Legalzoom.Com, Inc. Q1 FY2023 Earnings Call

Thank you, operator. Hello, and welcome to LegalZoom's First Quarter 2023 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 this 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. Such forward-looking statements are based on management's assumptions and expectations and information available to us as of today's date. These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future results or otherwise. In addition, we will also discuss certain non-GAAP financial measures. Our CEO and CFO use these measures in making 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'll turn the call over to Dan.

Thanks, Sarah, and good afternoon, everyone. I'm excited to share our strong performance as we kick off 2023. I'll start with a brief overview of Q1 results. Revenue came in at $166 million, up 7% year-over-year. Transaction revenue was down 5%, while subscription revenue was up 15%. LegalZoom business formations grew 32% year-over-year to 170,000 units. U.S. Census formation were up 4% to $1.5 million for the quarter. The resulting share gain was 27%, which is the largest gain we've seen since we began tracking it. Adjusted EBITDA was $22 million for the quarter or 13% margin. These results reflect the bulk of traffic going to a premium line of tests over the full quarter, and then more specifically, all traffic being directed to the winning lineup at the beginning of March. We tested this lineup for some time, and there were no surprises in the results once deployed. In March, we were able to better understand the implications of free messaging on traffic, and it exceeded our expectations. Coupled with a stronger-than-anticipated formations macro, we saw strength across the board. This is a significant business model shift and inflection point, providing a step function improvement towards realizing our strategy. Our first strategic pillar is to scale the core formations business. And in this quarter, we saw record formations growth, while improving service levels and reducing cost of revenue per unit on the formations business. Our second strategic pillar is to create an ecosystem of subscription services. With this new lineup, we will further leverage the ecosystem by shifting the purchase mix more aggressively towards recurring revenue. And our third strategic pillar is to integrate experts. This new lineup includes a premium SKU that bundles a subscription with access to our network of independent attorneys. The freemium lineup is an accelerant to all of our strategic pillars. To be clear, it's still early innings. And while we're very happy with the initial launch, there are many opportunities to improve our performance across all investment areas. We're excited to build on this new foundation and we have a backlog of improvements that we've already begun to test. Stepping back, our focus is to remove any barrier that stands in the way of someone wanting to launch a business. With this new lineup, we've materially reduced the price of forming a business, which is especially important in today's economic environment. In fact, the formation lineup pricing we have today is lower than it was at our founding in 2001. This focus on making our formations products more accessible, while expanding the type of services we offer beyond just legal and compliance has led us to revisit our mission. Our heritage as a legal disruptor is something we remain both proud of and dedicated to, but we continue to identify additional ways to remove barriers to block entrepreneurs when they form a business. As an early and often the first adviser to small businesses, our customers are looking for us to do much more. Democratizing law is one of many opportunities we have to make expertise more accessible and affordable. As such, 20 years into this journey, we're updating our mission from Democratize law to unleash entrepreneurship. We've already made progress against this new broader mission, and we're excited to share additional product updates in support of it by the end of the year. With this new mission, our top priority is helping small businesses get off the ground. We mentioned last quarter that small businesses are resilient, determined, and their secular tailwinds point to a strong long-term macro. Many factors such as working from home, the emergence of gig economy platforms, lower capital requirements and increasingly sophisticated digital enablement tools make starting a small business easier and lower risk than it's ever been before. Just as we feel good about the long-term prospects of the macro, we also anticipate growth opportunities as we begin to leverage generative AI. The most exciting opportunity we see is eliminating inefficiencies in the contract drafting and review process. This was the key thesis of the Revv acquisition and the forms reinvestment we announced at the end of last year, where we see less opportunity, and therefore, we consider the product highly defensible is within our core filing solution. Let me go ahead and expand on both. There are two parts to our core formation process. The first is providing context and confidence around what's required to form. We believe generative AI is a meaningful evolution to current search solutions when providing content and context and we'll work to integrate those capabilities. Although it's worth noting that much of this content has been widely available for some time through traditional search and there is a high bar around confidence in the source as well as regulations that advise delivery through a credentialed expert. But once a customer has the necessary context, the formation process is a complex workflow. This requires data