LegalZoom.com(LZ) - 2024 Q2 - Quarterly Report

Part I FINANCIAL INFORMATION This section presents LegalZoom's unaudited financial statements and management's discussion of financial condition and results Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents LegalZoom's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed accounting notes Condensed Consolidated Balance Sheets Total assets decreased from $447.8 million to $359.5 million, driven by reduced cash, while liabilities increased and equity substantially declined | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :--------------------------- | :------------------------------- | | Cash and cash equivalents | $118,795 | $225,719 | | Total current assets | $179,278 | $275,338 | | Total assets | $359,515 | $447,818 | | Total current liabilities | $283,043 | $263,963 | | Total liabilities | $298,753 | $278,984 | | Total stockholders' equity | $60,762 | $168,834 | Condensed Consolidated Statements of Operations Revenue increased by 5% for both three and six months ended June 30, 2024, with net income improving to a profit for the six-month period | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $177,362 | $168,854 | $351,576 | $334,790 | | Gross profit | $113,753 | $105,106 | $219,583 | $210,647 | | Income from operations | $1,146 | $4,745 | $6,201 | $3,949 | | Net income (loss) | $1,314 | $1,395 | $6,058 | $(963) | | Net income (loss) per share — basic | $0.01 | $0.01 | $0.03 | $(0.01) | Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income for the three months was $1.5 million, and $6.5 million for six months, a significant improvement from the prior year's loss | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,314 | $1,395 | $6,058 | $(963) | | Change in foreign currency translation adjustments | $(4) | $(536) | $292 | $(1,167) | | Change in available-for-sale debt securities due to unrealized gains | $154 | — | $154 | — | | Total other comprehensive income (loss) | $150 | $(536) | $446 | $(1,167) | | Total comprehensive income (loss) | $1,464 | $859 | $6,504 | $(2,130) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $168.8 million to $60.8 million, primarily due to $125.2 million in common stock repurchases | Metric (in thousands) | Balance at December 31, 2023 | Balance at June 30, 2024 | | :------------------------------------------------------ | :--------------------------- | :----------------------- | | Common Shares | 188,538 | 176,108 | | Common Stock Amount | $189 | $177 | | Additional Paid-In Capital | $1,101,474 | $1,125,942 | | Accumulated Deficit | $(933,061) | $(1,066,035) | | Accumulated Other Comprehensive Income | $232 | $678 | | Total Stockholders' Equity | $168,834 | $60,762 | | Repurchased common stock (six months ended June 30, 2024) | N/A | $(125,199) | | Stock repurchase excise tax (six months ended June 30, 2024) | N/A | $(1,089) | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $61.4 million, while cash used in investing and financing activities significantly increased, largely due to stock repurchases | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $61,440 | $74,373 | | Net cash used in investing activities | $(19,351) | $(15,227) | | Net cash used in financing activities | $(148,981) | $(9,323) | | Net (decrease) increase in cash and cash equivalents | $(106,924) | $49,855 | | Cash and cash equivalents, at end of the period | $118,795 | $238,937 | Notes to Condensed Consolidated Financial Statements These notes detail LegalZoom's business, accounting policies, and specific financial items, including revenue, assets, debt, equity, compensation, and taxes Note 1. Description of the Business LegalZoom provides comprehensive legal and business services for small businesses and consumers, covering formation, compliance, tax, and estate planning - LegalZoom.com, Inc. provides services for the legal needs of small businesses and consumers, supporting businesses across their lifecycle with offerings including business formation, compliance, tax advice, business licenses, accounting, virtual mailbox, e-signature solutions, trademark filings, and estate plans[22] Note 2. Summary of Significant Accounting Policies This note details significant accounting policies, including revenue recognition changes for partner revenue, and discusses adopted and unadopted pronouncements - The company's financial statements are prepared in accordance with GAAP, with certain information condensed or omitted for interim reporting. Estimates are used for various items including revenue recognition, allowances, and fair value measurements[23] - Beginning in Q4 2023, partner revenue is included in transaction and subscription revenue to align with performance evaluation, with no impact on total revenue. Prior period disclosures have been conformed[23] Revenue by Type (in thousands) | Revenue Type | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Transaction | $68,537 | $65,863 | $134,854 | $133,890 | | Subscription | $108,825 | $102,991 | $216,722 | $200,900 | | Total revenue | $177,362 | $168,854 | $351,576 | $334,790 | Note 3. Other Financial Statement Information This note details changes in accounts receivable allowances, prepaid expenses, accrued liabilities, depreciation, amortization, and deferred revenue Accounts Receivable Allowance Changes (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance | $3,433 | $4,870 | $4,906 | $4,730 | | Add: amounts recognized as a reduction of revenue | $1,743 | $3,962 | $3,288 | $6,078 | | Add (less): allowance for credit losses recognized in general and administrative expense | $136 | $425 | $(19) | $489 | | Less: write-offs, net of recoveries | $(1,536) | $(3,523) | $(4,399) | $(5,563) | | Ending balance | $3,776 | $5,734 | $3,776 | $5,734 | Prepaid Expenses and Other Current Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Prepaid expenses | $9,234 | $10,423 | | Deferred cost