LegalZoom.com, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020 unless otherwise noted. LegalZoom operates an online U.S. legal and compliance platform for small businesses and consumers, generating revenue from transactions, subscriptions and partner referrals.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $575.1 million | $470.6 million | +22% |
| Gross profit / margin | $385.7 million / 67.1% | $316.1 million / 67.1% | Gross profit +22% |
| Operating income (loss) | $(85.1) million | $48.9 million | Turned to loss |
| Net income (loss) | $(108.7) million | $9.9 million | Turned to loss |
| Adjusted EBITDA (non-GAAP) | $47.7 million; 8% margin | $88.0 million; 19% margin | Down $40.3 million |
| Operating cash flow / free cash flow (non-GAAP) | $54.2 million / $42.4 million | $93.0 million / $82.5 million | Both declined |
| Cash and cash equivalents | $239.3 million | $114.5 million | Up $124.8 million |
| Long-term debt | None outstanding | $515.4 million, net of current portion | Repaid in July 2021 |
Subscription revenue rose 26% to $288.9 million and transaction revenue rose 22% to $258.1 million; partner revenue declined 2% to $28.0 million. Subscription units increased 22% to 1.329 million, while average revenue per subscription unit rose 6% to $236. Business formations increased 18% to 447,000; transactions rose 10% to 977,000; average order value rose 12% to $264.
Profitability was pressured by a substantial increase in operating expenses, particularly sales and marketing (+63%), technology and development (+101%) and general and administrative (+109%). Stock-based compensation expense was $112.8 million, largely reflecting IPO-related award modifications. The company recorded a $7.7 million debt-extinguishment loss. Operating cash flow fell despite revenue growth, reflecting the net loss and less favorable working-capital changes.
Liquidity, capital and material changes
- The July 2021 IPO and related private placement generated $666.9 million of net proceeds. The company used proceeds to repay its $521.6 million 2018 term loan in full and extinguished related interest-rate hedges.
- At year-end, the company had no borrowings or letters of credit under its $150 million revolving facility. It reported that cash, cash equivalents and operating cash flows should cover operational needs and contractual obligations for at least the next 12 months.
- Earth Class Mail was acquired in November 2021 for approximately $61.5 million in cash, expanding the virtual-mail offering. The acquisition added $48.5 million of goodwill; its contribution to FY2021 results was described as immaterial.
- On March 1, 2022, the board authorized share repurchases of up to $150 million. The program is discretionary and does not require the company to repurchase shares.
Outlook, commentary and risks
The filing provides no quantified FY2022 revenue or earnings guidance. Management expects continued investment in marketing, tax services, new products and automation, with Adjusted EBITDA and free cash flow expected to grow in absolute dollars over the longer term. Management expects average order value growth to moderate in 2022 as more competitively priced offerings are introduced; partner revenue may be weaker in the near term as the company shifts away from some legacy partners. The company also cautioned that pandemic-related demand tailwinds subsided in the second half of 2021, and that seasonality and the level of business formations make results difficult to predict.
- Financial reporting controls: Management concluded disclosure controls were not effective at December 31, 2021, due to three material weaknesses in the control environment, complex accounting controls and the financial close process. The company had not remediated them and stated timing was uncertain. The independent auditor’s opinion on the financial statements was unqualified; the auditor was not required to attest to internal controls.
- Regulatory and legal exposure: The company faces evolving rules concerning unauthorized or corporate practice of law, legal plans, subscription renewals, privacy and data security. A Wyoming citation alleged violations relating to registered-agent services and assessed an initial $4.1 million penalty; the company sought a hearing and said an adverse result could materially affect results, cash flows and financial condition. A separate partner demand alleged $5.6 million in overpayments; no loss was accrued because it was not considered probable.
- Other operating risks: Competition, subscriber renewals, customer acquisition costs, third-party and government-agency processing, cyber incidents and the ability to scale tax services could affect growth and margins. The company also flagged new USPTO identity-verification requirements expected to affect its do-it-yourself trademark filing process.
Investor verification points
- Track whether subscription growth and retention continue to offset any moderation in business formations and transaction growth.
- Assess whether marketing and other operating expense growth moderates, and whether margins and cash generation recover from FY2021 levels.
- Review the timing and effectiveness of remediation of the three material weaknesses, including subsequent reporting on internal controls.
- Monitor the Wyoming registered-agent citation and the Dun & Bradstreet demand for developments, potential accruals or operational impacts.
- Evaluate Earth Class Mail integration and returns, the economics of tax services, and the use of cash for the authorized repurchase program.