LEGALZOOM.COM, INC. [LZ] Filings

10-Q 1 lz-20240630.htm 10-Q lz-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three months ended June 30, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35618

LegalZoom.com, Inc.

(Exact name of registrant as specified in its charter)

___________________________________


Delaware			95-4752856
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

954 Villa Street, Mountain View, California 94041
(Address of Principal Executive Offices, including Zip code)

(323) 962-8600

(Registrant's telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	LZ	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☒	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 2, 2024, the registrant had outstanding 175,611,948 shares of common stock, $0.001 par value per share, outstanding.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those factors discussed below under “Summary of Risk Factors” and in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as those factors in our subsequent filings with the Securities and Exchange Commission, or SEC. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

Summary of Risk Factors

Our business involves significant risks and you are urged to carefully consider the risks discussed under Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q prior to making an investment in us. These risks include, but are not limited to, the following:

•Our business primarily depends on business formations.

•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.

•Failure to effectively manage our growth could adversely impact our business.

•Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.

•We have a history of net losses and we may not be able to maintain profitability.

•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.

•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.

•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.

Table of Contents

•Our business depends on our brand and reputation, which could be adversely affected by numerous factors.

•We are incorporating generative artificial intelligence into some of our products, which may present compliance risks and reputational risks.

•If our marketing efforts are unsuccessful, our business, results of operations, financial condition and future prospects may be adversely affected.

•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.

•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.

•Our reliance on third party providers could adversely affect our business.

•If we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

•Our business and services subject us to complex and evolving U.S. and foreign laws and regulations and any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits, and prosecutions, as well as changes in our service offerings, potential liabilities, or additional costs.

Note Regarding Third-Party Information

This Quarterly Report on Form 10-Q includes market data and certain other statistical information and estimates that are based on reports and other publications from independent third-party sources, as well as management's own good faith estimates and analyses. We believe these third-party reports to be reputable, but have not independently verified the underlying data sources, methodologies, or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by LegalZoom. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information.

Table of Contents

TABLE OF CONTENTS


		Page
Part I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	37
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
Signatures		62

Table of Contents

Part I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par values)


	June 30, 2024		December 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	118,795	$	225,719
Accounts receivable, net of allowances of $3,776 and $4,906, respectively	15,347		11,738
Prepaid expenses and other current assets	22,414		15,159
Current assets held for sale	22,722		22,722
Total current assets	179,278		275,338
Property and equipment, net	57,136		48,232
Goodwill	63,318		63,318
Intangible assets, net	11,194		13,735
Operating lease right-of-use assets	7,212		8,518
Deferred income taxes	31,396		29,015
Available-for-sale debt securities	1,374		1,159
Other assets	8,607		8,503
Total assets	$	359,515	$	447,818
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	34,247	$	32,282
Accrued expenses and other current liabilities	58,020		61,678
Deferred revenue	189,146		167,951
Operating lease liabilities	1,630		2,052
Total current liabilities	283,043		263,963
Operating lease liabilities, non-current	6,255		6,966
Deferred revenue	452		490
Other liabilities	9,003		7,565
Total liabilities	$	298,753	$	278,984
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value; 100,000 shares authorized at June 30, 2024 and December 31, 2023, none issued or outstanding at June 30, 2024 and December 31, 2023	—		—
Common stock, $0.001 par value; 1,000,000 shares authorized; 176,108 shares and 188,538 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively	177		189
Additional paid-in capital	1,125,942		1,101,474
Accumulated deficit	(1,066,035)		(933,061)
Accumulated other comprehensive income	678		232
Total stockholders’ equity	60,762		168,834
Total liabilities and stockholders’ equity	$	359,515	$	447,818

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		2023

Revenue		$	177,362	$	168,854	$	351,576	$	334,790
Cost of revenue		63,609		63,748		131,993		124,143
Gross profit		113,753		105,106		219,583		210,647
Operating expenses:
Sales and marketing		60,130		53,525		113,883		113,675
Technology and development		25,798		19,900		49,755		39,583
General and administrative		26,679		26,936		49,744		53,440

Total operating expenses		112,607		100,361		213,382		206,698
Income from operations		1,146		4,745		6,201		3,949
Interest expense		(112)		(87)		(173)		(171)
Interest income		2,315		2,240		5,202		3,905
Other (expense) income, net		11		624		104		1,318
Income before income taxes		3,360		7,522		11,334		9,001
Provision for income taxes		2,046		6,127		5,276		9,964
Net income (loss)		$	1,314	$	1,395	$	6,058	$	(963)
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)
Weighted-average shares used to compute net income (loss) per share — basic:		184,257		191,342		186,438		191,318
Weighted-average shares used to compute net income (loss) per share — diluted:		186,456		194,826		189,926		191,318

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		2023

Net income (loss)		$	1,314	$	1,395	$	6,058	$	(963)
Other comprehensive income (loss), net of tax:
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)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2023	188,538	$	189	$	1,101,474	$	(933,061)	$	232	$	168,834
Issuance of common stock upon exercise of stock options	161	—		82		—		—		82
Issuance of common stock upon vesting of restricted stock awards	2,236	2		(2)		—		—		—
Shares surrendered for settlement of minimum statutory tax withholdings	(888)	—		(9,564)		—		—		(9,564)
Stock-based compensation	—	—		16,273		—		—		16,273
Repurchased common stock	(1,172)	(1)		—		(12,758)		—		(12,759)

Other comprehensive income	—	—		—		—		296		296
Net income	—	—		—		4,744		—		4,744
Balance at March 31, 2024	188,875	190		1,108,263		(941,075)		528		167,906
Issuance of common stock upon exercise of stock options and ESPP	309	—		1,733		—		—		1,733
Issuance of common stock upon vesting of restricted stock awards	1,338	1		(1)		—		—		—
Shares surrendered for settlement of minimum statutory tax withholdings	(485)	—		(4,595)		—		—		(4,595)
Stock-based compensation	—	—		20,542		—		—		20,542
Repurchased common stock	(13,929)	(14)		—		(125,185)		—		(125,199)
Stock repurchase excise tax	—	—		—		(1,089)		—		(1,089)
Other comprehensive income	—	—		—		—		150		150
Net income	—	—		—		1,314		—		1,314
Balance at June 30, 2024	176,108	$	177	$	1,125,942	$	(1,066,035)	$	678	$	60,762


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2022	190,822	$	190	$	1,032,550	$	(891,862)	$	1,497	$	142,375
Issuance of common stock upon exercise of stock options	28	—		22		—		—		22
Issuance of common stock upon vesting of restricted stock awards	1,164	1		(1)		—		—		—
Stock-based compensation	—	—		17,378		—		—		17,378
Repurchased common stock	(771)	(1)		—		(6,767)		—		(6,768)
Other comprehensive loss	—	—		—		—		(631)		(631)
Net loss	—	—		—		(2,358)		—		(2,358)
Balance at March 31, 2023	191,244	190		1,049,948		(900,987)		866		150,017
Issuance of common stock upon exercise of stock options and ESPP	362	—		2,951		—		—		2,951
Issuance of common stock upon vesting of restricted stock awards	661	1		(1)		—		—		—
Shares surrendered for settlement of minimum statutory tax withholdings	(232)	—		(2,469)		—		—		(2,469)
Stock-based compensation	—	—		20,031		—		—		20,031
Repurchased common stock	(378)	—		—		(3,041)		—		(3,041)
Other comprehensive income	—	—		—		—		(536)		(536)
Net income	—	—		—		1,395		—		1,395
Balance at June 30, 2023	191,657	$	191	$	1,070,461	$	(902,633)	$	330	$	168,349