of revenue | $2,422 | $1,678 | | Capitalized cloud computing development costs | $1,362 | $1,085 | | Income tax receivable | $8,399 | $35 | | Other current assets | $997 | $1,938 | | Total prepaid expenses and other current assets | $22,414 | $15,159 | Depreciation and Amortization Expense (in thousands) | Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $4,618 | $3,011 | $9,085 | $5,633 | | Sales and marketing | $889 | $1,354 | $1,688 | $2,611 | | Technology and development | $1,841 | $841 | $3,318 | $1,699 | | General and administrative | $1,078 | $631 | $2,005 | $1,463 | | Total depreciation and amortization expense | $8,426 | $5,837 | $16,096 | $11,406 | Note 4. Assets Held for Sale Operational headquarters in Austin, Texas, with a carrying value of $22.7 million, are classified as assets held for sale since Q3 2022 Assets Held for Sale (in thousands) | Asset Type | June 30, 2024 | | :------------------------------- | :------------ | | Land | $6,400 | | Building and building improvements | $16,322 | | Total assets held for sale | $22,722 | - The company's operational headquarters in Austin, Texas, consisting of land, building, and improvements, has been classified as assets held for sale since Q3 2022, with a carrying value of $22.7 million as of June 30, 2024. No impairment was recorded[41] Note 5. Long-term Debt The $150.0 million 2021 Revolving Facility had no outstanding amounts as of June 30, 2024, and the company complied with all covenants - The company has a 2021 Revolving Facility for up to $150.0 million, with no outstanding amounts or letters of credit as of June 30, 2024[43] - The facility's interest rate benchmark was changed from LIBOR to SOFR in May 2023, with a 0.10% credit spread adjustment[43] - The company was in compliance with all financial covenants under the 2021 Revolving Facility as of June 30, 2024[43] Note 6. Commitments and Contingencies The company is not involved in material legal proceedings, and indemnification obligations to third-party providers are immaterial - The company is not currently involved in any material legal proceedings or aware of any pending or threatened litigation that could have a material adverse effect on its financial condition[44] - Indemnification obligations under third-party service provider agreements are deemed immaterial, with no amounts accrued or paid during the periods presented[45] Note 7. Stockholders' Equity The stock repurchase program was increased to $175.0 million, with $138.0 million in repurchases and $37.0 million remaining, incurring a $1.1 million excise tax - The stock repurchase program was increased to $175.0 million in May 2024[47] Stock Repurchase Activity (Six Months Ended June 30, 2024) | Metric | Value (in millions) | | :----------------------------------- | :------------------ | | Shares repurchased | 15.1 | | Total repurchase value | $138.0 | | Remaining available for repurchases | $37.0 | | Stock repurchase excise tax liability | $1.1 | Note 8. Stock-based Compensation Stock-based compensation was $18.9 million for three months and $33.8 million for six months, with 5.5 million RSUs and 1.5 million PSUs granted Stock-based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $1,747 | $1,105 | $3,340 | $1,979 | | Sales and marketing | $1,906 | $1,447 | $3,485 | $2,979 | | Technology and development | $6,525 | $4,875 | $12,228 | $9,195 | | General and administrative | $8,737 | $11,529 | $14,718 | $21,270 | | Total stock-based compensation expense | $18,915 | $18,956 | $33,771 | $35,423 | - During the six months ended June 30, 2024, the company granted 5.5 million restricted stock units (RSUs) with a fair value of $71.9 million and 1.5 million performance stock units (PSUs) to senior leadership, with vesting contingent on employment and profitability targets, and a total shareholder return (TSR) modifier[49][51] Note 9. Income Taxes Income tax provision was $2.0 million (61% effective rate) for three months and $5.3 million (47% effective rate) for six months, a significant reduction Income Tax Provision and Effective Tax Rate | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes | $2,046 | $6,127 | $5,276 | $9,964 | | Effective tax rate | 61% | 82% | 47% | 111% | - The effective tax rate decreased primarily due to lower non-deductible stock-based compensation and higher excess tax benefits on stock-based compensation[54] Note 10. Net Income (Loss) Per Share Basic and diluted EPS remained $0.01 for three months, improving to $0.03 for six months, reflecting a return to profitability Net Income (Loss) Per Share (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,314 | $1,395 | $6,058 | $(963) | | Weighted-average common stock used to compute net income (loss) per share — basic | 184,257 | 191,342 | 186,438 | 191,318 | | Net income (loss) per share — basic | $0.01 | $0.01 | $0.03 | $(0.01) | | Net income (loss) per share — diluted | $0.01 | $0.01 | $0.03 | $(0.01) | Note 11. Restructuring A restructuring plan in August 2024 will reduce the workforce by 15%, incurring $5.0 million in charges and yielding $10.0 million in savings - In August 2024, the company committed to a restructuring plan to reduce its global workforce by approximately 15%[58] - Expected charges of approximately $5.0 million for severance and termination benefits, primarily in Q3 2024[58] - The restructuring is expected to drive approximately $10.0 million in savings in 2024[58] Note 12. Fair Value Measurements Financial assets measured at fair value include cash equivalents (Level 1) and available-for-sale debt securities (Level 3) Assets Measured at Fair Value (in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | | :------------------------------- | :-------- | :------ | :------ | | Available-for-sale debt securities | — | — | $1,374 | | Money market funds | $107,753 | — | — | | Total assets (June 30, 2024) | $107,753 | — | $1,374 