is adjusting how we work to evolve with the environment we're operating within. We're focused on what we can control and seek to mitigate the risks we can. I'm more confident than ever in the growth opportunity in front of us and feel the changes we are making will make us even stronger in the future. And with that, I'll hand the call over to Noel.

Thanks, Dan. Good afternoon, everyone. I'll start today with a review of our performance in the second quarter and end with our outlook for the remainder of the year. Total GAAP revenue in the period came in at $164 million, up 9% year-over-year at the top end of our guidance range. As expected, transaction revenue was down 9% year-over-year at $67 million as we continue to lap challenging comparisons from the prior year surge in business formation. We completed 113,000 business formations in Q2, down 16% compared to the same period last year. Average order value came in at $296 in the second quarter, up sequentially from the first quarter and in line with typical seasonal patterns in the business. Year-over-year AOV was up 5% due to an acceleration of fulfillment and the discontinuation of our lower-priced DIY trademark products. Going forward, we expect AOV to decline year-over-year in the second half, primarily driven by the phased rollout of our premium offering. As we've discussed, we expect the introduction of truth yields to drive significant volume and share growth without costs affecting transaction revenue. Subscription revenue continued to perform nicely in the second quarter, coming in at $91 million, up 32% year-over-year. That said, we are expecting subscription growth to slow materially beginning in the third quarter and into next year. The primary driver is the impact of the slowing macro environment on our formation volumes, which in turn reduces the number of gross additions, particularly within our Registered Agent and compliance-related subscription offerings. We're also beginning to see pressure on our retention rates for these core products, which we believe is a result of increasing spend sensitivity among our SMB customers. ARPU was $252 in the second quarter, up 10% year-over-year. We expect similar growth in the back half of the year thanks to higher ARPU services like LZ Tax and Earth Class Mail becoming a greater share of our subscription business. Partnership revenue is down 24% year-over-year in the second quarter to $6 million as we lap legacy partnerships that are no longer in line with our strategic direction. We expect partner revenue to remain steady on an absolute dollar basis for the remainder of the year. Now, turning to expenses and margins where all of the following metrics are on a non-GAAP basis. Gross margin came in at approximately 67% of revenue in the second quarter, down from 68% in Q2 of last year. The slight year-over-year decline was largely driven by prior investments we've made to grow our in-house CPAs supporting LZ Tax. Sales and marketing costs were $68 million in the second quarter, or 41% of revenue, up from 39% in Q2 of last year. Customer acquisition spend came in at $45 million, up 2% year-over-year and incurred approximately $6 million of accretive production costs in the periods that we do not expect to incur in the second half of the year. As Dan mentioned, efficiencies in our spending were below expectations, largely due to inter-quarter stress in our spend allocation. We plan to reduce our media spend in the back half of the year and pivot to lower funnel direct response channels, which we believe provides the greatest degree of flexibility to help us navigate an uncertain operating environment. Technology and development spend was $11 million and general and administrative spend was $13 million, both capped out in the second quarter on an absolute dollar basis. We are rigorously managing our fixed cost structure and reducing non-essential discretionary spending. We're also limiting new hire activity to only the most critical roles, which we expect will largely fall in the tech and development sectors. Adjusted EBITDA was ahead of the top of our guidance range at $17 million for the quarter, compared to $22 million in the second quarter of 2021. Deferred revenue declined by $1 million in the period. In the second quarter, we continued to execute on our $150 million share repurchase authorization. We repurchased a total of 2.96 million shares of our common stock at an average per share price of $12.95, for a total repurchase of $38 million. We have continued to repurchase shares in the third quarter. As of June 30, 2022, we have cash and cash equivalents of $260 million and no debt outstanding. As Dan highlighted the key drivers of our revised guidance earlier in the call, I'll focus my comments now on the specifics of our guidance for the third quarter and full year 2022. For the third quarter of 2022, we expect total revenue of $149 million to $151 million, or 1% year-over-year growth at the midpoint. We expect subscription revenue growth to decelerate in Q3 driven by multiple quarters of declining formation volume, pressure on our retention rates, and slight impacts from LZ Tax seasonality. LZ Tax revenue skews toward the first half of the year and tax reporting impacts. We expect adjusted EBITDA of $16 million to $18 million, or 11% of revenue at the midpoint. As Dan mentioned, we are pulling back on non-committed brand spending in the third quarter to allow for greater flexibility. We expect customer acquisition spending to decline in Q3 but we'll continue to respond dynamically based on market conditions. For the full year 2022, we expect total revenue of $612 million to $616 million, or 7% growth at the midpoint. We expect adjusted EBITDA of $55 million, or 9% of revenue at the midpoint. In 2023, we are committed to managing expenses, realizing efficiencies from our infrastructure investments, and focusing on driving leverage at our margins. As Dan mentioned, we expect to grow share by 15% while also delivering an adjusted EBITDA margin of 15%. And with that, let's open the call for questions.

