LegalZoom.com, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. LegalZoom provides online legal, compliance, tax and related services to consumers and small businesses through transaction, subscription and partner offerings. The company completed its IPO in July 2021.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $147.9M | $131.6M | $432.9M | $348.4M |
| Gross profit / margin | $100.6M / 68.0% | $87.8M / 66.7% | $291.9M / 67.4% | $233.7M / 67.1% |
| Operating income (loss) | ($27.5M) | $19.6M | ($59.4M) | $33.6M |
| Net income (loss) | ($39.7M) | $9.4M | ($87.9M) | $0.5M |
| Adjusted EBITDA / margin | $15.1M / 10% | $27.4M / 21% | $40.7M / 9% | $61.1M / 18% |
- Q3 revenue rose 12%. Transaction revenue increased 5% to $66.9M, subscription revenue increased 24% to $73.3M, and partner revenue declined 8% to $7.7M. For the nine months, revenue grew 24%; transaction, subscription and partner revenue rose 26%, 24% and 10%, respectively.
- Q3 business formations fell 9% year over year to 106,000 and transactions fell 10% to 229,000; average order value rose 16% to $291. For the nine months, formations increased 21% to 351,000 and transactions increased 10% to 765,000.
- Subscription units grew 21% year over year to 1.264 million; average revenue per subscription unit increased 5% to $231.
- Operating cash flow was $60.2M for the nine months, versus $82.1M a year earlier. Capital expenditures were $8.5M, producing reported free cash flow of $51.7M, down from $74.3M.
- Cash and cash equivalents were $310.7M at September 30, up from $114.5M at year-end 2020. Current liabilities were $238.5M and current assets were $338.6M.
- Long-term debt was repaid in full in July using IPO proceeds; no borrowings or letters of credit were outstanding under the new $150M five-year revolving facility at quarter-end. The company reported compliance with applicable financial covenants.
Changes, outlook and notable items
- The IPO and concurrent private placement generated $666.9M net of underwriting discounts and commissions. Proceeds funded repayment of the $521.6M outstanding term loan. Preferred stock converted to common stock.
- GAAP results were substantially affected by IPO-related equity compensation: stock-based compensation was $38.1M in Q3 and $87.0M for the nine months, compared with $2.9M and $10.6M, respectively, in 2020. The company expects significant compensation expense over the next three years following equity-award modifications.
- Q3 Adjusted EBITDA declined despite higher revenue, primarily reflecting increased customer-acquisition marketing and other operating costs. Management expects Adjusted EBITDA and free cash flow to increase in absolute dollars over the longer term; it provided no specific numerical financial guidance in this filing.
- Management expects continued investment in marketing, technology, products and fulfillment. It expects subscription growth and long-term modest gross-margin improvement, while noting that transaction mix, seasonality and fulfillment costs can affect margins. It expected average-order-value growth to taper in Q4 2021 and partner revenue to be lower in the near term as it transitions from legacy partners.
- In November 2021, after quarter-end, LegalZoom acquired Earth Class Mail for $63M, funded with available cash; purchase-price allocation was still being evaluated.
- Risks include dependence on business formations and subscription renewals, seasonality and uncertain post-pandemic demand, competition, legal and regulatory uncertainty concerning unauthorized practice of law and registered-agent services, privacy and cybersecurity exposure, and foreign-exchange movements. The filing describes a $5.6M Dun & Bradstreet demand that remains unresolved; the company recorded no accrual and could not estimate a loss range. A state citation concerning a subsidiary’s registered-agent services also remained unresolved, with potential for material adverse impact if decided unfavorably.
- Disclosure controls were deemed ineffective because of three previously identified material weaknesses: accounting resources and control environment, controls over complex or unusual transactions, and the financial close and reconciliations. Remediation was underway, but management said full remediation was uncertain and might not occur in 2022.
Important facts for investors to verify
- Whether subscription-unit growth and renewals continue to offset weaker quarterly formation and transaction volumes.
- How marketing investment, fulfillment costs and IPO-related stock compensation affect GAAP profitability and Adjusted EBITDA.
- Cash generation after the decline in operating cash flow and free cash flow, including the effect of the $63M Earth Class Mail acquisition.
- Progress in remediating material weaknesses and the company’s ability to produce timely, reliable financial reporting.
- Outcomes of the Dun & Bradstreet matter, the registered-agent citation and other legal or regulatory issues, including potential unauthorized-practice-of-law and privacy exposure.