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses LegalZoom's business overview, recent developments, strategic priorities, key performance factors, financial results, liquidity, and non-GAAP measures Overview LegalZoom is a leading online platform providing comprehensive legal, tax, accounting, and compliance services for U.S. small businesses - LegalZoom is a leading online platform for business formation in the U.S., offering comprehensive legal, tax, accounting, and compliance products and expertise for small business owners[65] Recent Developments Jeff Stibel was appointed CEO, and an August 2024 restructuring will reduce the workforce by 15%, incurring $5.0 million in charges for $10.0 million in savings - Jeff Stibel was appointed Chief Executive Officer, effective July 9, 2024[66] - In August 2024, the company committed to a restructuring plan, reducing its workforce by approximately 15%[66] - The restructuring is expected to incur charges of approximately $5.0 million, primarily in Q3 2024, and drive approximately $10.0 million in savings in 2024[66] Updates to Strategic Execution Priorities LegalZoom's strategic priorities include optimizing subscriptions for customer lifetime value, diversifying go-to-market strategies, and leveraging AI for enhanced legal services - Prioritizing subscription products over transactional products to focus on customer lifetime value, including revisiting free business formation offerings[67] - Diversifying customer acquisition strategy across marketing channels, reinvesting in consumer channels, improving cross-selling, and re-evaluating partnership strategy[67] - Investing further in artificial intelligence to offer additional legal services and improve customer experience, particularly in expert solutions[68] Key Factors Affecting Our Performance Performance is influenced by macroeconomic conditions, business formation rates, customer lifetime value enhancement, and successful integration of expert offerings - Macroeconomic factors, such as increased corporate dissolutions and decelerated business formations, negatively impacted upsell and retention in H1 2024, with challenges expected to continue[69] - Performance depends on increasing the company's share of U.S. business formations, which serve as a primary entry point for customers into the LegalZoom ecosystem[69] - Future performance relies on enhancing customer lifetime value by integrating new products, increasing recurring subscription revenue, and improving customer experience[69] - The ability to integrate experts and increase consumption of higher-cost expert offerings through cross-selling and platform improvements will impact future results[69] Key Business Metrics LegalZoom tracks business formations, transactions, AOV, subscription units, ARPU, and retention to assess growth and marketing effectiveness Number of business formations Business formations decreased by 17% (three months) and 18% (six months) due to macroeconomic challenges and channel partner exits Number of Business Formations (in thousands) | Period | 2024 | 2023 | | :----------------------------------- | :--- | :--- | | Three Months Ended June 30, | 134 | 161 | | Six Months Ended June 30, | 273 | 331 | - Business formations decreased by 17% (3 months) and 18% (6 months) YoY, driven by a challenging macroeconomic environment and the exit of certain channel partner relationships[71] Number of transactions Transactions increased by 3% (three months) and 6% (six months), driven by new beneficial ownership reports and other small business transactions Number of Transactions (in thousands) | Period | 2024 | 2023 | | :----------------------------------- | :--- | :--- | | Three Months Ended June 30, | 292 | 283 | | Six Months Ended June 30, | 628 | 591 | - The increase in transactions was primarily driven by the introduction of beneficial ownership information reports and other small business-related transactions, such as annual reports and corporate dissolutions[72] Average order value Average order value was flat for three months but decreased by 5% for six months, due to a mix shift towards lower-priced transactions Average Order Value | Period | 2024 | 2023 | | :----------------------------------- | :---- | :---- | | Three Months Ended June 30, | $234 | $233 | | Six Months Ended June 30, | $215 | $226 | - The 5% decrease in average order value for the six months was driven by a higher mix of lower-priced small business transactions (e.g., annual reports, beneficial ownership information reports) and reduced fees from third-party leads[74] Number of subscription units Subscription units grew 4% to 1,609 thousand, driven by forms, e-signature, and virtual mail, despite declines in registered agent services Number of Subscription Units (in thousands) | As of June 30, | 2024 | 2023 | | :------------- | :---- | :---- | | Subscription units | 1,609 | 1,553 | - Growth was primarily driven by increases in forms and e-signature subscriptions (due to bundling) and virtual mail subscriptions[76] - Growth was partially offset by a decline in registered agent and compliance subscriptions due to the exit of certain channel partner relationships in Q3 2023[76] Average revenue per subscription unit ARPU increased 4% to $271, driven by higher-priced offerings, partially offset by lower-priced forms and e-signature subscriptions Average Revenue Per Subscription Unit (ARPU) | As of June 30, | 2024 | 2023 | | :------------- | :---- | :---- | | ARPU | $271 | $261 | - ARPU increased 4% due to a shift towards higher-priced subscription offerings, partially offset by an increase in lower-priced forms and e-signature subscriptions[77] Annual small business retention rate Annual small business retention rate was approximately 63% as of June 30, 2024, and is expected to fluctuate with product testing - Annual small business retention rate was approximately 63% as of June 30, 