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities
Net income (loss)	$	6,058	$	(963)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	16,096		11,406
Amortization of right-of-use assets	1,369		1,336
Amortization of debt issuance costs	113		112


Stock-based compensation	33,771		35,423
Deferred income taxes	(879)		7,614

Change in fair value of contingent consideration	—		(695)
Unrealized foreign exchange (gain) loss	338		(1,104)
Other	—		(1)
Changes in operating assets and liabilities:
Accounts receivable	(3,436)		(316)
Prepaid expenses and other current assets	(7,265)		3,407
Other assets	(254)		4
Accounts payable	1,935		8,319
Accrued expenses and other liabilities	(6,309)		(4,082)
Operating lease liabilities	(1,196)		(1,132)
Income tax payable	(59)		8
Deferred revenue	21,158		15,037
Net cash provided by operating activities	61,440		74,373
Cash flows from investing activities


Purchase of property and equipment	(19,351)		(15,227)

Net cash used in investing activities	(19,351)		(15,227)
Cash flows from financing activities
Repayment of capital lease obligations	(13)		(18)

Repurchase of common stock	(136,450)		(9,809)
Shares surrendered for settlement of minimum statutory tax withholding	(14,160)		(2,469)
Proceeds from issuance of stock under employee stock plans	1,642		2,973
Net cash used in financing activities	(148,981)		(9,323)
Effect of exchange rate changes on cash and cash equivalents	(32)		32
Net (decrease) increase in cash and cash equivalents	(106,924)		49,855
Cash and cash equivalents, at beginning of the period	225,719		189,082
Cash and cash equivalents, at end of the period	$	118,795	$	238,937
Non-cash operating, investing, and financing activities:
Accrued stock repurchase excise tax	$	1,089	$	—

Accrued stock repurchase costs	1,532		—
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities	2,635		983
Capitalized stock-based compensation	3,044		1,986

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of the Business

LegalZoom.com, Inc., was initially formed as a California corporation in 1999 and reincorporated as a Delaware corporation in 2007. LegalZoom.com, Inc., and its wholly owned subsidiaries, are referred to herein as the “Company”, “we,” “us,” or “our”.

We are a provider of services that meet the legal needs of small businesses and consumers. Our position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle, and we have expanded our platform to include professional expertise and other products, both legal and non-legal, to better meet the needs of small businesses. Along with business formation, our offerings include ongoing compliance and tax advice and filings, business licenses, accounting, virtual mailbox and e-signature solutions, trademark filings, and estate plans. Additionally, we have insights into our customers and leverage our offerings as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.

Note 2. Summary of Significant Accounting Policies

A summary of the significant accounting policies we follow in the preparation of the accompanying unaudited condensed consolidated financial statements is set forth below.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023. The December 31, 2023 unaudited condensed consolidated balance sheet was derived from our audited consolidated financial statements as of that date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. There have been no significant changes in accounting policies during the six months ended June 30, 2024 from those disclosed in the audited consolidated financial statements for the year ended December 31, 2023 and the related notes, except as noted below under Recently Adopted Accounting Pronouncements.

The operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the full year ending December 31, 2024.

Beginning in the fourth quarter of 2023, we include partner revenue in transaction and subscription revenue to conform with how we evaluate our performance. This change had no impact on total revenue. Prior period disaggregated revenue disclosures have been conformed to the current period presentation.

Certain other reclassifications have been made to prior periods amounts to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, however not limited to, revenue recognition, sales allowances and expected credit loss allowances, available-for-sale debt securities, other equity securities, recoverability of long-lived assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations, valuation of assets in asset acquisitions, and fair value of stock-based compensation. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate the estimates compared to historical experience and other factors including the current economic and regulatory environment, which form the basis for our judgments about the carrying value of assets and liabilities.

Significant Accounting Policies

Significant accounting policies are detailed in "Note 2. Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2023.

Segment and Geographic Information

Our Chief Executive Officer, as the Chief Operating Decision Maker, organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.

Revenue outside of the U.S., based on the location of the customer, represented less than 1% of our unaudited consolidated revenue for the three and six months ended June 30, 2024 and 2023. Our property and equipment and right-of-use, or ROU, assets located outside of the U.S. were immaterial as of June 30, 2024 and December 31, 2023.

Concentrations of Credit Risk

We maintain accounts in U.S. and U.K. banks with funds insured by the Federal Deposit Insurance Corporation, or FDIC, and the Financial Services Compensation Scheme, or FSCS, respectively. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. Management believes that we are not exposed to any significant credit risk related to our cash or cash equivalents and have not experienced any losses in such accounts.

Due to a large and diverse customer base, no individual customer represented more than 10% of our total revenue for the three and six months ended June 30, 2024 and 2023. At June 30, 2024 and December 31, 2023, there were no customers with an outstanding balance of 10% or more of our total accounts receivable balance.

Accounts Receivable and Allowance for Credit Losses

Our accounts receivable balances, which are not collateralized and do not bear interest, primarily consist of amounts receivable from our credit and debit card merchant processors, customer receivables, and fees due from third-parties for services purchased by our customers from such third-parties. We reduce our accounts receivable for sales allowances and a reserve for potentially uncollectible receivables. We determine the amount of the allowances based on various factors, including historical collection experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Account balances are charged off against the allowance when we determine that it is not probable we will collect the receivable. At June 30, 2024 and December 31, 2023 the allowance for credit losses was not material.

Investments in Other Equity Securities

We hold an equity investment in LawPath, Pty Ltd, or LawPath, an Australian proprietary limited company that provides an online legal platform to individuals and small and medium sized businesses. At both June 30, 2024 and December 31, 2023, the carrying amount of our investment in LawPath was $4.4 million. The investment in LawPath does not have a readily determinable fair value.

Revenue Recognition

We derive our revenue from the following sources:

Transaction revenue—Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts, sales allowances and credit reserves. Tax preparation services are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority. We also earn fees from third-party providers from leads generated to such providers through our online legal platform.

Subscription revenue—Subscription revenue is generated primarily from subscriptions to our registered agent, compliance packages, attorney advice, legal forms, tax and accounting, virtual mail and e-signature services, and software-as-a-service, or SaaS, accounting solution subscriptions and SaaS subscriptions in the U.K. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue includes the transaction price allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers.

performed as deferred revenue on our consolidated balance sheet. The transaction price that we record is generally based on the contractual amounts and is reduced for estimated sales allowances for price concessions, charge-backs, sales credits and refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize.

Our transaction and subscription revenue is as follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		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

Recently Adopted Accounting Pronouncements

In September 2022, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires that a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs. We adopted ASU 2022-04 effective January 1, 2023. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which amends certain provisions of ASC 842 related to the accounting for leasehold improvements in common-control arrangements. ASU 2023-01 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We early adopted ASU 2023-01 effective January 1, 2023. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We early adopted ASU 2023-02 effective January 1, 2023. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03 to amend various paragraphs in the Accounting Standards Codification, or ASC, to align with the previously issued SEC guidance. ASU 2023-03 did not provide any new guidance, and there is no transition or effective date associated with it resulting in the ASU 2023-03 being effective upon issuance. Consequently, the adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In March 2024, the FASB issued ASU 2024-01, which clarifies how an entity determines whether a profits interest or similar award is a share-based payment arrangement that is within the scope of ASC 718, Compensation - Stock Compensation. This accounting standard is effective for fiscal years beginning after December 15, 2024, including interim periods within those years, and early adoption is permitted. ASU 2024-01 can be applied retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies this accounting standard. We early adopted ASU 2024-01 effective January 1, 2024 and will apply the amendments prospectively to profits interest and similar awards granted or modified on or after January 1, 2024. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02, Codification Improvements to amend a variety of topics in the accounting codification by removing references to various FASB concepts statements. This accounting standard is effective for fiscal years beginning after December 15, 2024, and early adoption is permitted. ASU 2024-02 can be applied retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied or prospectively to all new transactions recognized on or after the date that the entity first applies the amendments. We early adopted ASU 2024-02 effective January 1, 2024 and will

apply the amendments prospectively to all new transactions recognized on or after January 1, 2024. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Entities must adopt the changes to the segment reporting guidance on a retrospective basis, and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires entities to disclose more detailed information in the reconciliation of their statutory tax rate to their effective tax rate. This accounting standard is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. ASU 2023-09 will be applied prospectively with an option for retroactive application to each period in the financial statements, and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.