Our first question will come from Ron Josey from Citi. Your line is open.

Great. Thanks for taking the question. Noel, Dan, I want to follow-up maybe on the last comment on just on growing share in 2023. Can you just talk about the drivers that might lead to that continued share gain as subscription growth is expected to decline materially in the back half of this year, with formations slowing down? So, I guess a two-part question then, Noel. One is, what gives you confidence to achieve share gains in 2023 given the new products that are being launched in the national rollout? And then just bigger picture, maybe more on macro and business formations overall, what do you think needs to happen to maybe turn these results around overall to achieve those share gains going forward? Thank you.

Thanks for the question, Ron. Yes, on the first point, yes, there are two big goals we've put out for 2023. One is to demonstrate a margin of 15%, which is the thing we can control, which is costs and ensuring that we're driving efficiencies as we scale this business. The other is a 15% share gain. The share gain is an early reflection of what we see when we innovate on our lineup. We talked about this in the past; we've had a lineup that is a premium price, DIY solution. We know we're a premium brand and many customers are willing to pay that premium on top of what they would be able to do with the Secretary of State. But we also know that there are other types of customers out there. So, there are people seeking legal expertise from an attorney, but they can't afford it, and so we have a premium component to the lineup. Then separately, there are cost-sensitive people who really want some extra guidance. We're going after that group as well with the premium components in our lineup. So, early indications — and again, we've been testing this and sequencing different variants in different states. The response we’re getting is very positive. We see customer growth relative to the control, which is our existing lineup. We see share gains. We're also observing a mix shift going more aggressively towards a subscription model versus today's transactional model. All of that's giving us confidence. When you start to look at it, in some components of the test, like mobile for instance, we see even higher acceleration, which is giving us some indication of what we need to do to even achieve higher conversion rates than what we're seeing today. So, yes, it's a reflection of what we expect to see from a completely rebuilt lineup and a set of new offerings that are going to be in the market next year. On the macro, that's a question that I think is multi-layered. I mean, what we've done as we go into this guide is we've really been thoughtful about what we think is going to be happening in the back half. There are different sets of data that we have compared to some of our peer group as well. I'll just walk through a couple of things. So first off, just the macro itself relative to our expectations has been a little softer than we thought it would be. But one of the things we haven't talked as much about is that we also have visibility into dissolutions and can see how businesses are not only forming but also their failure rates. We’ve discussed in prior calls that our 13-month retention rate has been going down, while some of our older cohorts have been performing better. Overall churn has remained relatively stable. If you consider the root cause of that, it’s dissolution. Dissolution rates peaked at the end of last year, but we still have to work through that, because we have an annual subscription renewal process. We’re seeing some of that impact as headwinds still play out. The good news is the dissolution rates are getting lower than they had been all throughout 2021. So we want to see that resolve itself before we start to feel optimistic about macro conditions. I'd say the last point, as you think about how we're considering our guidance, we are anticipating — if we aren't already in one — that we will be in a recession. That will impact some of the attach metrics and retention metrics we have as well. That’s us being a little conservative, but we want to see stabilization before we adopt a bullish point of view regarding the macro.

