LegalZoom.com, Inc. (LZ) Earnings

Management highlights

- **Core Strategic Direction**: LegalZoom's strategy focuses on building a leading small business platform combining AI with trusted human expertise, prioritizing higher-value recurring subscription revenue and diversified customer acquisition to offset legacy search channel risks. The company emphasizes its unique structural advantage as the only online formation provider with an owned law firm, giving it unique authority for AI platform ranking. - **Product Portfolio Growth**: The company's human-in-the-loop offering portfolio spans two complementary layers: (1) a service layer including registered agent and virtual mail subscriptions, and (2) an expert layer including legal plans, IP services, and rebranded concierge offering Business Manager. Legal plan customer utilization grew over 35% YoY in Q2, with strong growth also seen in expert transactional services like attorney-assisted trademark filings. Demand for higher-value expert offerings confirms small businesses will pay for accountable, actionable support that AI alone cannot provide. - **Customer Acquisition Diversification**: In response to Google's AI search shift that reduced traditional click-through traffic, the company is accelerating channel diversification: partnership order volume grew to ~11% of total orders in Q2, up from ~4% YoY, with new high-profile partners including USAA, AAA, PayPal, and Adobe. Unaided brand awareness grew ~10% YoY and aided awareness grew ~18% YoY, with over 70% of US households now familiar with LegalZoom, improving performance marketing efficiency. - **AI Distribution & Operational Integration**: The company has built a comprehensive AI channel strategy focused on generative engine optimization (GDO) to secure top brand positioning across leading AI platforms. Q2 AI platform traffic grew over 250% quarter-over-quarter, accounting for ~3% of LLC formation traffic in June, with higher conversion rates than traditional organic search. LegalZoom has embedded integrations across ChatGPT, Claude, and Microsoft 365 Copilot to enable seamless action from AI inquiry to task completion. AI is also embedded internally to improve operational efficiency, enabling gross margin expansion. - **Organizational Restructuring**: The company announced a 13% workforce reduction to simplify organizational structure, align resources with core growth priorities, and improve operating leverage. This follows an earlier 5% reduction announced earlier in the year, enabled by AI-driven workflow automation.

Guidance

- **Full Year 2026 Revenue**: Guidance was revised to $795 million to $805 million, representing ~6% YoY growth at the midpoint. The guidance assumes the current challenging traditional search environment will remain consistent through year end, with growth from subscriptions and partnerships partially offset by near-term headwinds from Google's search changes. - **Q3 2026 Revenue**: Guidance is $192 million to $196 million, representing ~2% YoY growth at the midpoint, with a high single-digit to low double-digit decline in transaction revenue expected due to ongoing customer acquisition headwinds from traditional search. - **Full Year 2026 Adjusted EBITDA**: Guidance is $190 million to $195 million, representing ~24% adjusted EBITDA margin at the midpoint. The guidance includes expected productivity improvements from AI, the cost savings from the announced 13% workforce reduction, and continued gross margin expansion. The 13% workforce reduction is expected to generate ~$7 million of net in-year savings and ~$14 million of annualized savings, with ~$6 million of restructuring charges expected primarily in Q3. - **Q3 2026 Adjusted EBITDA**: Guidance is $49 million to $51 million, representing ~26% adjusted EBITDA margin at the midpoint, inclusive of the impact of the workforce restructuring.

Segment performance

Total Q2 revenue was $205 million, up 7% year-over-year (YoY). - **Subscription Segment**: Revenue was $133 million, up 11% YoY, representing 65% of total revenue (up 300 bps YoY). Human-in-the-loop subscription revenue grew ~20% YoY, accounting for 65% of total subscription revenue and over 40% of total company revenue. ARPU grew 5% YoY driven by higher pricing on higher-value offerings. Total subscription units ended at ~1.9 million, down ~3% YoY amid an expected decline in lower-value bundled subscriptions, while stable retention was maintained. - **Transaction Segment**: Revenue was $72 million, down 1% YoY, representing 35% of total revenue. Transaction units increased 1% YoY to ~281 thousand, driven by higher annual report filing volumes, but total business formation volume declined ~5% YoY due to headwinds from Google's AI-powered search shift. Transaction average order value was $256, down ~2% YoY, as more order value shifted to subscription products.

Risks & headwinds

- Google's accelerated shift to AI-powered search has reduced click-through from traditional organic and paid informational search queries, increased paid search cost per click, and lowered customer acquisition from the company's historically largest acquisition channel, leading to lower business formation volume and near-term top-line pressure. - Emerging AI acquisition channels, while growing rapidly, are starting from a small base and will take time to fully offset the near-term impact of traditional search headwinds, creating near-term top-line growth uncertainty. - New partnership and brand investments have longer payback periods and initially lower return on ad spend compared to legacy performance search channels, creating near-term pressure on marketing efficiency. - While the company has diversified its customer acquisition base, it still maintains heavy reliance on Google for traditional discovery, leaving it exposed to further changes in Google's search algorithm that could additional harm traffic and acquisition.

Analyst Q&A

• Q: What have you learned about go-to-market for new higher-value human-in-the-loop products, and do they carry higher churn than existing subscriptions? /

  A: Management reports that higher-value offerings are growing far faster than the rest of the business, at ~20% YoY, and now make up over 40% of total revenue, which is encouraging. Renewal cycles are just beginning, so full churn data is not yet available, but early engagement and adoption trends are strong, with no major red flags around churn or go-to-market difficulty so far.

• Q: When did the Google search traffic decline become noticeable, and could conditions get worse from here? /

  A: There had been a slow steady shift of traffic away from Google to AI-native platforms, but a material structural step-down in traffic occurred in the back half of Q2 following Google's major AI search update, the largest change to its core search product in decades. Traffic levels have remained consistent at the new lower level through Q3 to date, and guidance assumes this steady state will continue through year end, with no assumptions of further decline or near-term recovery built in.

• Q: How are you adjusting customer acquisition marketing (CAM) spend plans for the back half of the year amid the Google search changes? /

  A: Management is shifting spend away from traditional Google search to higher-priority diversified channels including brand, partnerships, and emerging AI channels. Full year CAM is expected to increase a couple of percentage points as a share of revenue relative to last year, as these new channels require upfront investment. Brand and new partner channels have longer payback periods, so returns will take time to materialize, but they are more defensible long-term.

• Q: What conversion and cost differences do you see between AI traffic and traditional search traffic, and how is SMB adoption of AI tools on your platform progressing? /

  A: AI traffic currently has similar overall cost dynamics to traditional search, but attracts higher-intent customers that convert at higher rates. Early testing of direct AI tool sales to SMBs via partners has been encouraging, though it remains in early stages. Small businesses are seeking guided AI onboarding, which creates an opportunity for LegalZoom to become a trusted end-to-end small business operating system long-term.