Note 3. Other Financial Statement Information

Accounts Receivable

Changes in the allowances consisted of the following (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		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

The allowance recognized as a reduction of revenue primarily relates to our installment plan receivables for which we expect we will not be entitled to a portion of the transaction price based on our historical experience with similar transactions. The allowance recognized against general and administrative expense represents an allowance relating to receivables from partners that are no longer considered collectible.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	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

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	June 30, 2024		December 31, 2023
Accrued payroll and related expenses	$	26,815	$	33,635
Accrued vendor payables	17,189		11,223
Sales allowances	3,124		3,412
Accrued sales, use and business taxes	5,436		9,795
Other	5,456		3,613
Total accrued expenses and other current liabilities	$	58,020	$	61,678

Depreciation and Amortization

Depreciation and amortization expense of our property and equipment, including capitalized internal-use software, and intangible assets consisted of the following (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		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

Deferred revenue

Deferred revenue as of June 30, 2024 and December 31, 2023 was $189.6 million and $168.4 million, respectively. Revenue recognized in the three months ended June 30, 2024 and 2023 that was included in deferred revenue as of March 31, 2024 and 2023 was $88.4 million and $88.5 million, respectively. Revenue recognized in the six months ended June 30, 2024 and 2023 that was included in deferred revenue as of December 31, 2023 and 2022 was $131.7 million and $128.2 million, respectively.

We have omitted disclosure on the transaction price allocated to remaining performance obligations and the estimated timing of revenue recognition as our contracts with customers that have a duration of more than one year are immaterial.

Note 4. Assets Held for Sale

During the quarter ended September 30, 2022, following an evaluation of our office space and business requirements, we commenced a plan to sell our operational headquarters in Austin, Texas, consisting of land, a building and building improvements, and determined that these assets met the held for sale criteria. We ceased recording depreciation on these assets upon meeting the held for sale criteria. At June 30, 2024, the total carrying value of the assets held for sale remains at $22.7 million as follows:


	June 30, 2024
Land	$	6,400
Building and building improvements	16,322
Total assets held for sale	$	22,722

The estimated fair value less costs to sell the assets held for sale exceed their carrying values and hence no impairment was necessary during the quarter ended June 30, 2024.

Note 5. Long-term Debt

In 2021, we entered into an amended and restated credit and guaranty agreement, or 2021 Revolving Facility, providing for revolving borrowings of up to $150.0 million with an availability period of five years. Under the 2021 Revolving Facility, we can use up to $20.0 million in letters of credit and up to $10.0 million in borrowings on same-day notice, referred to as swingline loans. Additional debt issuance costs of $0.8 million were allocated to the 2021 Revolving Facility.

In May 2023, we entered into an amendment to the 2021 Revolving Facility to replace the LIBOR interest rate benchmark with the Secured Overnight Financing Rate, or SOFR, benchmark, with a 0.10% credit spread adjustment to the SOFR benchmark, or Adjusted Term SOFR, for all available interest periods, provided that if the Adjusted Term SOFR is less than zero, the Adjusted Term SOFR shall be deemed to be zero. Other than the foregoing, the remaining terms of the 2021 Revolving Facility remained unchanged. The interest rate applicable to the 2021 Revolving Facility is subject to a 1.0% floor and is a rate equal to the greatest of (i) the administrative agent’s prime rate (ii) the federal funds effective rate plus 1/2 of 1.0% or (iii) Adjusted Term SOFR plus 1.0%.

The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a further reduction of 0.25% upon achieving total net first lien leverage ratios of 3.50 to 1.00 and 2.50 to 1.00, respectively. We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans under the 2021 Revolving Facility at any time without premium or penalty, other than customary “breakage” costs with respect to SOFR loans. There is no scheduled amortization under the 2021 Revolving Facility. Any principal amount outstanding is due and payable in full at maturity, five years from the closing date of the 2021 Revolving Facility. Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The 2021 Revolving Facility is secured by a first-priority security interest in substantially all of our assets, subject to certain exceptions.

The 2021 Revolving Facility contains a number of covenants that, among other things, subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates.

The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or the Financial Covenant. The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35% of the total commitments under the 2021 Revolving Facility on the last day of such fiscal quarter.

At June 30, 2024 and December 31, 2023, we had no amounts outstanding under our 2021 Revolving Facility or any outstanding letters of credit and we were in compliance with all financial covenants.

Note 6. Commitments and Contingencies

Legal Proceedings

From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. We are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that could have a material adverse effect on our results of operations, cash flows, and financial condition, should such litigation be resolved unfavorably.

Indemnifications

Indemnification provisions in our third-party service provider agreements provide that we will indemnify, hold harmless, and reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any claim by any third-party as a result of our website, advertising, marketing, payment processing, collection or customer service activities. The maximum potential amount of future payments we could be required to make under these indemnification provisions is undeterminable.

No amounts have been accrued or have been paid during any period presented as we believe the fair value of these indemnification obligations is immaterial.

Note 7. Stockholders’ Equity

Stock Repurchase Program

In October 2023, our board of directors approved a stock repurchase program authorizing repurchases of up to $100.0 million of our common stock, with no fixed expiration. In May 2024, our board of directors approved a $75.0 million increase in the stock repurchase program, bringing the aggregate amount authorized to $175.0 million. Under this program, we are authorized to repurchase our common stock through any manner, including open market transactions, accelerated stock repurchase agreements, or privately negotiated transactions with third parties, and in such amounts as management deems appropriate. Open market repurchases may be structured to occur in accordance with applicable federal securities laws, including within the pricing and volume requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our shares of common stock under this authorization. This program does not obligate us to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of our board of directors. Shares repurchased under our stock repurchase program are purchased for immediate retirement.

During the three months ended June 30, 2024, using Rule 10b5-1 plans, we repurchased a total of 13.9 million shares of our common stock through open market purchases at an average per share price of $8.99 for a total repurchase of $125.2 million including broker commissions. During the six months ended June 30, 2024, using Rule 10b5-1 plans, we repurchased a total of 15.1 million shares of our common stock through open market purchases at an average per share price of $9.14 for a total repurchase of $138.0 million including broker commissions. The repurchases were recorded as a reduction to stockholders' equity. Approximately $37.0 million remained available for future repurchases under the stock repurchase program as of June 30, 2024.

The Inflation Reduction Act of 2022, enacted in August 2022, imposed a 1% non-deductible excise tax on net repurchases of shares by domestic corporations whose stock is traded on an established securities market. Consequently, this excise tax is applicable to shares of stock repurchased pursuant to our stock repurchase program beginning in 2023 and represents a cost of the repurchases of our common stock. We have recognized a $1.1 million excise tax liability as of June 30, 2024 because the fair market value of stock repurchases exceeded the fair market value of stock issuances during the six months ended June 30, 2024.

