LegalZoom.com, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 16, 2022. LegalZoom provides online legal, compliance, tax and related services to small businesses and consumers. Comparisons below are with Q1 2021 unless otherwise stated.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $154.2 million | $134.6 million | +15% |
| Gross profit / gross margin | $98.3 million / 63.7% | $90.7 million / 67.4% | Profit +8%; margin down 3.7 percentage points |
| Operating expenses | $124.3 million | $95.0 million | +31% |
| Operating loss | $(26.1) million | $(4.4) million | Loss widened |
| Net loss / diluted loss per share | $(30.6) million / $(0.15) | $(9.8) million / $(0.08) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $1.3 million | $3.6 million | Down $2.3 million |
| Operating cash flow / free cash flow (non-GAAP) | $13.7 million / $8.8 million | $31.4 million / $28.5 million | Both declined |
Revenue mix: subscriptions $84.4 million (+29%), transactions $64.1 million (+4%), and partners $5.7 million (−26%). Subscription revenue reached 55% of total revenue, compared with 49% a year earlier. Higher fulfillment and customer-care costs, including investment in tax professionals and production capacity, contributed to gross-margin compression.
Liquidity, debt and capital
- Cash and cash equivalents were $247.5 million at March 31, 2022, versus $239.3 million at year-end 2021. Management said cash, expected operating cash generation and available financing should cover operating needs for at least the next 12 months.
- No borrowings or outstanding letters of credit were drawn under the $150 million five-year revolving facility; the company reported compliance with its financial covenants. The prior term loan had been repaid in July 2021.
- Current liabilities included $163.7 million of deferred revenue. Total liabilities were $261.2 million and stockholders’ equity was $189.9 million.
- The board authorized repurchases of up to $150 million. The company repurchased $1.1 million of shares in Q1; it reported $9.2 million in cumulative repurchases under the program as of the filing date, including subsequent repurchases.
Business trends and management outlook
- Business formations were 129,000, down 2%; total transactions were 267,000, down 3%. Average order value rose 8% to $240. Subscription units increased 19% to 1.362 million, and average revenue per subscription unit rose 8% to $244.
- Management attributed subscription growth to registered-agent, compliance and tax-advisory services and the Earth Class Mail acquisition. Transaction growth in average order value reflected product mix, timing of revenue recognition and attorney-assisted trademark adoption. Partner revenue fell as the company moved away from certain legacy relationships.
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects average-order-value growth to moderate during 2022 as it introduces more competitively priced offerings; it anticipates continued investment in marketing, tax services, technology and fulfillment. It expects gross margin to face near-term pressure, with modest longer-term improvement, and adjusted EBITDA and free cash flow to increase over the longer term.
- Stock-based compensation expense was $21.9 million, versus $3.9 million in Q1 2021, largely reflecting IPO-related award modifications. The filing cites $62.2 million of unrecognized option compensation and $112.8 million for unvested RSUs.
Risks, contingencies and notable items
- Legal matters: A Wyoming regulator cited subsidiary Legalinc, initially assessed a $4.1 million penalty and revoked its commercial registered-agent status; the company is seeking a hearing and negotiating, and outcome is uncertain. A Dun & Bradstreet demand alleges $5.6 million of overpayments; no claim had been filed. No loss was accrued for either matter because loss was not considered probable; the Wyoming matter could materially affect results, cash flows or financial condition if resolved adversely.
- Financial reporting controls: Management concluded disclosure controls were not effective as of March 31, 2022 because of three previously identified material weaknesses involving the control environment, complex transactions and the financial close process. Remediation is ongoing, and management said completion during 2022 is uncertain. The initial phase of a new ERP system was implemented during the quarter.
- Operating risks: The filing highlights dependence on business formations and subscription renewals, seasonality, competition, customer experience, hiring and retention, regulatory restrictions on legal services, privacy and cybersecurity, and uncertainty in post-pandemic demand. Management reported that COVID-19 had no material financial-statement impact in Q1, but future effects remain uncertain.
- Other: The company adopted lease accounting on January 1, 2022, recognizing operating lease right-of-use assets and liabilities; adoption did not materially affect equity, results or cash flows. It reported a $1.4 million foreign-currency transaction loss in Q1.
Investor verification priorities
- Track subscription-unit growth, retention and ARPU against the company’s expectations, alongside formation volumes and transaction mix.
- Assess whether revenue growth can outpace rising fulfillment, marketing, technology and stock-compensation costs, and review GAAP losses alongside non-GAAP Adjusted EBITDA.
- Monitor operating cash flow and free cash flow, particularly the contribution from deferred revenue and changes in working capital.
- Follow developments in the Wyoming citation and Dun & Bradstreet demand, including any change in probability, accrual or estimated exposure.
- Check progress remediating material weaknesses and implementing the ERP system, and confirm future management conclusions about control effectiveness.