And Ron, I just wanted to build on Dan's earlier comment around share gains. Just also note, and we've talked about being willing to trade off on the transaction revenue for the benefit of subscription. This is an example where incremental customer growth, formations growth, creates a trade-off with average order value because we're offering a free SKU. It’s leveraging the benefit of the ecosystem that we've been building out in the subscription side to help drive long-term customer value, but at the trade-off of the upfront transactional revenue.

Great. Thank you, Dan. Thank you, Noel.

Our next question comes from Andrew Boone from JMP Securities. Your line is open.

Good afternoon, guys, and thanks for taking my questions. Two please. I want to understand more of the macro. It sounds like you guys are seeing a deterioration in terms of business formations in terms of the data you have. If you look at this morning, the Census Bureau recorded July was down 4%. So, are you seeing something different than what's publicly available via the Census Bureau? Or how should we think about that? And then just going to marketing efficiency on a go-forward basis? Can you talk more about your plans in terms of increasing efficiency? Just help us understand what changes are there? Thanks so much.

Thanks, Andrew. Yes, on the macro. It may be slightly redundant with what I just answered, but we definitely saw the macro to be a little lighter than we had expected. And yes, the Census data published today showed a 4% decline. We've also noted that there are month-to-month anomalies in the reporting that we see from the census data. If you recall, the prior month was much lower. The thing that is probably a little more of a unique data point that we see is the relationship between formations and dissolutions. As I mentioned, dissolutions are a little bit of a foreshadowing for us around retention and renewal because we have some existing subscriptions that are annual subscribers and are seeking compliance on their entity. If their business fails, then we can't expect them to renew. Again, the good news is we’re sorting through that. We probably have a quarter or two left where we’ll start to see some of that reversal already happening, but that is a data point that’s unique to us. Additionally, I mentioned we are a little conservative in how we’re thinking about the back half of the year. Small business and consumer sentiment is quite low right now. To Noel's point, some of our add-on subscriptions have a pretty high ARPU. Our accounting subscription, for instance, involves $1,500. Thus, we do expect these to be impacted as we might be heading into a recessionary type environment. On the efficiency gains, that’s something we’ve been working at diligently for a long time. Before we could even go into the market with a premium solution, we knew we had to automate everything in our back office. We’ve been working on a project that provides straight-through processing so that orders flow automatically through to the Secretary of State. When they return, they can then be automatically compiled for the customers. That project has gone better than expected, and we continue to accelerate not just the efficiency but also the customer experience because now orders are processed much faster than they used to be. And then we've really considered where we need to grow OpEx in the future. We're focusing very much on product and technology as the place we continue to grow. But we also recognize there are areas where we can invest less and run a little leaner that are outside of that. An additional point is tax, which we always mention in the first season. We aimed to solve for the customer experience and not so much for efficiency. Post-tax season, we now have a very good sense of the curve. We know what we should expect in terms of the number of CPAs required to support our small businesses, and now we're executing on that.

And Andrew, just to build on the marketing efficiencies question, we did experience some headwinds in efficiencies this quarter just as we — historically, we've been shifting our spend more into our media mix modeling. In this quarter, just given the uncertainty, we actually started to shift back into performance channels, which did create some inefficiencies in the quarter. The reason we did that is just, given the uncertain environment, we wanted more flexibility to be nimble and have performance-based marketing that can react quickly to changes in the macro so we can respond dynamically.

Yes. And actually in thinking about what that means in the back half, it means really bringing down more of our brand spend very specifically. As we have seen in media mix modeling before, if we keep looking back at history, while that may look like good returning spend, we want to be cautious in terms of that spend heading into a new environment.

Thank you.

One moment for our next question. Our next question comes to the line of Matthew Pfau from William Blair. Your line is open.