Note 8. Stock-based Compensation

Stock-based Compensation Expense

We recorded stock-based compensation expense in the following categories in the accompanying unaudited condensed consolidated statements of operations and balance sheets (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		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
Amount capitalized to internal-use software		1,627		1,075		3,044		1,986
Total stock-based compensation		$	20,542	$	20,031	$	36,815	$	37,409

Restricted and Performance Stock Units

During the six months ended June 30, 2024, we granted 5.5 million restricted stock units, or RSUs, with a total grant date fair value of $71.9 million to various employees. RSUs are measured based on the fair market value of the underlying stock on the date of grant and recognized as expense over the requisite service period.

During the six months ended June 30, 2024 and in July 2024, we also granted 1.5 million and 0.8 million, respectively, RSUs with performance conditions, or PSUs, to members of our senior leadership team. Vesting of the PSUs is contingent upon the recipient’s continuous employment over the requisite service period and is subject to fulfillment by the Company of a predefined profitability target during the performance period. The number of PSUs subject to vesting is determined at the end of the performance period and may equal zero percent (0%) to two hundred percent (200%) of the target award. If the performance criteria are achieved, one

third of the PSUs will vest on the date the compensation committee of the board of directors certifies achievement of the performance criteria, and the remaining awards will vest quarterly thereafter through February 2027. These PSU awards also include a modifier to the total number of shares earned based on the Company’s total shareholder return, or TSR, compared to the TSR of the Nasdaq Composite Index during the performance period. The total number of shares issued pursuant to the PSU award may be increased, decreased, or remain unchanged based on the TSR modifier. The TSR modifier applicable to the PSUs is considered a market condition and therefore is reflected in the respective grant-date fair values of the awards. A Monte Carlo simulation was used to account for this market condition in the grant-date fair value of the awards. Expense related to the PSUs is recognized over the employee’s requisite service period using graded vesting attribution method to the extent it is probable that the performance conditions will be achieved. We recognized $3.0 million and $3.5 million in stock-based compensation expense during three and six months ended June 30, 2024, respectively, related to these awards.

The assumptions that were used to calculate the grant-date fair value of our PSU grants during the six months ended June 30, 2024 using a Monte Carlo simulation model were as follows:


	Six Months Ended June 30,
	2024
Expected life (years)	0.8
Risk-free interest rate	5.2	%
Expected volatility	47.4	%
Expected dividend yield	—

In July 2024, we granted 2.7 million RSUs with a market vesting condition. Vesting of this award is contingent upon the recipient’s continuous employment over the requisite service period and is subject to achievement of predetermined stock price targets, which are measured based on a 45-trading day weighted-average closing price of our common stock during a five-year performance period, subject to a 44-day extension in certain circumstances. The number of RSUs subject to vesting during the performance period may equal zero percent (0%) to two hundred percent (200%) of the target award. Upon the achievement of a stock price target during the performance period, one-half of the eligible RSUs will vest on the date the compensation committee of the board of directors certifies achievement of the stock price target and the other half will vest one year from such date, subject to the recipient’s continued employment through the vesting date.

In July 2024, we also granted 0.8 million RSUs to members of our senior leadership team. The RSUs will vest in two substantially equal annual installments in July 2025 and July 2026, subject to the recipient’s continued service through the applicable vesting date.

Note 9. Income Taxes

We recorded a provision for income taxes of $2.0 million and $5.3 million for the three and six months ended June 30, 2024, respectively. We recorded a provision for income taxes of $6.1 million and $10.0 million for the three and six months ended June 30, 2023, respectively. The effective tax rate for the three months ended June 30, 2024 and 2023 was 61% and 82%, respectively. The effective tax rate for the six months ended June 30, 2024 and 2023 was 47% and 111%, respectively. The difference from the federal statutory rate of 21% is primarily due to the recognition of significant non-deductible stock-based compensation and other discrete adjustments.

Gross unrecognized tax benefits were $12.5 million and $11.5 million as of June 30, 2024 and December 31, 2023, respectively. The gross unrecognized tax benefits, if recognized by us, will result in a reduction of approximately $12.5 million, excluding interest and penalties, to the provision for income taxes, thereby favorably impacting our effective tax rate. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. For the periods presented, interest and penalties related to income tax positions were not material to our unaudited condensed consolidated financial statements.

We are subject to taxation and file income tax returns in the U.S. federal, state, and foreign jurisdictions. The federal income tax returns for the years 2018 and forward and state income tax returns for the tax years 2008 and forward remain open to examination. We are under examination in two states which are not expected to have an impact on our results of operations, cash flows and financial condition.

Note 10. Net Income (Loss) Per Share

The following table shows the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Numerator:
Net income (loss)	$	1,314	$	1,395	$	6,058	$	(963)
Denominator:
Weighted-average common stock used in computing net income (loss) per share — basic	184,257		191,342		186,438		191,318
Effect of potentially dilutive securities
Options to purchase common stock	789		884		1,422		—
RSUs	1,386		2,583		2,052		—
Employee stock purchase plan	24		17		14		—
Weighted-average common stock used in computing net income (loss) per share — diluted	186,456		194,826		189,926		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)

The following table presents the number of stock options, RSUs, and PSUs excluded from the calculation of diluted net income (loss) per share because they are anti-dilutive (in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,
		2024	2023	2024	2023
Options to purchase common stock		6,572	10,529	6,741	21,048
RSUs		9,948	4,660	7,585	15,363
Employee stock purchase plan		6	8	18	122
Total		16,526	15,197	14,344	36,533

Note 11. Restructuring

From time to time, we initiate cost reduction activities to integrate acquired businesses, to align our workforce with strategic business activities, or to improve efficiencies in our operations. During the three and six months ended June 30, 2023, we incurred $0.1 million and $0.7 million, respectively, in severance costs related to the reduction of our U.K. headcount, which was substantially complete by December 31, 2023. Restructuring expenses include severance for the impacted employees and are included in general and administrative expenses in the accompanying unaudited condensed consolidated financial statements.

In August 2024, we committed to a restructuring plan resulting in a reduction of our global workforce. We expect to incur approximately $5.0 million in severance and other termination benefits in conjunction with the forgoing restructuring plan which is expected to be substantially complete by September 30, 2024.

Note 12. Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

At June 30, 2024 and December 31, 2023, our financial assets recorded at fair value on a recurring basis consist of cash equivalents and available-for-sale debt securities. The cash equivalents consist of money market funds valued using quoted prices in active markets, which represents Level 1 inputs in the fair value hierarchy. The available-for-sale debt securities are valued using a Monte Carlo simulation, which include inputs that represent Level 3 inputs in the fair value hierarchy.

The carrying amounts of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.

The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):


	As of June 30, 2024
	Level 1		Level 2		Level 3
Available-for-sale debt securities	$	—	$	—	$	1,374
Money market funds	107,753		—		—
Total assets	$	107,753	$	—	$	1,374


	As of December 31, 2023
	Level 1		Level 2		Level 3
Available-for-sale debt securities	$	—	$	—	$	1,159
Money market funds	208,970		—		—
Total assets	$	208,970	$	—	$	1,159

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Part II, Item 8, “Financial Statements and Supplementary Data” included in our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 29, 2024 and our other filings with the SEC. The following discussion contains forward-looking statements based upon current plans, expectations and beliefs and that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q. See “Forward-Looking Statements” preceding Part I of this Quarterly Report on Form 10-Q.

Overview

LegalZoom is a leading online platform for business formation in the U.S. Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business throughout its lifecycle, and we have expanded our platform to include professional expertise and other products, both legal and non-legal, to better meet the needs of small businesses. Driven by a mission to unleash entrepreneurship, we deliver comprehensive legal, tax, accounting and compliance products and expertise for small business owners through easy-to-use technology. We operate across all 50 states and in over 3,000 counties in the U.S., with over two decades of experience in simplifying the legal and compliance process for our customers and empowering entrepreneurs to make their dream a reality.