collection, mapping the data set to proprietary unstructured forms and the last mile connection to over 3,000 counties, 50 states and several federal agencies. These agencies do not have APIs. Instead, our intellectual property here is the combination of the scale workflow, numerous RPA bots to automate filing and last mile capabilities that sometimes require human intervention. In many ways, we act as an API on top of all government agencies and likely have an opportunity to be a plug-in through ChatGPT. We do, however, believe generative AI will revolutionize the legal document space and therefore is an untapped growth opportunity. You can already see large investments being made in national consulting and legal practices to build internal tools that serve enterprise clients. What isn't addressed by that investment is smaller, independent firms that can't afford to make similar investments. These are the firms that typically serve small businesses. According to the ABA roughly half of practicing lawyers are in firms of one to ten attorneys. One of our strategic pillars is to integrate experts. As part of that strategy, we're building an expert platform that enables smaller firms within our ecosystem to compete by driving new business, managing administrative burdens, enabling efficiencies and leveraging new technologies. We've hinted multiple times that you should expect new product releases in the back half of this year that will provide clarity on our strategy with attorneys. And the foundation for this is a new contract and forms platform that will leverage AI. It's worth noting that while technology will continue to make attorneys more efficient due to regulations related to unauthorized practice of law, attorneys will still play a prominent role in the delivery of legal services and this is yet another area where we differentiate ourselves from most of our online competition with a large network of independent attorneys already operating in our ecosystem and ready to consume these services. Beyond generative AI, there are many growth opportunities across all our strategic pillars. With the new lineup rolled out and parallel progress on tech investments to streamline fulfillment, we continue to improve efficiencies as we scale volume. We're about halfway through our automation investment and have opportunities to drive higher margins for multiple years. These investments will also serve to improve the customer experience by lowering the error rate and increasing our speed to file. In addition to efficiency gains, we're focused on improvements in how we commercialize our service through the formation of workflow. Right after we deployed our winning test, we were in market testing ongoing improvements to the new lineup. And in the coming months, we have additional tests queued up on our attached products and services. Similar to virtual mail, we moved quickly to integrate forms and e-signature through MyLZ. This is the third ecosystem subscription launched within the last two years. We aim to be the simplest e-signature provider offering a low-cost service tailored specifically to small businesses' needs. We're currently working to reimagine the entire end-to-end experience starting with form and contract creation through collaboration with an attorney and culminating with a process to get a digital signature and securely store your documents. In addition to deploying a lineup that included an attorney subscription bundle, we continue to make progress on our third strategic pillar, integrating experts. While tax season is extended this year with grace periods for filing in California, we're far enough along through the year to understand our performance and begin applying learnings towards next season. For the year, we expect to double the total number of returns filed compared to 2022, benefiting from the product investments we made before the tax season. We're still just a couple of years into creating this service and believe there are opportunities to drive stronger growth through a better return experience, which will then translate to better retention rates. In our first tax season, we were largely an offline provider. That changed this year as we built onboarding, intake, document upload and accountant scheduling into MyLZ. In turn, those investments drove significant improvements. But with any new product experience, we continue to receive valuable feedback that will be incorporated into postseason releases. Outside of the filing experience, we are still constructively dissatisfied with active usage and retention rates. While we expected lower retention for those seeking pure advisory as their needs may be more episodic, especially right after they form and pre-revenue, we have not seen the level of ongoing active engagement expected for those entitled to a tax return. We have many insights in this area. And as was the case last year, we're building and we'll be testing improvements in anticipation of next tax season. On the whole, this was a big quarter at LegalZoom, and I want to thank the LegalZoom employees for all their hard work and dedication. We made considerable progress against our new mission of unleashing entrepreneurship, and as a result, we're raising both top and bottom line guidance for the year, which Noel will detail in a few moments. I'm very encouraged by the progress we've seen in the market, demonstrating significant share gains while accelerating our shift to recurring subscription revenue. What gets me even more excited, though, is what I see in our product pipeline and the advances we continue to make in building out a new and novel small-to-medium-sized business ecosystem. With that, I'll turn it over to Noel.

