LegalZoom.com, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Financial amounts below are in millions unless stated otherwise. LegalZoom provides online legal and compliance services, with transaction, subscription and partner revenue. Its IPO was completed on July 2, 2021, after quarter-end.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $150.4 | $111.0 | $285.1 | $216.8 |
| Gross profit / margin | $100.6 / 66.9% | $75.2 / 67.8% | $191.2 / 67.1% | $145.9 / 67.3% |
| Operating income (loss) | $(27.5) | $10.5 | $(31.9) | $14.0 |
| Net income (loss) | $(38.4) | $(4.1) | $(48.2) | $(8.9) |
| Adjusted EBITDA / margin | $22.0 / 15% | $20.3 / 18% | $25.6 / 9% | $33.6 / 16% |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $40.7 | $49.3 |
| Free cash flow | Not presented separately for quarter | Not presented separately for quarter | $34.7 | $44.8 |
- Q2 revenue rose 36% year over year. Transaction revenue grew 45% to $73.4 million, subscription revenue grew 29% to $69.4 million, and partner revenue grew 14% to $7.7 million.
- For the first half, revenue increased 31%; transaction, subscription and partner revenue grew 40%, 25% and 21%, respectively.
- Gross profit increased, but gross margin narrowed in Q2 as revenue mix shifted toward transactions, which have lower margins than subscriptions.
- Q2 operating expenses were $128.1 million, up from $64.7 million. Stock-based compensation was approximately $45.0 million for the quarter, largely related to IPO-linked equity award modifications. The resulting GAAP loss contrasts with positive Adjusted EBITDA; Adjusted EBITDA is a non-GAAP measure.
- First-half operating cash flow and free cash flow declined year over year despite higher revenue. Cash generation included a $23.8 million increase in deferred revenue, largely from subscriptions billed in advance.
Financial position and capital
- At June 30, cash and cash equivalents were $167.0 million, current assets $190.4 million, and current liabilities $239.4 million. The current ratio was approximately 0.80.
- Long-term debt had a $513.9 million carrying value, with $521.6 million of principal outstanding. Cash was therefore below principal debt by approximately $354.6 million at quarter-end. No revolving facility borrowings were outstanding.
- After quarter-end, the IPO and related private placement generated $666.9 million in proceeds after underwriting discounts and commissions. LegalZoom repaid the $521.6 million term-loan principal, paid $13.6 million to cancel interest-rate swaps and hybrid debt, and replaced its prior revolving facility with a $150 million facility. The filing reports a $7.7 million debt-extinguishment loss.
- Management stated that cash and expected operating cash flows should fund operational needs for at least the next 12 months. This assessment preceded the post-quarter debt repayment and related transactions.
Changes, outlook and risks
- Business formations increased 34% in Q2 and 42% for the first half. Transactions increased 12% and 21%, respectively; subscription units rose 25% year over year to 1.215 million at June 30. Average order value rose 30% in Q2 to $282, while subscription-unit ARPU increased 3% to $230.
- Management expects transaction growth to fluctuate, and expects year-over-year average-order-value growth to taper in the second half of 2021. It anticipates continued investment in marketing, technology, tax offerings and talent; expects modest long-term gross-margin improvement and longer-term growth in Adjusted EBITDA and free cash flow. No specific full-year revenue or earnings guidance is provided.
- Management cited pandemic-driven online demand tailwinds in 2020 and strengthening macroeconomic conditions in 2021, but cautioned that growth could moderate if those trends or stimulus effects reverse. Consumer estate-planning activity had benefited from pandemic-related conditions in the prior year and declined year over year.
- Material weaknesses were identified in the control environment, complex/non-routine accounting controls and the financial-statement close process. Disclosure controls were concluded to be ineffective as of June 30. Remediation was in early stages, and the company could not assure timely remediation.
- Contingencies include a Dun & Bradstreet demand alleging $5.6 million in overpayments and a vendor arbitration in which the vendor seeks at least $6.1 million; no accrual was recorded and potential loss could not be estimated. A website session-replay class action was dismissed without prejudice. The company also reported inactive state inquiries relating to unauthorized practice of law or insurance.
- Other uncertainties include COVID-19 effects, foreign-currency exposure, interest-rate exposure if the new revolver is drawn, and the possibility of future limits on use of tax loss carryforwards. The company reported compliance with debt covenants at June 30.
Most important facts to verify
- Whether growth in formations, transaction value and subscriptions continues after pandemic-related comparisons and the expected second-half taper in average-order-value growth.
- How recurring stock-based compensation, marketing investment and public-company costs affect GAAP profitability and cash generation.
- Post-IPO cash, debt and liquidity after repayment of the term loan, swap cancellation costs and establishment of the $150 million revolver.
- Progress and independent validation of remediation for the disclosed material weaknesses.
- Developments in the D&B matter, vendor arbitration and regulatory inquiries, including any change in the ability to estimate potential losses.