Recent Developments

•On July 8, 2024, our board of directors appointed Jeff Stibel, the current Chair of the Board, to serve as Chief Executive Officer, effective July 9, 2024.

•In August 2024, we committed to a restructuring plan as part of our re-alignment of our business and cost structure. The restructuring plan will reduce the size of our workforce by approximately 15% of our employees as compared to our headcount as of June 30, 2024. We expect to incur charges of approximately $5.0 million in connection with the restructuring plan, which consist primarily of severance and termination benefits offered to the impacted employees. We expect substantially all of these charges to be cash expenditures and to incur the majority of these charges in the third quarter of 2024. We also expect these changes to drive approximately $10.0 million in savings in 2024. We also intend to reduce our planned hiring efforts.

Updates to Strategic Execution Priorities

We are focused on three priority areas in the near term as we continue to execute on our strategic pillars of scaling the business, building the ecosystem and integrating experts. We believe that this focus will increase the predictability of our business, improve operational efficiencies and margins, and help us accelerate and sustain growth at scale.

Optimizing Our Subscription Business. We intend to prioritize our subscription products over our transaction products in order to focus on customer lifetime value. Our goal is for customers to grow their use of our platform as their businesses evolve and that, in turn, customers increase their cumulative spend with us over time. In order to achieve this goal, we will be evaluating ways to better reorient our products towards subscription offerings, including revisiting certain of our historical transaction offerings, such as our free business formation. Further, we are continuing to optimize our product line-up with the goal of improving the quality of our subscriber base as we seek to increase customer lifetime value. Our subscription revenue growth rate decelerated during the six months ended June 30, 2024 and, more recently, we have experienced softer retention rates in our compliance subscriptions, particularly in our freemium customers. We believe the prioritization of our subscription products over transaction products will help accelerate and sustain our subscription revenue over the long term.

Reorienting Our Go-to-Market Strategy. We will be diversifying our customer acquisition strategy, which will include testing a mix of marketing channels with the goal of balancing our marketing investments across product categories versus our historical focus on business formations. We are also reinvesting in our consumer channel, improving on cross-selling, up-selling, bundling, and packaging to our businesses during their lifecycle, and revisiting our partnership strategy, which may include adding new partners into our ecosystem.

We are also re-evaluating LZ Tax. We are reviewing opportunities to reorient our tax offerings by offering necessary pieces of our tax product early in a business’ lifecycle and selling our more robust tax offerings via

our online customer platform and sales team during later stages of that business’ lifecycle. We expect this shift in our LZ Tax strategy to result in a subscription revenue headwind throughout the remainder of 2024.

Leveraging Artificial Intelligence to Deliver Expertise to Our Customers. We will further invest in artificial intelligence to offer additional legal services to our customers and to improve our customer experience. In particular, we aim to better leverage artificial intelligence into our expert solutions.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

•Macroeconomic factors. Adverse changes in general macroeconomic, political, regulatory and market conditions can negatively impact consumer spending patterns, the success of existing small businesses and the rate of new small business formations. We believe downward macroeconomic pressure contributed to the increase in corporate dissolutions and the deceleration in business formations that we experienced in the six months ended June 30, 2024, which, in turn, negatively impacted our ability to upsell and retain our customers. While we continue to actively monitor the impacts of the evolving macroeconomic environment on all aspects of our business, we expect the macroeconomic environment to remain challenging throughout the remainder of 2024.

•Our share of business formations. In the three and six months ended June 30, 2024 and 2023, business formations represented the largest share of our total transaction orders. Business formations act as an entrance point for many customers to the LegalZoom ecosystem, where they then often purchase a mix of transaction and subscription offerings alongside and after the initial formation transaction. As a result, our operating results depend on the continuation of new business formations in the U.S. and even more so, on our ability to increase our share of these formations.

•Ability to enhance customer lifetime value. Our future performance depends on our ability to integrate new products and services into our LegalZoom ecosystem and to increase recurring revenue through subscription offerings. As we continue to test new and existing products and services in order to optimize our core product line-up, including converting certain transaction offerings to subscription offerings and testing various commercialization strategies for those offerings, we expect increased volatility across our key business metrics. In addition, in an effort to enhance customer lifetime value, we intend to continue to invest in improving our customer experience, which includes investments in our educational content and improving our website and mobile experience.

•Ability to integrate experts. We believe that our expert offerings significantly expand our addressable market. We aim to increase the consumption of our higher-cost expert offerings through targeted cross-selling and promotion of our products, as well as by improving the platforms through which our customers and experts interact. The extent to which we are able to integrate experts into our LegalZoom ecosystem and increase the consumption of our expert offerings by new and existing customers will impact our future results of operations.

Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated financial statements, we regularly monitor the following financial and operating metrics to evaluate the growth of our business, measure the effectiveness of our marketing efforts, identify trends, formulate financial forecasts and make strategic decisions:

Number of business formations

We define the number of business formations in a given period as the number of limited liability company, or LLC, incorporation, not-for-profit and doing business as, or DBA, orders placed on our platform in such period. We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription revenue as customers adopt additional products and services throughout the lifecycle of their business.

We believe that including customers filing DBAs on our platform provides a more accurate representation of the number of newly formed businesses we serve. These transactions are most often completed by sole proprietors who represent potential future transaction and subscription cross-sell opportunities as their businesses mature.

Furthermore, we believe our definition of the number of business formations is most closely aligned with U.S. Census reporting of new applications for Employer Identification Numbers, or EINs, which we believe to be the most relevant source of publicly available U.S. market data.

The below table sets forth the number of business formations for the three and six months ended June 30, 2024 and 2023:


	Three Months Ended June 30,		Six Months Ended June 30,
	2024	2023	2024	2023
	(in thousands)
Number of business formations	134	161	273	331

We experienced a 17% and 18% decrease in business formation transactions during the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023. The decrease in business formation transactions during the three and six months ended June 30, 2024 was primarily due to a 12% decrease in direct channel LLC formations driven partly by the challenging macroeconomic environment, as well as due to the exit of certain channel partner relationships in the third quarter of 2023. This compares to an overall U.S. business formations decline of 6% and 4%, respectively, during the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023 based on a review of U.S. Census data revealing new applications for EINs.

Number of transactions

We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period. Transactions may include one or more services purchased at the same time. For example, a customer of our business formation services may choose to form an LLC and purchase an operating agreement and business licenses at the same time. This constitutes a single transaction. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee. We consider the number of transactions to be an important metric considering that our customers generally begin their LegalZoom journey with a transaction, creating the foundation for generating subsequent subscription revenue.

The below table sets forth the number of transactions for the three and six months ended June 30, 2024 and 2023:


	Three Months Ended June 30,		Six Months Ended June 30,
	2024	2023	2024	2023
	(in thousands)
Number of transactions	292	283	628	591

We experienced a 3% and 6% increase in the number of transactions during the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023. The increase in the number of transactions during both the three and six months ended June 30, 2024 resulted primarily from the introduction of our beneficial ownership information report product in December 2023, along with increases in other small business related transactions, including annual reports and corporate dissolutions. These increases were partially offset by the decrease in business formations discussed above.

Average order value

We define average order value for a given period as total transaction revenue divided by total number of transactions in such period. We consider average order value to be an important metric given that it indicates how much customers are spending on average on our platform per transaction.

