LegalZoom.com, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 11, 2022. LegalZoom provides online legal, compliance, tax and related services to small businesses and consumers. Results are unaudited.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $163.9m | $150.4m | $318.1m | $285.1m |
| Gross profit | $106.5m | $100.6m | $204.7m | $191.2m |
| Operating loss | $(11.6)m | $(27.5)m | $(37.7)m | $(31.9)m |
| Net loss | $(13.2)m | $(38.4)m | $(43.8)m | $(48.2)m |
| Adjusted EBITDA (non-GAAP) | $17.8m | $22.0m | $19.1m | $25.6m |
| Operating cash flow | Not separately stated | Not separately stated | $24.8m | $40.7m |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $14.4m | $34.7m |
Gross margin was approximately 65.0% in Q2, versus 66.9% a year earlier; for the six-month periods it was approximately 64.4%, versus 67.1%. Net loss per share was $0.07 for Q2 and $0.22 for the first half, compared with $0.31 and $0.38, respectively, in 2021. Stock-based compensation was $44.7m for the first half.
At June 30, cash and cash equivalents were $215.5m, down from $239.3m at year-end 2021. Current assets were $242.4m and current liabilities $238.9m. Deferred revenue was $164.3m. The company had no borrowings or letters of credit outstanding under its $150m revolving facility and reported covenant compliance. The former $521.6m term loan was repaid following the 2021 IPO.
Material changes versus prior year
- Revenue grew 9% in Q2 and 12% in the first half, led by subscription revenue: up 32% and 30%, respectively. Transaction revenue fell 9% in Q2 and 3% in the first half; partner revenue fell 21% and 24%.
- Subscription units rose 15% year over year to 1.394m, while ARPU increased 10% to $252. Transaction volumes declined 13% in Q2 and 8% in the first half; business formations fell 16% and 9%, respectively.
- Higher fulfillment and customer-care costs—including investment in tax professionals and capacity, and Earth Class Mail—contributed to cost of revenue rising 15% in Q2 and 21% for the first half. Sales and marketing increased 11% and 10%.
- Operating losses narrowed in Q2 but widened for the first half. Adjusted EBITDA and free cash flow declined year over year. Lower first-half operating cash flow reflected, among other factors, less favorable working-capital movements and timing of payments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects subscription growth and ARPU to benefit from product mix, and expects transaction average-order-value growth to moderate as lower-priced offerings are tested. It expects near-term partner revenue to be weaker during a shift away from certain legacy partners.
- Management expects ongoing investment in marketing, tax services, product development and automation; it anticipates gross margin may face near-term pressure, with longer-term improvement dependent on subscription mix and fulfillment automation. It expects available cash and operating cash flow to meet needs for at least 12 months.
- The company repurchased $39.2m of stock in the first half under its $150m authorization. It reported further repurchases of $15.1m after June 30 through the filing date.
- Two unaccrued legal matters could result in losses: Dun & Bradstreet alleges $5.6m of overpayments, which LegalZoom denies; Wyoming assessed an initial $4.1m penalty and revoked a subsidiary’s commercial registered-agent status. Management said outcomes are uncertain and losses were not considered probable at June 30.
- Disclosure controls and procedures were deemed ineffective because three previously identified material weaknesses in internal control over financial reporting remained unremediated. Management said remediation timing was uncertain and the weaknesses might not be remediated in 2022.
- Other notable items include $991,000 of restructuring costs in Q2 and an August 2022 acquisition for $4.1m. The company cites business-formation declines, macroeconomic uncertainty, regulatory and unauthorized-practice-of-law risks, cybersecurity, and customer retention among its risks.
Most important facts for investors to verify
- Whether business-formation declines continue and subscription growth, retention and ARPU offset weaker transaction and partner revenue.
- Whether higher fulfillment costs and investments improve customer experience and margins, and how adjusted EBITDA and free cash flow develop.
- Progress toward remediating internal-control weaknesses and the reliability of future financial reporting.
- Developments in the Wyoming and Dun & Bradstreet matters, including any potential financial or operational impact.
- Cash use and remaining authorization under the repurchase program, alongside commitments and future acquisition spending.