Thanks, Dan, and good afternoon, everyone. I'll begin by echoing Dan's excitement with regards to our start to the year. The combination of our new lineup, alongside refreshed marketing messaging, drove impressive market share growth in business formation, a key focus of ours as we look to drive more customers into our subscription ecosystem. Importantly, this combination has also led to improved traffic trends and marketing efficiencies as we've been able to significantly reduce our marketing spend year-over-year while driving higher volumes. We continue to see increasing benefits from automation within our operations where improving productivity levels allowed us to fulfill orders faster than anticipated in the quarter. We also saw reductions in the number of customer care contacts per order and in the related cost per contact. We believe there is still a significant opportunity to improve the efficiency and effectiveness of our operations and are maintaining the investments needed to realize these gains. Cost discipline remains a focus. As we look to balance our goals of reaccelerating revenue growth and improving margins, we remain confident in our ability to drive significant margin improvement year-over-year and see our Q1 results as an important indication of our progress. One of the key factors in our performance this quarter was the macro where its performance exceeded our forecast and was the first quarter of formation growth reported by the Census in over a year. As a result, we're increasing our formations macro expectation for the second quarter. Despite this strength and aligned with our focus on controlling expenses, at this time, we are not adjusting our macro assumptions for the back half of the year. We will continue to manage to the expectation of a recession with the one exception being the continued acceleration of our investment in product and technology. I'll now provide you with a review of our performance in the first quarter and end with our outlook for Q2 and the full year 2023. Total GAAP revenue in the period came in at $166 million, up 7% year-over-year and above the top end of our guidance range. Transaction revenue was down 5% year-over-year at $62 million. Average order value declined 18% year-over-year while total transaction units were up 15% year-over-year. Reduction in average order value was driven by the full rollout of our new lineup. We completed 170,000 business formations in Q1, up 32% compared to the same period last year. Our formations growth well outperformed the market, which was up 4% during the period as measured by U.S. Census data, enabling us to grow our market share by 27% versus the same period last year. The successful share gain can largely be attributed to our new lineup, and we, therefore, expect the year-over-year growth in share gains to moderate in the second half of this year as we start to lap the initial testing and expanding rollout of our free products. Transaction units were 308,000 in Q1, up 15% year-over-year and increasing business formation transactions was offset by a decline in intellectual property and consumer transactions. Average order value came in at $202 in the first quarter, down sequentially from the fourth quarter and down 18% year-over-year, again driven by the rollout of our new lower-priced lineup. As mentioned earlier, we did see increasing benefits from automation within our fulfillment operations and improving productivity levels allowed us to fulfill orders faster and recognize more revenue than anticipated in the quarter. Subscription revenue was $97 million in the quarter, up 15% year-over-year due to a 10% increase in the number of subscriptions and continued improvement in average revenue per unit (ARPU). We saw revenue growth in the quarter across our core compliance, LZ Tax and virtual mail subscription products. I remind you that Q1 is a stronger quarter for revenue recognition in LZ Tax, given the higher tax preparation volumes and unutilized tax preparation entitlements. Average revenue per unit came in at $259, up 6% year-over-year and flat sequentially from the fourth quarter. The increase was primarily due to the increased mix of higher-priced LZ Tax subscriptions within our total subscription base. We expect year-over-year average revenue per unit growth to moderate through the remainder of the year. Partnership revenue was up 11% year-over-year in the first quarter at $6 million. Now turning to expenses and margins, where all of the following metrics are on a non-GAAP basis. Gross margin came in at approximately 66% of revenue in the first quarter, up from 65% in Q1 of last year. The improvement was driven by efficiency gains from cost reduction initiatives implemented in the second half of last year. We expect gross margin to slightly decline in 2023 as a result of higher filing fees as a percentage of revenue due to higher business formation volumes. Sales and marketing costs were $57 million in the quarter or 35% of revenue, down 11 points from Q1 of last year. Customer acquisition marketing came in at $41 million, down 24% year-over-year. In Q2, we continue to expect a significant year-over-year decline in customer acquisition marketing, although to a lesser extent than our Q1 results. Technology and development expenses were $14 million in Q1, up $1 million year-over-year as our primary hiring focus remains in product and engineering. General and administrative expenses were $15 million in Q1, up $1 million year-over-year. Adjusted EBITDA was above our guidance range at $22 million for the quarter compared to $2 million in the first quarter of 2022 and our base of deferred revenue increased $17 million in the period. In the first quarter, we continued to execute on our $150 million share repurchase authorization. We repurchased a total of 771,000 shares of our common stock at an average price of $8.78 per share for a total repurchase of $7 million. Since inception, we have completed $102 million in buyback with a total of 10 million shares repurchased. As of March 31, 2023, we had cash and cash equivalents of $204 million and no debt outstanding. I'll now provide guidance for the second quarter and full year 2023. For the second quarter of 2023, we expect total revenue of $166 million to $168 million, a 3% year-over-year growth at the midpoint. We expect adjusted EBITDA of $27 million to $29 million or 17% of revenue at the midpoint. For the full year of 2023, we are raising our total revenue to $630 million to $650 million or 3% year-over-year growth at the midpoint. As a result, we now expect adjusted EBITDA to increase to $105 million or 16% of revenue. And with that, let's please open the call for questions.