The below table sets forth the average order value for the three and six months ended June 30, 2024 and 2023:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Average order value	$	234	$	233	$	215	$	226

Average order value was flat for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, and down 5% for the six months ended June 30, 2024 compared to the six months

ended June 30, 2023, primarily driven by a higher mix of lower priced small business related transactions, including annual reports and beneficial ownership information reports, and a reduction in fees earned from third-party providers from leads generated for such providers through our online platform. These decreases were partially offset by an increase in average order value related to our consumer transaction products due to commercialization changes within our consumer product suite.

Number of subscription units

We define the number of subscription units in a given period as the number of paid subscriptions at the end of such period, including those that are not yet 60 days past their subscription order dates. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.

We consider the number of subscription units to be an important metric since subscriptions enable us to increase the lifetime value of a customer through deeper, longer-term relationships. In addition, as we continue to innovate our product line-up, including by testing varying price points for our products and evaluating our commercialization strategy, we believe the number of subscription units, when viewed together with the number of business formations during a particular period, provides insight into the effectiveness of our efforts to drive growth in our subscription business.

Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders and have an annual term. Our customers can have multiple subscriptions at the end of a period. For example, a popular combination for a new small business owner is attorney advice and registered agent subscriptions.

The below table sets forth the number of subscription units as of June 30, 2024 and 2023:


	As of June 30,
	2024	2023
	(in thousands)
Number of subscription units	1,609	1,553

We achieved 4% growth in subscription units from June 30, 2023 to June 30, 2024, primarily driven by an increase in forms and e-signature subscriptions resulting from bundling of these products into certain business formation offerings, as well as an increase in virtual mail subscriptions. This growth was partially offset by a decline in registered agent and compliance subscriptions driven by the exit of certain channel partner relationships in the third quarter of 2023.

On a sequential basis, the number of subscription units as of June 30, 2024 slightly increased from 1,605 thousand units as of March 31, 2024.

Average revenue per subscription unit

We define average revenue per subscription unit, or ARPU, as of a given date as subscription revenue for the twelve-month period ended on such date, or LTM, divided by the average of the number of subscription units at the beginning and end of the LTM period. We consider ARPU to be an important metric because it helps to illustrate our ability to provide and monetize higher value subscriptions. In addition, when viewed together with subscription units, ARPU provides insight into the impact that higher-value subscriptions have on our ability to grow our subscription units.

The below table sets forth ARPU as of June 30, 2024 and 2023:


	As of June 30,
	2024		2023
Average revenue per subscription unit	$	271	$	261

ARPU increased 4% as of June 30, 2024 compared to June 30, 2023 driven primarily by a shift in mix towards our higher priced subscription offerings, partially offset by an increase in our forms and e-signature subscription offerings, both of which carry lower price points. ARPU was also impacted by the exit of certain

channel partner relationships in the third quarter of 2023. ARPU as of June 30, 2024 was flat compared to March 31, 2024.

Annual small business retention rate

We define annual small business retention rate as the percentage of small business subscription units active as of the last day of the quarter one year ago that were still active subscriptions 12 months later. Small business subscription units represent our subscriptions targeted at our small business customers and include subscriptions for our registered agent and compliance services, LZ Tax, our small business legal advisory plan and subscriptions acquired through our purchase of Earth Class Mail and Revvsales Inc., and exclude subscriptions from our enterprise customers, our operations in the U.K. and our consumer legal advisory plan. Annual small business retention rate includes both monthly and annual subscription units and reflects all subscription unit attrition, including as a result of actual business failures of certain of our customers. Our annual small business retention rate as of June 30, 2024 was approximately 63%.

We expect annual retention rate to fluctuate as we continue to test new products, subscription term lengths and price points and seek to optimize our product offerings across our lineup. While there may be a general correlation between annual small business retention rate and our ability to increase customer lifetime value and the growth of our customer base, we do not view it as a predictor of future revenue given the varying needs of a small business during its lifecycle and the varying use cases of the products underlying our subscription units.

Key Components of our Results of Operations

Revenue

We generate revenue from the sources identified below. Beginning in the fourth quarter of 2023, we no longer present partner revenue on a standalone basis and partner revenue is now included within transaction and subscription revenue. This change had no impact on total revenue. Prior period disclosures and amounts have been conformed to the current period presentation.

For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered. We record amounts collected for services that have not been performed as deferred revenue on our consolidated balance sheet. The transaction price that we record is generally based on the contractual amounts and is reduced for estimated sales allowances for price concessions, charge-backs, sales credits and refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize.

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Revenue Recognition” in our 2023 Annual Report on Form 10-K for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.

Cost of revenue

Cost of revenue includes all costs of providing and fulfilling our services. Cost of revenue primarily includes government filing fees, costs of fulfillment, customer care, including the cost of credentialed professionals for tax, and payroll services, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation, telecommunications and data center costs, amortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal-use software, printing, shipping and handling charges, credit and debit card fees, allocated overhead, legal document kit expenses, and sales and use taxes. We defer direct and incremental

costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. These contract assets are recognized as cost of revenue in the same period the related revenue is recognized.

Gross profit and gross margin

Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, primarily the mix between transaction and subscription revenue. Our long-term gross margin expansion is also expected to be driven by automation improvements and digitization efforts. Further, our acquisitions of other companies have negatively impacted our gross margin in the short term, and any such future acquisitions could have a similar effect. Our gross margin could fluctuate from period to period due to fulfillment rates and seasonality.

Operating expenses

Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, impairments of goodwill, long-lived assets and other assets.

Sales and marketing

Sales and marketing expenses consist of customer acquisition media costs, compensation and related benefits, including stock-based compensation for marketing and sales personnel, media production, public relations and other promotional activities, general business development activities, an allocation of depreciation and amortization and allocated overhead. Customer acquisition media costs consist primarily of search engine marketing, television and social media costs. Marketing and advertising costs to promote our services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired.

We intend to continue to invest in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness. We anticipate that sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future.

Technology and development

Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation for technology and development personnel, expenses for outside consultants, an allocation of depreciation and amortization and allocated overhead. These expenses include costs incurred in the development and implementation of our products, websites, mobile applications, online legal platform, research and development and related infrastructure. Technology and development expenses are expensed as incurred, except to the extent that such costs are associated with internal-use software costs that qualify for capitalization.

We expect our technology and development expenses to remain relatively consistent as a percentage of our revenue for the foreseeable future, although our technology and development expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.

General and administrative

Our general and administrative expenses relate primarily to compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, an allocation of depreciation and amortization, allocated overhead and legal costs.

We expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term. Our general and administrative expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.

Interest expense

Interest expense consists primarily of amortization of debt issuance costs related to our Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility.

We expect interest expense to remain insignificant in the near term as we have no outstanding indebtedness. However, we would incur interest expense in the longer term should we draw down on our 2021 Revolving Facility or incur other indebtedness.

Interest income

Interest income consists primarily of interest income generated from our investment in money market funds.

Income taxes

Our provision for income taxes consists of current and deferred federal, state and foreign income taxes.

We account for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from stock-based compensation and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

Results of Operations

The following table sets forth our consolidated statement of operations data for each of the periods indicated. The period-to-period comparison of financial results should not be considered as a prediction or indicative of our future results:


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		2023
		(in thousands)
Revenue		$	177,362	$	168,854	$	351,576	$	334,790
Cost of revenue(1)(2)		63,609		63,748		131,993		124,143
Gross profit		113,753		105,106		219,583		210,647
Operating expenses:
Sales and marketing(1)(2)		60,130		53,525		113,883		113,675
Technology and development(1)(2)		25,798		19,900		49,755		39,583
General and administrative(1)(2)		26,679		26,936		49,744		53,440

Total operating expenses		112,607		100,361		213,382		206,698
Income (loss) from operations		1,146		4,745		6,201		3,949
Interest expense		(112)		(87)		(173)		(171)
Interest income		2,315		2,240		5,202		3,905
Other (expense) income, net		11		624		104		1,318

Income before income taxes		3,360		7,522		11,334		9,001
Provision for income taxes		2,046		6,127		5,276		9,964
Net income (loss)		$	1,314	$	1,395	$	6,058	$	(963)

(1)Includes stock-based compensation expense as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		2023
		(in thousands)
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

For additional information regarding stock-based compensation, refer to Note 8 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

(2)Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software and intangible assets as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
		2024		2023		2024		2023
		(in thousands)
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

Comparison of the Three Months Ended June 30, 2024 and 2023

Revenue


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Revenue by type(1)
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	%

(1) Beginning in the fourth quarter of 2023, we no longer present partner revenue on a standalone basis and partner revenue is now included within transaction and subscription revenue. This change had no impact on total revenue. Prior period disclosures and amounts have been conformed to the current period presentation.