Great. Thanks, guys. Wanted to dig into the retention comments a little bit more. You mentioned that dissolutions are one factor that's driving that higher churn. I believe in the prepared remarks, it was also cited that tax attrition was higher than expected. Is there anything else that you're seeing that is driving the expectation to have churn higher in the back half besides just general macro concerns that you have?

Yes. I think there are a couple of components to highlight. I'll just replay it. Dissolutions are really interesting. We haven't discussed it before on the call, so it's worth unpacking. When COVID hit, we saw formations accelerate and dissolutions almost go to 0% growth, which is unique. They usually move in parallel. As we got to the late stage of stimulus, they were both growing really fast, which was a healthier environment, but also feel like it was propped up due to stimulus. As we reached the end of last year, growth in formations was decreasing, but actually, the dissolutions were on the rise. That's the worst environment, and we’re working through that right now, which you can see impacting us over a period of four quarters post that dissolution rate. So that's one thing that has impacted our 13 months. We've discussed this; the 13-month retention rate has been going down due to it being offset by some older cohorts, which are actually showing a better profile. Over time, as this builds, that 13-month becomes larger. LZ Tax is different. I would say two things happened. We overperformed on the channel, meaning we attached far more people than we anticipated. However, we were not providing as strong an experience for those customers as we know we can, and so this contributed to a lower attach rate. The overall outcome was what we expected, but the path to get there was just different. The good news here is we understand what we need to do to improve retention in the tax area.

Got it. Very helpful. And just one follow-up in terms of the subscription guidance. It would be helpful if you could help us understand how seasonality impacted LZ Tax in the second quarter? Because, I believe even if we assumed no sequential subscription growth in the back half of the year, we would still be decently ahead of 20% subscription revenue growth. What are the components driving the expectation for sequential decline in subscription revenue in Q3 and Q4 relative to Q2?

Yes. I'm not sure we will break that out into specifics, because there are a few drivers. Obviously, we're still talking relatively small dollar amounts overall. But LZ Tax was a component driving this, just due to the revenue recognition timing during tax prep season. You see heavier income in Q1 and Q2. That's an important part of it. But it’s also a reflection of the slowing in our core business, which we discussed in our prepared remarks. This slowing of business formations over the last couple of quarters flows through to our gross additions on the subscription side. There’s also a bit of lag time as that flow affects our revenue.

Got it. Thanks, guys. I appreciate it.

Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Your line is open.

Great. Thank you so much. It's really encouraging to see the focus on controlling costs, given the tougher environment. But I wanted to ask about just the nascency of the market you guys are in today and kind of the education that's needed. What's the risk that lower CAM could impact demand despite having the new product lineup? Conversely, how has the market matured for these solutions over the last year?

Thanks for the question, Elizabeth. Just going back to that margin goal, most of it results from reductions through COGS and thinking about efficiencies surrounding it, in addition to OpEx and reductions outside of tech. Part of it will also stem from non-media marketing spend, which I think — that's an area we can control. We have some great creative production this year that we probably won’t deploy in the back half. It’s not like there's a big CAM reduction required next year to reach the margin we expect. I think it remains significant. But what I would emphasize is having the right offering. If you looked at our funnel, starting with the number of people who start with LegalZoom, we reach a very small portion that complete. The biggest drop-off areas are controllable when it comes to pricing. We want to drive the most share by making it easy to get customers started and into our ecosystem, ultimately monetizing them throughout their lifecycle. If they're looking for an attorney, we also want to capture that. Today, we just don't offer those upfront in our lineup. That’s always been the goal. The first couple of years are about developing the market and now it’s about innovating the product to drive that share gain.

Great. And then on the segmented lineup, I know it's still early, but on the free solution, do you have any early reads on how the free product might be attaching subscriptions or partner solutions relative to the paid product?