And our first question comes from Andrew Boone with JMP Securities.

Congrats on a strong set of share gains. Can you talk a little bit about how LOMs may change the competitive dynamic for business formation? What are the risks you see out there as people are utilizing more generative AI models, what do you see there? And then can you talk a little bit about the cadence of the quarter? So understood for you really went live in March. Can you give us some more recent update in terms of what you guys saw on attach as well as maybe how March compared to January and February.

Thanks for the question, Andrew. Let me start up on the question with generative AI. I mean, maybe I'll just start by saying, this isn't all that new news for us. I mean if you go back and think through the pandemic when GPT-3 was released, we saw a pretty significant demonstration of some of the incredible capabilities that you get from LLM and from generative AI. If you think about some of them, it's legal text to plain English, summary briefs, just all of the distilling capabilities that it has and even more complex drafting. So when ChatGPT came out, that was just a little bit more about fine-tuning on a model of conversational UI. But those capabilities have been in place for some time now. So if you step back, the generative piece of this is going to change how people write almost like photos changed art, and bad writers will be somewhat overnight pretty good writers, and we all know attorneys are amazing writers that effectively get paid by the word, which is a proxy of time. So there's going to be an impact on the industry. What I don't think everybody fully appreciates is that our whole purpose for the first 20 years of our existence has been to leverage tech to make legal services accessible. The issue isn't in my mind, disruption of the online players. This is all about getting to the problem of non-consumption through broader digital reach. And just about every estimate we see by every expert says that the majority of the U.S. population leaves their legal needs unmet. And anything that can stimulate that demand is a good thing in my mind. So what do I mean by that? So on our business, less than 5% of our revenue comes from forms and contracts, including our estate planning business as well. We announced our acquisition of Revv in Q4 last year, pre the ChatGPT release. Our intent there was twofold. We've talked about e-signatures and actually, we've deployed that already, but part of this was to reimagine our forms and our contract offerings. Because we hadn't invested in that business in 10 years despite the fact that that's where we got started, we really haven't had a significant investment there for some time. So in due diligence, when we were out looking at potential acquisitions, Revv was one of the things that attracted to us to them was the fact that they had some pretty novel features leveraging machine learning. And I've been through these shifts a couple of times before. What I'd say, typically, the pattern is that the most disruptive technologies start horizontally and then they get tuned vertically. And we're in a really unique position to not only leverage ChatGPT, but to also couple it with our attorney network to bridge its shortfalls. And there's a couple of those, such as technical issues like hallucinations but also regulatory issues like unauthorized practice of law. So I view ChatGPT as expanding our addressability. Of course, that means we have to be innovative in the space, but we are the market leader, so you should expect that. I certainly do. So we're excited about where we are, and we have a couple of things that we talked about as we get towards the end of the year, and we're in a pretty good spot for that. On the cadence in the quarter, I would say we didn't see any surprises in the launch. And part of that is a reflection of just how much we tested before we released the winning lineup. And so if anything, we saw the predictable conversion improvements, we saw the reduction in average order value. The one thing that we were able to get a new read on in March was marketing efficiency and just what the impact of free messaging would be. And I can say that, that exceeded our expectations a bit. And we're just getting started there, too. So there's a lot of tuning that has to happen on the lineup itself. But the early indication is that the free messaging is resonating, you can see it in the share performance. I mean the 27% share gain is probably the best indication in general. On the attach side, we did not have any surprises there. It played out exactly how we saw it in our tests, where we're seeing slightly lower attach rates, but that's overcome by the fact that you have many more units. And so overall, it's going to be an acceleration in the subscription business, increasing mix and driving longer lifetime revenue. And all of that is in combination with lower customer acquisition marketing expenses and better customer acquisition marketing efficiencies. So it really was pretty clean exactly what we had expected.