2024[80] - The retention rate is expected to fluctuate due to ongoing product testing and commercialization strategies[80] Key Components of our Results of Operations This section details LegalZoom's revenue, cost of revenue, gross profit, and operating expenses, outlining influencing factors and future outlook Revenue Revenue is generated from transaction services like legal documents and tax preparation, and subscription services including registered agent and attorney advice - Transaction revenue is primarily from customized legal document services, tax preparation, and fees from third-party leads[81] - Subscription revenue is generated from services like registered agent, compliance packages, attorney advice, legal forms, tax and accounting, virtual mail, e-signature, and SaaS solutions[81] Cost of revenue Cost of revenue includes filing fees, fulfillment, customer care, independent contractors, data center costs, amortization, depreciation, and credit card fees - Cost of revenue includes government filing fees, fulfillment, customer care (including credentialed professionals), independent contractors, telecommunications, data center costs, amortization of acquired technology, depreciation, printing, shipping, credit/debit card fees, allocated overhead, legal document kit expenses, and sales/use taxes[82] Gross profit and gross margin Gross profit and margin are influenced by revenue mix, with long-term expansion expected from automation, though acquisitions and seasonality may cause fluctuations - Gross profit and gross margin are primarily affected by the mix of transaction and subscription revenue[84] - Long-term gross margin expansion is anticipated from automation improvements and digitization efforts[84] Operating expenses Operating expenses primarily comprise sales and marketing, technology and development, and general and administrative costs, with minor impairment impacts - Operating expenses primarily include sales and marketing, technology and development, and general and administrative expenses[85] Sales and marketing Sales and marketing expenses cover customer acquisition, personnel, media production, and business development, and are expected to remain the largest operating cost - Sales and marketing expenses include customer acquisition media costs, compensation for marketing and sales personnel, media production, public relations, business development, and allocated overhead[86] - The company plans to continue investing in sales and marketing to drive revenue and market penetration, expecting it to remain the largest operating expense category[86] Technology and development Technology and development expenses include personnel, consultants, and allocated costs for product development, platforms, and infrastructure, expected to remain consistent as a percentage of revenue - Technology and development expenses include personnel costs, outside consultants, and allocated depreciation/amortization for product development, websites, mobile applications, online platform, research, and infrastructure[87] - These expenses are expected to remain relatively consistent as a percentage of revenue, though subject to period-to-period fluctuations[87] General and administrative General and administrative expenses include executive compensation, professional fees, and legal costs, expected to decrease as a percentage of revenue long-term - General and administrative expenses primarily include compensation for executive and corporate personnel, professional and consulting fees, and allocated depreciation/amortization and legal costs[88] - These expenses are expected to decrease as a percentage of revenue over the longer term[88] Interest expense Interest expense, primarily from debt issuance costs, is expected to remain insignificant due to no outstanding debt, but would increase if the facility is drawn - Interest expense primarily consists of amortization of debt issuance costs related to the 2021 Revolving Facility[89] - It is expected to remain insignificant in the near term as there is no outstanding indebtedness[89] Interest income Interest income is primarily generated from investments in money market funds - Interest income is primarily generated from investments in money market funds[91] Income taxes Income tax provision is based on an estimated annual effective tax rate, which can fluctuate significantly due to pre-tax income, tax law changes, and stock-based compensation - Income taxes are accounted for using an estimate of the annual effective tax rate, which can fluctuate significantly due to factors like pre-tax income, tax law changes, tax audits, and stock-based compensation[93] Results of Operations This section compares LegalZoom's consolidated statements of operations for Q2 and H1 2024 vs. 2023, detailing changes in revenue, costs, and net income Comparison of the Three Months Ended June 30, 2024 and 2023 Q2 2024 revenue increased 5% to $177.4 million, driven by subscription growth, while gross profit rose 8%, and net income slightly decreased to $1.3 million Revenue by Type (Three Months Ended June 30, in thousands) | Revenue Type | 2024 | 2023 | $ Change | % Change | | :----------- | :------- | :------- | :------- | :------- | | Transaction | $68,537 | $65,863 | $2,674 | 4% | | Subscription | $108,825 | $102,991 | $5,834 | 6% | | Total revenue | $177,362 | $168,854 | $8,508 | 5% | - Total revenue increased by $8.5 million (5%) primarily due to a 6% increase in subscription revenue, driven by a 4% increase in subscription units and a 4% improvement in ARPU[98][100] - Cost of revenue decreased by $0.1 million, mainly due to a $1.9 million reduction in filing fees and a $1.8 million decrease in third-party staffing fees, partially offset by increases in depreciation and payroll[101] - Sales and marketing expenses increased by $6.6 million (12%) due to an $11.1 million increase in customer acquisition