Online legal service provider LegalZoom (NASDAQ:LZ) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 3.04% year on year to $168.9 million. The company also expects next quarter's revenue to be around $160 million, roughly in line with analysts' estimates. LegalZoom made a GAAP profit of $1.4 million, improving from its loss of $13.2 million in the same quarter last year.
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LegalZoom (LZ) Q2 FY2023 Highlights:
- Revenue: $168.9 million vs analyst estimates of $167 million (1.1% beat)
- EPS: $0.01 vs analyst expectations of $0.02 (46.8% miss)
- Revenue Guidance for Q3 2023 is $160 million at the midpoint, roughly in line with what analysts were expecting
- The company lifted revenue guidance for the full year from $640 million to $647 million at the midpoint, a 1.09% increase
- Free Cash Flow of $37.4 million, up 71.6% from the previous quarter
- Gross Margin (GAAP): 62.2%, down from 65% in the same quarter last year
- Subscription Units: 1.55 million, up 159 thousand year on year
“The recent launch of LZ Books reaches across all our strategic growth pillars while solving a large gap in the market. We are setting ourselves apart as the sole online platform providing solutions for small business needs required right at the time of formation and beyond, all under one roof,” 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.
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 which feed back into further customer acquisition.
Sales Growth
LegalZoom's revenue growth over the last three years has been mediocre, averaging 13.4% annually. This quarter, LegalZoom reported lacklustre 3.04% year-on-year revenue growth, in line with analysts' expectations.
Guidance for the next quarter indicates LegalZoom is expecting revenue to grow 3.62% year on year to $160 million, slowing down from the 4.42% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 4.94% over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
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 11.3% annually to 1.55 million. This is decent growth for a consumer internet company.
In Q2, LegalZoom added 159 thousand users, translating into 11.4% year-on-year growth.
Key Takeaways from LegalZoom's Q2 Results
With a market capitalization of $2.96 billion, LegalZoom is among smaller companies, but its $238.9 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
It was good to see LegalZoom add new users this quarter. Business formations and transaction units beat expectations. We were also happy that its revenue growth outperformed Wall Street's expectations, even if just narrowly. On the other hand, its weak revenue growth wasn't great. Also, while next quarter's revenue guidance was in line, adjusted EBITDA guidance was below. Overall, this was a mixed quarter for LegalZoom. The company is down 4.89% on the results and currently trades at $14.6 per share.
So should you invest in LegalZoom 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.
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The author has no position in any of the stocks mentioned in this report.