And Andrew, just one thing that builds on the trajectory of the quarter. We did see some strength in March as we fully rolled out. I mean, we were largely rolled out throughout the quarter, so it was a slight improvement. We also saw a stronger macro in March. That's kind of normalized in April. And so while we've increased our assumptions and forecast for the macro in Q2, our projections are not as strong as what we actualized in Q1. And then, per our commentary, we also noted that in the back half of the year, we continue to take a really conservative approach to the macro. So as you think about Q2 from a business formation standpoint, what we saw in Q1 should be a fair expectation for our performance in Q2 from a year-over-year growth standpoint, and still staying conservative on the macro in the back half of the year.

Wanted to ask on LZ Tax. Just sort of to clarify, how did that perform in its second year relative to your expectations? And you're thinking about areas of improvement, maybe what would some of those look like? Where do you think there's additional opportunities with that product?

Thank you for the question, Matt. To recap, our tax business is quite unique as we cater to a group of customers that many do not, particularly those who are pre-formation or in the early stages of their operations. These individuals often seek guidance on what type of entity they should establish, and even after creating an entity, they may not yet be operational, which is where we provide substantial tax advice. This creates a distinctive business model through a unique channel, as we are able to identify these customers directly, unlike others who rely on performance or brand marketing to connect with them. The progress we've made has been remarkable; considering this practice is under two years old and we've just completed our second tax season, the scaling efforts and service enhancements have been outstanding. However, while I'm not dissatisfied, I do feel we could improve on retaining customers since we believe our retention rates could be better. We've recognized some challenges in our filing process and identified capabilities we want to develop as a tax service beyond just filing. We continue to learn these things as we engage with the market. Our philosophy is to balance rapid growth with attentiveness to customer feedback and service evolution. The service is performing well, but I believe there remains significant potential as we work on enhancing the overall experience for our customers.

Got it. And then in terms of the share gains you're seeing, I mean, my guess would be a lot of that is coming from more of the price-sensitive consumer. What are you doing then to address the large portion of the market that's still paying a much higher fee to go to a bricks-and-mortar attorney to do a business formation?

Yes, that's one of the really fun parts of the lineup that we deployed is it both solves for the price-sensitive at the low end with a free offering, but our premium SKU actually comes bundled with access to an attorney. And so the benefit there is we're introducing a lot of people to the idea of you can get access to an attorney through technology to handle some of the early questions that you have as you're forming, and then you can decide from there whether or not you're going to renew the service. And so that really is an entree into starting to disrupt the higher end of the market. Super early innings here. And actually, the volume that we're seeing coming in from this lineup is, again, what we're going to learn from and keep evolving the service, but the early read is quite positive. And that was the lineup that won overall in terms of both thinking about conversion as well as lifetime value.

The other thing I'd add just in the value that we bring is the fact that it's a full suite of solutions and services that we provide either directly or through partners, which is a better customer experience. We're also improving our overall customer experience. We also mentioned this in our remarks around the automation wins that we've had in terms of the delivery of our services. And so we've been able to deliver a faster and better experience to our customers, which makes us a better choice overall.

This is Jack Butler on for Mario. My first question was surrounding the partnership side of things. When should we expect to see a meaningful uplift from these new partnerships such as Chase? Is there any timeline you may be able to put behind that?