marketing spend, partially offset by a $4.3 million reduction in payroll[103] - Technology and development expenses increased by $5.9 million (30%) primarily due to increased payroll and related benefits from higher headcount[106] - General and administrative expenses decreased by $0.3 million (1%) mainly due to a $2.8 million decrease in stock-based compensation, partially offset by increased consulting costs and payroll[106] - Provision for income taxes decreased by $4.1 million (67%) due to lower non-deductible stock-based compensation and higher excess tax benefits, resulting in a lower effective tax rate of 61% (vs. 82% in 2023)[110] Comparison of the Six Months Ended June 30, 2024 and 2023 H1 2024 revenue increased 5% to $351.6 million, with subscription revenue up 8%, and net income significantly improved to $6.1 million from a prior year loss Revenue by Type (Six Months Ended June 30, in thousands) | Revenue Type | 2024 | 2023 | $ Change | % Change | | :----------- | :------- | :------- | :------- | :------- | | Transaction | $134,854 | $133,890 | $964 | 1% | | Subscription | $216,722 | $200,900 | $15,822 | 8% | | Total revenue | $351,576 | $334,790 | $16,786 | 5% | - Total revenue increased by $16.8 million (5%) primarily due to an 8% increase in subscription revenue, driven by a 4% increase in subscription units and a 4% increase in ARPU[111][114] - Cost of revenue increased by $7.9 million (6%) mainly due to a $5.4 million increase in payroll and benefits, a $3.5 million increase in depreciation, and a $1.3 million increase in filing fees, partially offset by a $4.5 million decrease in third-party staffing fees[115] - Sales and marketing expenses were flat, increasing by $0.2 million (0%) due to an $11.0 million increase in customer acquisition marketing spend, offset by a $10.3 million reduction in payroll[116] - Technology and development expenses increased by $10.2 million (26%) primarily due to increased payroll and related benefits from higher headcount[118] - General and administrative expenses decreased by $3.7 million (7%) primarily due to a $6.6 million decrease in stock-based compensation, partially offset by increased consulting costs and payroll[118] - Provision for income taxes decreased by $4.7 million (47%) due to lower non-deductible stock-based compensation and higher excess tax benefits, resulting in a lower effective tax rate of 47% (vs. 111% in 2023)[120] Liquidity and Capital Resources Cash and equivalents decreased to $118.8 million due to stock repurchases, but LegalZoom expects sufficient liquidity for 12 months with a $150.0 million revolving facility Overview Cash and equivalents decreased by $106.9 million to $118.8 million due to stock repurchases, but liquidity is expected to be sufficient for 12 months - Cash and cash equivalents decreased by $106.9 million from December 31, 2023, to June 30, 2024, primarily due to stock repurchases and capital expenditures[121] - The company expects its available cash, cash equivalents, and cash provided by operating activities to be sufficient for operational cash needs for at least the next twelve months[121] - Approximately $37.0 million remained available for future repurchases under the $175.0 million stock repurchase program as of June 30, 2024[121] Borrowings The $150.0 million 2021 Revolving Facility had no outstanding borrowings as of June 30, 2024, and the company complied with all financial covenants - As of June 30, 2024, the company had no borrowings outstanding and $150.0 million available under its 2021 Revolving Facility[122] - The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, tested quarterly if usage exceeds 35% of total commitments[125] Cash flows Operating cash flow was $61.4 million, investing activities used $19.4 million, and financing activities used $149.0 million, resulting in a $106.9 million cash decrease Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $61,440 | $74,373 | | Net cash used in investing activities | $(19,351) | $(15,227) | | Net cash used in financing activities | $(148,981) | $(9,323) | | Net (decrease) increase in cash and cash equivalents | $(106,924) | $49,855 | Net cash provided by operating activities Operating cash flow was $61.4 million, driven by $6.1 million net income, $50.8 million non-cash expenses, and $4.6 million from operating assets/liabilities changes - Net cash provided by operating activities was $61.4 million for the six months ended June 30, 2024[127] - This resulted from net income of $6.1 million, $50.8 million in non-cash expenses, and $4.6 million from changes in operating assets and liabilities, including a $21.2 million increase in deferred revenue[127] Net cash used in investing activities Investing activities used $19.4 million, primarily for property, equipment, and capitalized internal-use software purchases - Net cash used in investing activities was $19.4 million for the six months ended June 30, 2024, primarily for purchases of property and equipment, including capitalized internal-use software[130] Net cash used in financing activities Financing activities used $149.0 million, mainly for $136.5 million in stock repurchases and $14.2 million for RSU tax withholding settlements - Net cash used in financing activities was $149.0 million for the six months ended June 30, 2024[131] - This was primarily driven by $136.5 million in common stock repurchases and $14.2 million for settlement of minimum statutory tax withholding on RSUs[131] Material Cash Requirements Non-cancelable vendor commitments total $28.0 million over four years, and operating lease maturities are $8.8 million, with $1.0 million due within six months - Non-cancelable vendor commitments total $28.0 million remaining as of June 30, 2024, over a four-year period[132] - Total minimum operating lease maturities are $8.8 million, with $1.0 million due within six months[133] Non-GAAP Financial