LegalZoom (NASDAQ:LZ) Misses Q1 Sales Targets, Stock Drops 14.8%

Radek Strnad /
2024/05/07 4:07 pm EDT

Online legal service provider LegalZoom (NASDAQ:LZ) fell short of analysts' expectations in Q1 CY2024, with revenue up 5% year on year to $174.2 million. Next quarter's revenue guidance of $174 million also underwhelmed, coming in 2.5% below analysts' estimates. It made a GAAP profit of $0.02 per share, improving from its loss of $0.01 per share in the same quarter last year.

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LegalZoom (LZ) Q1 CY2024 Highlights:

  • Revenue: $174.2 million vs analyst estimates of $175.4 million (small miss)
  • EPS: $0.02 vs analyst estimates of $0 ($0.02 beat)
  • Revenue Guidance for Q2 CY2024 is $174 million at the midpoint, below analyst estimates of $178.4 million
  • The company reconfirmed its revenue guidance for the full year of $710 million at the midpoint (below expectations)
  • Gross Margin (GAAP): 60.7%, down from 63.6% in the same quarter last year
  • Free Cash Flow of $24.72 million, up 75% from the previous quarter
  • Subscription Units: 1.61 million, up 104,000 year on year
  • Market Capitalization: $2.28 billion

“I am excited by the momentum we are seeing across our ecosystem. We began the year with strong demand for our new compliance offering, continued to enhance our formations experience, and are innovating towards creating a modern technology platform that provides a simple and affordable experience for legal and financial services,” said Dan Wernikoff, LegalZoom’s Chief Executive Officer.

LegalZoom (NASDAQ:LZ) is an online platform that provides online legal services to individuals and small businesses. The company’s co-founders found it difficult and expensive to find lawyers and file paperwork when trying to start a business so they started LegalZoom instead to address this pain point.

Online Marketplace

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.

Sales Growth

LegalZoom's revenue growth over the last three years has been unremarkable, averaging 10.6% annually. This quarter, LegalZoom reported rather lacklustre 5% year-on-year revenue growth, missing analysts' expectations.

LegalZoom Total Revenue

Guidance for the next quarter indicates LegalZoom is expecting revenue to grow 3% year on year to $174 million, slowing from the 3.8% year-on-year increase it recorded in the comparable quarter last year. Ahead of the earnings results, analysts were projecting sales to grow 9.8% over the next 12 months.

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Usage Growth

As an online marketplace, LegalZoom generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Over the last two years, LegalZoom's users, a key performance metric for the company, grew 10.2% annually to 1.61 million. This is decent growth for a consumer internet company.

LegalZoom Subscription Units

In Q1, LegalZoom added 104,000 users, translating into 6.9% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like LegalZoom because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and LegalZoom's take rate, or "cut", on each order.

LegalZoom ARPU

LegalZoom's ARPU growth has been decent over the last two years, averaging 6.8%. The company's ability to increase prices while growing its users demonstrates the value of its platform. This quarter, ARPU grew 5% year on year to $272 per user.

Key Takeaways from LegalZoom's Q1 Results

We struggled to find many strong positives in these results. Its revenue guidance for next quarter missed analysts' expectations and its revenue growth was quite weak. Full yea revenue guidance, while maintained from previous, also missed. Overall, this was a mediocre quarter for LegalZoom. The company is down 14.8% on the results and currently trades at $10.39 per share.

LegalZoom may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.