There are two types of partnerships that we have. One involves marketing services through our formation workflow, while the other is the partnership channel, where some partners promote our formation service. Your question seems to focus on the services we promote on our platform, which has a lot of moving components. Recently, we exited a partnership on uncontested divorce services, which is a challenge, but we're also significantly enhancing our partnership with Wix. We’ve added Chase as a banking partner, and NEXT Insurance is another important partner for us that is seeing substantial growth. I anticipate this growth will continue to gain momentum, despite some challenges from partnerships we are exiting. Over the last couple of years, we have consistently aimed to build an ecosystem that integrates experiences for customers. This sometimes leads us to take ownership of experiences that are closely related to compliance, as we did with tax services, which has now transitioned from being a partnership to a direct offering to our customers. In terms of the partnership channel, we have partnerships that are mutually beneficial, with both sides effectively promoting each other's services. However, we also have some legacy partnerships where we act more as a low-cost vendor to other providers, which isn't our long-term goal. We want symbiotic partnerships where both parties contribute positively to each other’s success. Conversely, vendor-type arrangements do not align with our vision for maximizing lifetime value. Therefore, we will be reevaluating partnerships in our channel as we move forward.

Great. That's helpful. And then in terms of customer acquisition marketing, I know you indicated earlier on the call that you would expect to see a decline in that in Q2 on a year-over-year basis. Is that largely as a result of your shifting towards product and maybe weaning off after the season with heightened marketing on LZ Tax, or is there some other factor at play maybe you could call out?

Yes, there are a couple of different factors here. I mean we've really scaled down our brand spend. And that's a reflection of thinking relatively to our competition. Our awareness is just extremely high, and we have a strong lead. And in this environment, we didn't feel like that's a place to commit and have long-term investments. So we backed off on the brand side a bit. But it's also just gotten more efficient when you start to think about the performance side given the free messaging that we're using, some of the channel shifts that we're doing within performance marketing. And then even beyond that, sales and marketing, so thinking about the OpEx side, we adjusted as well. And sales, for instance, has come down as an expense. So when you think about the headcount side, that's down 8% for the quarter. So came down 24%, the sales and marketing headcount expense down 8% with the program dollar in there as well. It's sort of across the board a reduction as we become more and more efficient to align with our new strategy, which is a lower average order value product.

Dan, I wanted to revisit a question or comment you made earlier. You mentioned that the most disruptive technology is typically introduced on a broad scale before being refined for specific applications. Can you elaborate on how this approach might influence LegalZoom or your perspective on its support for specialized LLMs? Additionally, although we discussed the freemium model during the call and this may have been addressed, I would like to hear about what we've learned regarding demand and, more importantly, the upsell process and how we can increase awareness of LegalZoom's additional offerings.

Thank you for the question, Ron. Regarding LLM and verticalization, it's similar to fine-tuning. LLMs like ChatGPT provide a broad range of responses but aren't perfect in any single area. Their effectiveness can be influenced by the data sources available. For instance, while one might easily access terms of service online, specific small business vendor contracts or local lease terms might not be as readily available. This provides an advantage to larger players. As you look at LLM options, considering open-source platforms that allow for fine-tuning with your own data is essential. We're early in this process, and we're excited because we possess unique data accumulation methods that give us an edge. Investing in our expert platform is crucial, as it serves as the foundation for training these models, and we plan to increase our investment in coming quarters. Regarding the lessons learned about our lineup and demand generation, we've done extensive testing prior to deployment to understand commercialization challenges. However, we lacked a complete understanding of its impact on marketing and demand generation. We've identified new sub-channels to explore, but I won't elaborate on specifics. Another key insight is figuring out how to effectively use free messaging. While increasing the free message can lower average order value, it's important to strike a balance to cater to price-sensitive customers without overdoing the free offers. We're just beginning to explore this area, and I believe there's significant opportunity for enhancement as the year progresses, especially since we haven't fully tested these strategies yet. This is currently unfolding in the market.

This is Sang for Brent Thill. Two questions. One on the freemium. Wondering if you could talk about the pace, once they come in through that door, how quickly do they end up buying a paid product and typically which products get attached? And then second, on your decision to keep your recession or macro outlook the same for the second half. Just wondering what you're seeing? I mean, it looks like last quarter, you mentioned January, February are pretty good and obviously, Q1 turned on very well, but just wanted to see your thinking behind that thought process of the guidance around the macro assumption.