Measures LegalZoom uses non-GAAP measures like Adjusted EBITDA and Free Cash Flow to assess core operating performance, which complement but do not replace GAAP metrics Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA was $28.9 million (Q2) and $56.8 million (H1), with a 16% margin for both periods, showing mixed year-over-year changes Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands, except percentages) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,314 | $1,395 | $6,058 | $(963) | | Interest expense | $112 | $87 | $173 | $171 | | Interest income | $(2,315) | $(2,240) | $(5,202) | $(3,905) | | Provision for income taxes | $2,046 | $6,127 | $5,276 | $9,964 | | Depreciation and amortization | $8,426 | $5,837 | $16,096 | $11,406 | | Other (income) expense, net | $(11) | $(624) | $(104) | $(1,318) | | Stock-based compensation | $18,915 | $18,956 | $33,771 | $35,423 | | Restructuring costs | $425 | $107 | $746 | $735 | | Adjusted EBITDA | $28,912 | $29,645 | $56,814 | $51,513 | | Adjusted EBITDA margin | 16% | 18% | 16% | 15% | - Adjusted EBITDA for the three months ended June 30, 2024, decreased by $0.7 million, primarily due to increased operating expenses (excluding non-cash and non-recurring items) partially offset by increased revenue and reduced cost of revenue[137] - Adjusted EBITDA for the six months ended June 30, 2024, increased by $5.3 million, primarily due to increased revenue, partially offset by increased operating expenses and cost of revenue (excluding non-cash items)[137] Free cash flow Free cash flow decreased to $42.1 million for six months, primarily due to reduced operating cash flow and higher capital expenditures Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $61,440 | $74,373 | | Purchase of property and equipment | $(19,351) | $(15,227) | | Free cash flow | $42,089 | $59,146 | - Free cash flow decreased by $17.0 million, primarily due to a $12.9 million decrease in net cash provided by operating activities and higher capital expenditures[139] Critical Accounting Estimates No significant changes were made to critical accounting estimates during the three and six months ended June 30, 2024 - No significant changes to critical accounting estimates were made during the three and six months ended June 30, 2024[140] Recent Accounting Pronouncements Information on recently adopted and not yet implemented accounting pronouncements is detailed in Note 2 of the financial statements - Refer to Note 2 for information on recently adopted and not yet adopted accounting pronouncements[141] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses LegalZoom's market risks, including interest rate fluctuations, foreign currency exchange, and inflation, affecting its U.S. and U.K. operations Interest rate fluctuation risk LegalZoom faces interest rate risk on cash equivalents, but with no outstanding debt, immediate exposure is limited, though it would increase if the facility is drawn - The company holds $118.8 million in cash and cash equivalents, primarily money market funds, which carry interest rate risk[143] - As of June 30, 2024, there was no outstanding debt subject to interest rate risk, limiting immediate exposure to fluctuations[143] Foreign currency exchange risk The company faces foreign currency risk, primarily from GBP, recognizing a $0.3 million loss for six months, with a 10% adverse change increasing it by $0.1 million - The company is exposed to foreign currency risks, primarily related to GBP-denominated revenue and expenses[144] - A foreign currency loss of $0.3 million was recognized for the six months ended June 30, 2024[145] - A 10% adverse change in foreign exchange rates would have resulted in an additional $0.1 million increase in foreign currency loss[145] Inflation risk Inflation has not materially affected the business, but sustained pressures could increase costs, impact profitability, and adversely affect small business formations - Inflation has not had a material effect on the business to date[146] - Significant inflationary pressures in the future could increase costs and negatively impact small business success and formation rates, potentially harming the business[146] Item 4. Controls and Procedures LegalZoom's disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting Evaluation of disclosure controls and procedures Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2024 - Disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of June 30, 2024[147] Changes in internal control over financial reporting No material changes in internal control over financial reporting occurred during the three months ended June 30, 2024 - No material changes in internal control over financial reporting were identified during the three months ended June 30, 2024[148] Limitations on effectiveness of controls and procedures Controls and procedures provide only reasonable assurance due to inherent limitations, resource constraints, and the application of management judgment - Controls and procedures provide only reasonable assurance due to inherent limitations, resource constraints, and the application of management judgment[149] Part II OTHER INFORMATION This section covers LegalZoom's legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings The company is not involved in any material legal proceedings or aware of any pending litigation that could adversely affect its financial condition - The company is not currently a party to any material legal proceedings, nor is it aware of any pending or threatened litigation that could materially adversely affect its financial condition[151] Item 1A. Risk Factors This section outlines significant risks impacting LegalZoom's business, financial condition, and future prospects, covering industry, financial, legal, and intellectual property matters Risks Relating to Our Business and Industry Business and industry risks include