The increase in total revenue for the three months ended June 30, 2024 was primarily driven by an increase in subscription revenue. Subscription revenue was 61% of total revenue for both the three months ended June 30, 2024 and 2023 and transaction revenue was 39% of total revenue for both the three months ended June 30, 2024 and 2023.

Transaction revenue for the three months ended June 30, 2024 increased due to a 3% increase in transaction units for the three months ended June 30, 2024. The increase in transaction units during the three months ended June 30, 2024 resulted primarily from the introduction of our beneficial ownership information report product in December 2023 along with increases in other small business related transactions, including annual reports and corporate dissolutions. The increase in transaction units was partially offset by a 17%

reduction in business formations primarily due to a 12% decrease in direct channel LLC formations driven partly by a challenging macroeconomic environment, as well as due to the exit of certain channel partner relationships in the third quarter of 2023.

Subscription revenue for the three months ended June 30, 2024 increased primarily due to a 4% increase in the number of subscription units and a 4% improvement in ARPU compared to June 30, 2023. The increase in subscription units was primarily driven by an increase in forms and e-signature subscriptions resulting from bundling of these products in certain business formation offerings, as well as an increase in virtual mail subscriptions. This growth was partially offset by a decline in registered agent and compliance subscriptions driven by the exit of certain channel partner relationships in the third quarter of 2023. ARPU as of June 30, 2024 increased 4% compared to June 30, 2023 driven primarily by a shift in mix towards our higher priced subscription offerings, partially offset by an increase in our forms and e-signature subscription offerings, both of which carry lower price points. ARPU was also impacted by the exit of certain channel partner relationships in the third quarter of 2023.

Cost of revenue


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Cost of revenue		$	63,609	$	63,748	$	(139)	—	%

Cost of revenue for the three months ended June 30, 2024 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 a $1.6 million increase in depreciation and amortization expense, a $1.5 million increase in payroll and related benefits, and a $0.6 million increase in stock-based compensation expense. The decrease in filing fees was primarily driven by the decrease in business formations during the three months ended June 30, 2024 compared to the same period in 2023.

Gross profit


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Gross profit		$	113,753	$	105,106	$	8,647	8	%

Gross profit for the three months ended June 30, 2024 increased by $8.6 million compared to three months ended June 30, 2023 due to a $8.5 million increase in revenue and a $0.1 million reduction in cost of revenue.

Sales and marketing


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Sales and marketing		$	60,130	$	53,525	$	6,605	12	%

Sales and marketing expenses for the three months ended June 30, 2024 increased by $6.6 million primarily due to a $11.1 million increase in customer acquisition marketing spend, partially offset by a $4.3 million reduction in payroll and related benefits largely due to a reduction in sales and marketing headcount.

Customer acquisition marketing spend was $47.1 million and $36.0 million for the three months ended June 30, 2024 and 2023, respectively.

Technology and development


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Technology and development		$	25,798	$	19,900	$	5,898	30	%

Technology and development expenses for the three months ended June 30, 2024 increased primarily due to an increase in payroll and related benefits largely due to increased technology and development headcount.

General and administrative


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
General and administrative		$	26,679	$	26,936	$	(257)	(1	%)

General and administrative expenses for the three months ended June 30, 2024 decreased by $0.3 million mainly due to a $2.8 million decrease in stock-based compensation expense, partially offset by a $1.2 million increase in consulting costs, a $0.7 million increase in payroll and related benefits, and a $0.4 million increase in depreciation and amortization expense compared to three months ended June 30, 2023.

Interest expense


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Interest expense		$	(112)	$	(87)	$	(25)	29	%

Interest expense consists primarily of amortization of debt issuance costs related to our 2021 Revolving Facility.

Interest income


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Interest income		$	2,315	$	2,240	$	75	3	%

The change in interest income was primarily due to interest income generated from our money market investments during the three months ended June 30, 2024.

Other (expense) income, net


	Three Months Ended June 30,
		2024		2023		$ change		% change
		(in thousands, except percentages)
Other (expense) income, net		$	11	$	624	$	(613)	(98	%)

The change in other (expense) income, net, between 2024 and 2023 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in British Pound Sterling, or GBP.

Provision for income taxes


	Three Months Ended June 30,
		2024			2023			$ change		% change
		(in thousands, except percentages)
Provision for income taxes		$	2,046		$	6,127		$	(4,081)	(67	%)
Effective tax rate		61		%	82		%

There was a $4.1 million favorable change in the provision for income taxes for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The change was primarily due to lower nondeductible stock-based compensation and higher excess tax benefits on stock-based compensation for the three months ended June 30, 2024. This resulted in a lower effective tax rate.

Comparison of the Six Months Ended June 30, 2024 and 2023

Revenue


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Revenue by type(1)
Transaction	$	134,854	$	133,890	$	964	1	%
Subscription	216,722		200,900		$	15,822	8	%
Total revenue	$	351,576	$	334,790	$	16,786	5	%

The increase in total revenue six months ended June 30, 2024 was primarily driven by an increase in subscription revenue. Subscription revenue was 62% and 60% of total revenue for the six months ended June 30, 2024 and 2023, respectively, and transaction revenue was 38% and 40% of total revenue for the six months ended June 30, 2024 and 2023, respectively.

Transaction revenue for the six months ended June 30, 2024 increased due to a 6% increase in the number of transactions, partially offset by a 5% decrease in average order value compared to the six months ended June 30, 2023. The overall increase in transaction units during the six months ended June 30, 2024 resulted primarily from the introduction of our beneficial ownership information report product in December 2023 along with the increase in other small business related transactions, including annual reports and corporate dissolutions. The increase in transaction units was partially offset by an 18% reduction in business formations primarily due to a 12% decrease in direct channel LLC formations driven partly by a challenging macroeconomic environment, as well as due to and the exit of certain channel partner relationships in the third quarter of 2023. The 5% decrease in average order value for the six months ended June 30, 2024 was driven primarily by a higher mix of lower priced small business related transactions, including annual reports and beneficial ownership information reports, and a reduction in fees from third-party providers through our

online platform, partially offset by an increase in average order value of our consumer transaction products due to commercialization changes within our consumer product suite.

Subscription revenue for the six months ended June 30, 2024 increased primarily due to a 4% increase in the number of subscription units as of June 30, 2024 compared to June 30, 2023 and a 4% increase in ARPU compared to June 30, 2023. The increase in subscription units was driven primarily by an increase in forms and e-signature subscriptions resulting from bundling of these products into certain business formation offerings, as well as an increase in virtual mail subscriptions. This growth was partially offset by a decline in registered agent and compliance subscriptions driven by the exit of certain channel partner relationships in the third quarter of 2023. ARPU increased 4% compared to June 30, 2023 driven primarily by a shift in the mix of our higher priced subscription offerings. ARPU was also impacted by the exit of certain channel partner relationships in the third quarter of 2023 and the increased mix of our forms and e-signature subscription offerings, both of which carry lower price points.