Thank you for your question. Regarding the attachment rates for this new group of customers, they have been fairly predictable based on our testing. We analyzed what customers are attaching, and we offer a set of standard solutions, including essential documents like operating agreements and EINs, as well as compliance subscriptions like registered agents and services for annual filings. These offerings are pretty standard and attach well because they are often necessary. They provide value not just from a perspective of relevance during the formation process but are also required. As a result, they maintain strong attachment rates. However, we haven't yet commercialized these products to cater specifically to the new customer segments. Price-sensitive customers may not seek a comprehensive feature set or advanced products; they might prefer something simpler, which presents us with an opportunity to adjust our commercialization strategy to increase those attachment rates. The exciting part is that we are very satisfied with the freemium launch—there were no surprises. Coming out of this, we recognize that our product lineup is somewhat under-optimized since we haven't fully tested several add-on subscriptions or products. We're aware of the opportunities ahead and have a number of tests ready to be conducted, which have been queued up while we were focusing on the freemium line for some time.

Regarding the macro environment, we believe it's wise to remain conservative. We are currently navigating an uncertain macro landscape characterized by high inflation and rising interest rates, leading to an expected economic slowdown. We analyze historical growth rates and assess potential changes over time, recognizing that the trends may have shifted positively due to various supportive factors for establishing and operating a business. We take multiple factors into account but overall feel it's prudent to maintain a cautious outlook as we project into the future. We will adjust our forecast for the upcoming quarter based on current observations, but for the time being, we will continue with a conservative approach for the longer term.

Yes. In April, for example, the weekly data published by the Census showed that things remained quite healthy. To Noel's point, we want to focus on managing the factors within our control, and we believe that adopting a cautious stance in light of a potentially negative macro environment is beneficial for managing our workforce. This approach is also important for our spending decisions as we aim to be as conservative as possible in the current climate.

Actually, just one from our side. Is there a different consideration for the lifetime value of a customer that aligns with the willingness to accept a lower upfront price? Perhaps that could affect the long-term model or the long-term margin profile?

Yes, I want to make sure I understand your question. Are you asking whether or not we should expect a different lifetime value for the customers coming in through this lineup?

Yes. I'm considering that when we think back to the IPO a couple of years ago, your long-term model likely included a different upfront price for most of the transaction units and a different price for the subscription units as well. I'm curious about how this new product offering interacts with your long-term margin profile, which I believe has largely remained the same since your initial launch.

Yes. It's difficult to predict the lifetime value impact of this customer base as we look into the future. What we're focusing on is how this relates to our customer acquisition marketing spend. When we examine the reduction in average order value, we see that the customer acquisition marketing cost per customer is decreasing faster than the total cart value. This could lead to some improvement, but it also depends on what we observe in customer behavior in the second and third years. As we transition more toward subscriptions, it's reasonable to expect that our margin profile will improve, but it ultimately relies on retention rates, which we can't currently determine.

I wanted to touch on the share gains in business formations. The 27% is very impressive in Q1 and while you expect that to moderate in the year, how should we think about the trend versus your original target to achieve about a 12% improvement this year? And has that target changed at all just given the strong Q1 performance?

When we discuss moderation, we are referring to a slowdown in the growth rate, which is starting to reflect the testing that will occur in the latter half of the year. Our main objective is to increase our market share throughout the year. As I mentioned earlier, there might be instances where we opt not to pursue certain shares if they do not offer the right value. Additionally, we are aware of areas where we can make incremental investments to boost our market share. For instance, we currently optimize only the LLC segment of formations, which accounts for about 75% of the formation transactions, leaving 25% that are still priced traditionally. This has resulted in a strong performance, and we are very pleased with it. We believe it positions us well to optimize further and build on this success as the year progresses.

And one thing I'll just add there Elizabeth. We had stated that our goal was to grow market share by 15% this year. And we're still highly confident that we are going to drive at least 15% growth.

Yes. So the way automation works is, we really prioritize based off of the number of transactions that are occurring. And as you can imagine, because we do a lot of different types of transaction types. You get to a place of diminishing returns eventually, and it becomes a little bit more of a long tail of smaller improvements. What I would say is we expect some significant improvements by the end of this year that should drive incremental efficiencies. And then at that point, we start to move to transaction types that have a little less impact thereafter. But there are parts of our products, for instance, that I mentioned before that we really haven't touched in many years. Even like when you think about consumer business, that still has a lot of manual processes underneath it. And most of what we've talked about on the automation side has really been on the small business side. So still opportunities. A lot of larger improvements should happen over the next six months and then it starts to moderate.

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