dependence on business formations and subscriptions, macroeconomic factors, competition, AI integration, growth management, and third-party reliance Our business primarily depends on business formations Transaction revenue heavily relies on business formations, which are susceptible to macroeconomic conditions, competition, and regulatory changes, adversely affecting the business - The majority of transaction revenue is generated from business formation services, which are crucial entry points for customers[153] - Business formations are subject to unpredictable declines due to macroeconomic factors, increased competition, regulatory obstacles, and changes in the business environment[153] Our business depends substantially on our customers expanding their use of our platform, including converting our transactional customers to subscribers and our subscribers renewing their subscriptions with us Subscription revenue, a significant portion, depends on customer conversion and retention, with H1 2024 showing decelerated growth and softer retention rates - Approximately 62% of revenue in 2023 and H1 2024 came from subscriptions, primarily originating from transactional customers[154] - Subscription revenue growth decelerated in H1 2024, with softer retention rates in compliance subscriptions, especially among freemium customers[154] Failure to effectively manage our growth could adversely impact our business Failure to effectively manage growth, exacerbated by a 15% workforce reduction, could lead to declines in service quality, increased costs, or delayed product introductions - Effective growth management is crucial, requiring improvements in operational, financial, and management controls[157] - The August 2024 restructuring plan, involving a 15% workforce reduction, may accentuate growth management risks[157] Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict Quarterly operating results are highly unpredictable due to strategic execution, business formation rates, customer demand, competition, seasonality, and macroeconomic conditions - Quarterly results are highly variable due to factors including strategic execution, business formation rates, customer demand, product changes, competition, and seasonality[157] - Adverse global macroeconomic conditions, such as recessionary fears, inflation, and interest rates, contribute to fluctuations in operating results[157] We have a history of net losses and we may not be able to maintain profitability With an accumulated deficit of $1,066.0 million, LegalZoom may continue to incur net losses, requiring revenue growth to outpace operating expenses for profitability - The company has an accumulated deficit of $1,066.0 million as of June 30, 2024, and may continue to incur net losses[159] - Maintaining or increasing profitability depends on revenue and gross profit growing at a greater rate than operating expenses[159] If we fail to provide high-quality products and services that meet our customers' expectations, we may not be able to attract and retain customers Customer attraction and retention depend on high-quality products, services, and independent professional performance; failure to meet expectations could lead to churn - Customer attraction and retention are critical and depend on the quality and value of services, customer care, and the performance of independent attorneys and accountants[160] - The success of new products and enhancements relies on timely completion, competitive pricing, quality testing, and market acceptance; past efforts have not always met customer interest[160] If we do not continue to innovate and provide a platform that is useful to our customers, we may not remain competitive, and our results of operations could suffer Failure to continuously innovate and integrate new technologies like generative AI could diminish competitiveness, render services obsolete, and harm financial results - Continued innovation and platform enhancements are essential for competitiveness, including investments in new technologies like generative AI[161] - Failure to adapt to rapid technological developments and changes in internet-related hardware, software, and database technologies could make the platform less marketable or obsolete[161] The legal solutions market is highly competitive and our failure to effectively compete successfully could materially and adversely affect our business, results of operations, financial condition and future prospects The highly competitive legal solutions market, with new AI-driven entrants, poses risks of reduced revenue, margins, and market share if LegalZoom fails to compete effectively - The legal solutions market is highly competitive, with rivals including law firms, online legal document services, legal plans, secretaries of state, and tax preparation companies[164] - New market entrants using technologies like generative AI and machine learning could increase competition[164] Our business depends on our brand and reputation, which could be adversely affected by numerous factors LegalZoom's brand and reputation are critical but vulnerable to negative publicity, customer complaints, regulatory actions, and issues with third-party professionals - Maintaining and enhancing the LegalZoom brand and reputation is critical for growing and retaining its customer base[165] - Negative publicity, customer complaints, regulatory proceedings, or issues with third-party professionals can adversely affect the brand and reputation[165][167] We are incorporating generative AI into some of our products, which may present compliance risks and reputational risks Integrating generative AI into products like Doc Assist carries risks of accuracy issues, biases, and legal liabilities, potentially leading to competitive harm and reputational damage amid evolving regulations - Incorporating generative AI into products like Doc Assist presents risks