Cost of revenue


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Cost of revenue	$	131,993	$	124,143	$	7,850	6	%

Cost of revenue for the six months ended June 30, 2024 increased by $7.9 million mainly due to a $5.4 million increase in payroll and related benefits, a $3.5 million increase in depreciation and amortization expense, and a $1.3 million increase in filing fees, partially offset by a $4.5 million decrease in third-party staffing fees. The increase in filing fees was primarily driven by filing fees related to business formations during the six months ended June 30, 2024 in certain states that temporarily halted charging filing fees in the first half of 2023, partially offset by the decrease in overall business formations during the six months ended June 30, 2024.

Gross profit


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Gross profit	$	219,583	$	210,647	$	8,936	4	%

The increase in gross profit was driven by a $16.8 million increase in revenue partially offset by a $7.9 million increase in cost of revenue.

Sales and marketing


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Sales and marketing	$	113,883	$	113,675	$	208	—	%

Sales and marketing expenses for the six months ended June 30, 2024 increased by $0.2 million primarily due to an $11.0 million increase in customer acquisition marketing spend, partially offset by a $10.3 million reduction in payroll and related benefits. The decrease in payroll and related benefits was largely due to decreased sales and marketing headcount. Customer acquisition marketing spend was $87.7 million and $76.7 million for the six months ended June 30, 2024 and 2023, respectively.

Technology and development


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Technology and development	$	49,755	$	39,583	$	10,172	26	%

Technology and development expenses for the six months ended June 30, 2024 increased primarily due to an increase in payroll and related benefits largely due to increased technology and development headcount.

General and administrative


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
General and administrative	$	49,744	$	53,440	$	(3,696)	(7	%)

General and administrative expenses for the six months ended June 30, 2024 decreased by $3.7 million primarily due to a $6.6 million decrease in stock-based compensation expense, partially offset by a $1.3 million increase in consulting costs, a $0.8 million increase in payroll and related benefits, and a $0.5 million increase in depreciation and amortization expense compared to three months ended June 30, 2023.

Interest income, net


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Interest income, net	$	5,202	$	3,905	$	1,297	33	%

The change in interest income, net, was primarily due to interest income generated from our money market investments during the six months ended June 30, 2024.

Other (expense) income, net


	Six Months Ended June 30,
	2024		2023		$ change		% change
	(in thousands, except percentages)
Other (expense) income, net	$	104	$	1,318	$	(1,214)	(92	%)

The change in other (expense) income, net, between 2024 and 2023 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in GBP.

Provision for income taxes


	Six Months Ended June 30,
	2024			2023			$ change		% change
	(in thousands, except percentages)
Provision for income taxes	$	5,276		$	9,964		$	(4,688)	(47	%)
Effective tax rate	47		%	111		%

There was a $4.7 million favorable change in the provision for income taxes for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The change was primarily due to lower nondeductible stock-based compensation and higher excess tax benefits on stock-based compensation for the six months ended June 30, 2024. This resulted in a lower effective tax rate.

Liquidity and Capital Resources

Overview

We fund our operations and capital expenditures from cash flows from operating activities. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. At June 30, 2024, our principal sources of liquidity were cash and cash equivalents of $118.8 million, which consisted of cash on deposit with banks and money market funds, of which approximately $1.7 million related to our foreign subsidiaries. Our cash and cash equivalents decreased by $106.9 million from December 31, 2023 to June 30, 2024, primarily as a result of stock repurchases and purchases of property and equipment, partially offset by cash provided by operating activities during the six months ended June 30, 2024.

We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next twelve months and in the foreseeable future. We have the ability to supplement our liquidity needs with borrowings under our 2021 Revolving Facility. In addition, we previously announced our intention to sell our operating headquarters in Austin, Texas, which is discussed in more detail in Note 4 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In August 2024, we committed to a restructuring plan as part of our re-alignment of our business and cost structure. We expect to incur charges of approximately $5.0 million in connection with the restructuring plan, the majority of which will be incurred in the third quarter of 2024. We also expect these changes to drive approximately $10.0 million in savings in 2024. See “Recent Developments” above for additional information.

We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and accordingly no taxes have been provided on such earnings. We continue to evaluate our plans for reinvestment or repatriation of unremitting foreign earnings and have not changed our previous indefinite reinvestment determination following the enactment of the 2017 Tax Cuts and Jobs Act, or Tax Act. We have not repatriated funds to the U.S. to satisfy domestic liquidity needs, nor do we anticipate the need to do so. If we determine that all or a portion of our foreign earnings are no longer indefinitely reinvested, we may be subject to foreign withholding taxes and U.S. state income taxes.

In October 2023, our board of directors approved a new stock repurchase program, pursuant to which our management is authorized to repurchase up to $100.0 million of shares of our common stock from time to time. In May 2024, our board of directors approved a $75.0 million increase in the stock repurchase program, bringing the aggregate amount authorized to $175.0 million. At June 30, 2024, approximately $37.0 million remained available for future repurchases of our common stock under the stock repurchase program. For additional information regarding our stock repurchase program, refer to Note 7 to our unaudited condensed consolidated financial statements.

Borrowings

2021 Revolving Facility

On July 2, 2021, we entered into our 2021 Revolving Facility with JPMorgan Chase Bank, N.A., as the administrative agent. The 2021 Revolving Facility, as amended, provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million. As of June 30, 2024, we had no borrowings outstanding and $150.0 million was available for use under our 2021 Revolving Facility.

Subject to the satisfaction of certain criteria, we will be able to increase the 2021 Revolving Facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last twelve months cash earnings before interest expense, tax, depreciation and amortization, or LTM CEBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM CEBITDA), plus (iii) an unlimited amount so long as we are in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.

We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00. We are also required to pay customary letter of credit fees and agency fees. As of June 30, 2024, the interest rate applicable to the 2021 Revolving Facility was subject to a 1.0% floor and was at a rate equal to the greatest of: (i) the administrative agent’s prime rate; (ii) the federal funds effective rate plus 1/2 of 1.0%; and (iii) the secured overnight financing rate, or SOFR, plus a 0.10% credit spread adjustment to the SOFR benchmark, or Adjusted Term SOFR, plus 1.0%; provided that if the Adjusted Term SOFR is less than zero, the Adjusted Term SOFR shall be deemed to be zero. The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a

further reduction of 0.25% if the total net first lien leverage ratio does not exceed 3.50 to 1.00 and 2.50 to 1.00, respectively.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary “breakage” costs with respect to SOFR loans. There is no scheduled amortization under the 2021 Revolving Facility. The principal amount outstanding is due and payable in full at maturity on July 1, 2026.

Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The 2021 Revolving Facility is secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions.

The 2021 Revolving Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates.

Cash flows

The following table sets forth a summary of our cash flows for the periods indicated:


	Six Months Ended June 30,
	2024		2023
	(in thousands)
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)
Effect of exchange rate changes on cash and cash equivalents	(32)		32
Net (decrease) increase in cash and cash equivalents	$	(106,924)

LEGALZOOM.COM, INC. [LZ] Filings
10-Q	[2024-08-07]
10-Q	[2024-05-07]
10-K	[2024-02-29]
10-Q	[2023-11-07]
10-Q	[2023-08-08]
10-Q	[2023-05-09]
10-K	[2023-03-01]
10-Q	[2022-11-10]
10-Q	[2022-08-11]
10-Q	[2022-05-16]
10-K	[2022-03-24]
10-Q	[2021-11-10]
10-Q	[2021-08-12]
S-1	[2021-06-04]
S-1	[2012-05-10]