Yes, great question. We have a lot of different tests going at the same time, so it’s hard to give a very specific answer. What I will state is, while we see lower attach rates, we indeed see increased bookings because we drive significantly more conversion through it when talking about subscriptions. That’s exactly how we want it to work. We don’t expect to maintain attach rates to these customers, but we want the number of customers to significantly increase to the point where it becomes beneficial in the aggregate. By the way, this is without customizing any of the subscriptions to reflect that they're coming in as free customers. Over time, we would consider how to use segments in subscriptions. You might have a lower-end registered agent subscription and a premium registered agent subscription specifically targeting the type of customer entering our lineup. The interesting part is we’re seeing a lot of early data and feeling encouraged, which employs the ingredients we have in our lineup rather than starting from scratch to build it out.

Got it. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Mario Lu from Barclays. Your line is open.

Great. Thanks for taking the question. The first one is more high level in terms of as we kind of enter a tougher macro environment. How would you describe the competitive landscape shifting over the past couple of quarters? Do you view your $200 million plus cash on the balance sheet as an advantage compared to your peers? How would you compare this strategy in terms of capital allocation? Thank you.

Yes. It's interesting. Even starting in 2021, at the beginning of the year, formations were starting to take off. We did see more participation in our category by both low-end providers and from adjacencies. This has made our marketing expenditures tougher because many e-commerce players were also competing for our keywords, directing their efforts towards businesses that were forming. This has had a significant marketing impact. From a competitive standpoint, we haven't seen anyone execute anything that we would term innovative, yet they are competing by pricing, which is why we are rolling out the freemium offering. The $200 million on our balance sheet represents a competitive advantage. We can be a little more aggressive, maintaining cash flow and playing offense during times like this and pursuing consolidation. Implementing freemium may indeed lead to short-term trade-offs to amplify lifetime value. Additionally, we’re identifying opportunities to accelerate our roadmap through talent acquisition, which presents real opportunities as hiring within the tech sphere has been quite challenging over the last couple of years.

We think in this environment there will likely be heightened activity and opportunities on the M&A side. Just maintaining a strong balance sheet allows us to be opportunistic if those chances arise.

Great. Thank you, both.

One moment for our next question. Our next question comes from the line of John Byun from Jefferies. Your line is open.

Thank you. This is John Byun on for Brent Thill. Two questions. On the subscription side, it’s been better than the expected growth for a while now. Is there a way to consider how to disaggregate between retention and conversion of the base versus first information positions? Secondly, could you talk a bit more about the going forward trend on AOVs and ARPU? What will the drivers and dynamics relate to that be going forward? Thank you.

Yes. So on the subscription question regarding disaggregation. I think you’re pointing to the difference between retention versus the acquisition piece. I don't know if we specifically want to break those components down. They have been affected by the growth rate information and that growth rate relates to dissolution. The disaggregation that may be a bit more helpful is the distinction between core subscriptions that tie to entity compliance, versus newer components like LZ Tax and Earth Class Mail. The former is untethered by growth because they are in an early development phase. You're seeing strong growth in those two. In regards to the core subscriptions, we are now reaching five quarters with reduced or flat formations. That means we’re observing impacts from the dissolution rates along with flat acquisitions. Retention rates have remained stable overall, if you look at churn from a holistic perspective. However, there is indeed a dynamic underlying this where the 13-month is impacted by dissolution, and older cohorts are achieving better profiles than expected. That’s probably how I’d address that and I’ll turn it over to Noel regarding AOV.

Yes. Regarding AOV and ARPU, looking at AOV, we expect it to decrease year-over-year in the latter half, largely due to our testing with the freemium offering. That free SKU will certainly continue to pressure AOV. On the ARPU side, we maintain strength in that area and anticipate durability through the end of this year, particularly since LZ Tax and ECM are higher ARPU offerings and are becoming a larger part of our subscription business. As those continue, they’ll apply some upward pressure on ARPU.

Yes. It really comes down to focusing on the experience and LZ Tax. If we improve retention, we already know the steps to achieve this. In addition, we have opportunities to better integrate ECM, which will enhance acquisition as the changes are being initiated now, where we’ll begin to see that number start to improve. Changes in that mix will indeed be impactful.

Thank you.

Thank you. That's all the time we have for Q&A today. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.