such as accuracy issues, unintended biases, and discriminatory outcomes[167] - Potential government regulation and ethical issues related to AI use could expose the company to legal liability and increase research and development costs[167] If our marketing efforts are unsuccessful, our business, results of operations, financial condition and future prospects may be adversely affected Unsuccessful marketing efforts, due to algorithm changes, increased competition, or data limitations, could reduce website traffic and increase expenses, adversely affecting LegalZoom's business and financial results - Customer acquisition depends on successful marketing channels, including search engine marketing, social media, and other digital channels[168] - Changes in search engine algorithms, increased competition for paid listings, or limitations on data collection for targeted advertising could adversely affect marketing effectiveness and customer traffic[168] We depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain or motivate our employees, we may not be able to grow or operate effectively, which may adversely affect our business and future prospects LegalZoom's success depends on attracting and retaining top talent, including senior management and independent professionals; challenges in this area could impair growth and operations - Future success depends on identifying, hiring, developing, motivating, and retaining top talent, especially in the competitive technology industry[169] - The remote-first work policy presents challenges in orienting, training, and engaging employees, potentially impacting business effectiveness[170] - The recent appointment of Jeff Stibel as CEO requires successful leadership transition to avoid impairing business operations[170] Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business may be harmed if we fail to maintain or expand these relationships LegalZoom's business relies on strategic third-party relationships; failure to maintain or expand these partnerships could harm customer relationships, reputation, and financial results - The company depends on third-party relationships for services like website development, credit card processing, and business insurance[171] - Failure to retain or expand partnerships, or difficulties in integrating third-party technology, could harm customer relationships, reputation, and financial results[171] Our reliance on third party providers could adversely affect our business Reliance on government agencies and third-party providers for fulfillment and infrastructure exposes LegalZoom to risks of disruptions, which could damage its brand, reputation, and financial performance - Reliance on government agencies (e.g., Secretary of State, IRS) for processing documents and third-party providers (e.g., legal plan networks, registered agent services) for fulfillment[172][173] - Dependence on cloud computing infrastructure, particularly Amazon Web Services (AWS), to host its platform and support operations[173] - Failures or disruptions from these third parties could adversely affect business operations, brand, reputation, and financial results[173] Our failure to successfully address the evolving market for transactions on mobile devices and to build mobile products could harm our business Failure to provide a seamless mobile experience and manage associated fraud and regulatory risks could hinder customer attraction and retention, harming LegalZoom's business - The increasing use of mobile devices necessitates providing a strong mobile experience to attract and retain customers[174] - Mobile transactions introduce different fraud and regulatory risks that must be effectively anticipated and managed[174] We may acquire or invest in companies, which may divert our management's attention and result in additional dilution to our stockholders Potential acquisitions or investments carry risks of integration difficulties, management distraction, increased expenses, and dilution for stockholders, negatively impacting financial results - Acquisitions or investments may negatively affect results of operations, requiring charges or assumption of debt[176] - Integration difficulties, unforeseen expenditures, and diversion of management attention are significant risks associated with M&A[176] - Issuing equity securities for acquisitions could dilute existing stockholders and decrease earnings per share[176] Our focus on the long-term best interests of our company and our consideration of our stakeholders, more broadly, including our stockholders, customers, employees, and other stakeholders that we may identify from time to time, may conflict with short- or medium-term financial interests and business performance, which may negatively impact the value of our common stock Prioritizing long-term interests and broader stakeholder considerations may conflict with short-term financial performance, potentially negatively impacting common stock value - Focusing on long-term best interests and broader stakeholder considerations may conflict with short- or medium-term financial performance[176] - Strategic decisions, including updated execution priorities, could negatively impact short-term business results and the trading price of common stock[176] We may not effectively ensure that online services and physical locations are protected from significant outages, denial or degradation of service attacks, natural disasters, including adverse weather conditions, and other disruptions, any of which could adversely affect our brand and reputation, business, results of operations, financial condition and future prospects Failure to protect online services and physical locations from outages, cyberattacks, and natural disasters could lead to performance delays, data compromises, and reputational and financial harm - Online services and physical locations are vulnerable to outages,