What Happened:
Shares of online legal service provider LegalZoom (NASDAQ:LZ) fell 31.6% in the morning session after the company announced a leadership change and lowered its full-year revenue and free cash flow guidance. LegalZoom announced in a press release that the current Chairman of the Board of Directors, Jeffrey Stibel, has been named CEO, effective immediately. This follows the announcement of the departure of current Chief Executive Officer Dan Wernikoff, who will also resign from the Board.
Separately, the company lowered FY'24 revenue expectation to a range of $675 million to $685 million (vs. previous guidance of $710m at the midpoint) and its free cash flow to a range of $75 million to $85 million (vs. prior guidance of $90m at the midpoint).
Following the announcement, multiple Wall Street analysts downgraded the stock's rating. JMP Securities lowered the stock's rating from Market Outperform (Buy) to Market Perform (Hold), adding, "Investors are likely to take this as a signal of newfound, operational troubles at the company. Since initiating coverage in February, we have been strongly optimistic about LegalZoom's (LZ) continued transition to a subscription-dominant platform. Our thesis — which expected improved results would bear fruit in 2H24 and 2025 — appears compromised."
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What is the market telling us:
LegalZoom's shares are quite volatile and over the last year have had 10 moves greater than 5%. But moves this big are very rare even for LegalZoom and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 2 months ago, when the stock dropped 23.7% on the news that the company reported first quarter earnings. Its revenue guidance for next quarter missed analysts' expectations and its revenue growth was quite weak. Transaction revenue drove the underperformance, down 3%, driven by a 10% decline in average order value, partially offset by a 9% increase in transaction units. While the subscription revenue recorded positive growth, it was impacted by the exit of legacy partners. This affected ARPU as the company focused on more offerings with lower price points. Looking ahead, full-year revenue guidance, while maintained from the previous, also missed. Moving to the bottom line, gross margin fell, while free cash flow narrowly missed expectations. Overall, this was a mediocre quarter for LegalZoom.
LegalZoom is down 45.5% since the beginning of the year, and at $5.95 per share it is trading 61.7% below its 52-week high of $15.51 from August 2023. Investors who bought $1,000 worth of LegalZoom's shares at the IPO in June 2021 would now be looking at an investment worth $157.33.
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