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LegalZoom Looks for Subscription Revenue

Less than four months after going public, LegalZoom.com Inc. is in the middle of a corporate transformation. 

The Glendale-based online legal technology company – which sells do-it-yourself legal services and documents to small businesses and individuals – wants to find ways to expand LegalZoom’s scope from a single-transaction legal shop to a site that keeps customers engaged with new features such as annual subscriptions and online advice. 

The transition comes from a new executive management that previously worked at Intuit Inc., the company behind TurboTax and QuickBooks, led by Chief Executive Dan Wernikoff, and his team, who came aboard in late 2019.

“In 2020, we made a significant change in our strategic approach,” Wernikoff said during an Aug. 13 second-quarter earnings call. “We also plan to expand the services we bring to our customers by partnering with best-in-class third-party solutions to offer business checking accounts, payments, website hosting and other relevant adjacencies.” 

Wernikoff believes that the rollout of new products, such as the CPA-access feature LegalZoom Tax introduced last October, will increase subscriptions. 

“We remain very bullish on the long-term opportunity and are investing aggressively to accelerate its growth,” Wernikoff said on the call. “From the second half of this year, we expect to rollout a tax solution across 100 percent of LLC formation traffic.” 

The new strategy seems to be working. Despite the impact of the COVID pandemic on the economy, LegalZoom’s second-quarter revenue of $150 million signified a year-over-year increase of 36 percent. Transaction revenue, representing 49 percent of total revenue, was up 45 percent year-over-year. By July, LegalZoom had more than 1.2 million asset subscriptions, up 69,000 units from the first quarter and 25 percent year-over-year. 

At the end of June, the company made a splashy public market debut with a $28 offering price that closed at $37.85 on the Nasdaq and gave the company a valuation of more than $7.5 billion. Shares closed Oct. 20 at $27.36.

Court of opinions 

Analysts have been overall optimistic regarding LegalZoom’s potential although there is some debate over how high the legal tech company can zoom. 

In late July, Brent Thill at Jefferies conveyed his confidence in the “experienced new management team … CEO and three other C-level execs joined in the last two years and started applying best practices from Intuit.” 

Thill said that an attractive element of LegalZoom is that it is a “leader in an underpenetrated market” with much potential. 

“LegalZoom helped form 10 percent of new LLCs in 2020 and has 70 percent aided brand awareness,” Thill said. “Online legal services account for only 8 percent of the market, with a conservative Serviceable Addressable Market of $49 billion. LegalZoom’s pricing is disruptive at a flat fee of $79 and up versus average hourly attorney fees of $280.” 

Some of the lessons imported by new management from Intuit, Thill continued, includes “new expert-assisted products, shift to subscriptions and other recurring revenue streams, optimized digital marketing and migration to a cloud platform.”

However, Thill also observed that the company is still early in its business model transition. 

“While we are optimistic on the new management team’s transformation of the company, we see some execution risk,” Thill said. “The last two years have seen many changes at LegalZoom, including a new management team, restructured operations, new expert-assisted products, overhauled partnerships and infrastructure replacements.” 

Thill predicted “relatively modest low to mid-20s percent revenue growth. While this is healthy, it trails that of most of the peers in comp group.” 

Sounding more confident about LegalZoom’s new direction, William Blair analyst Matt Pfau believes that the company could seize market share with its “efficient and cost-effective” online services and products.

“The legal and regulatory aspects of running a business are still mostly managed through offline law practices, which are costly and inefficient for simple tasks,” Pfau said in his coverage report. “Much like Intuit did with TurboTax in the tax preparation market, LegalZoom aims to enable small businesses to complete certain legal transactions themselves through software that guides them through the process.” 

With LegalZoom at “a clear brand advantage” eight times that of its closest competitor, according to Wernikoff, the company intends to continue to expand LegalZoom’s digital transformation in what he sees as a growth opportunity.

“Our journey to democratize law brings with it a compelling economic opportunity,” Wernikoff said in the earnings call. “The $50 billion legal services vertical has seen very little technology adoption and therefore very little innovation in that, last year, just 8 percent of legal services in the United States were provided online.” 

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.
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