LegalZoom (LZ)

Online legal service provider LegalZoom (NASDAQ:LZ) announced better-than-expected revenue in Q3 CY2025, with sales up 12.8% year on year to $190.2 million. On top of that, next quarter’s revenue guidance ($184 million at the midpoint) was surprisingly good and 4% above what analysts were expecting. Its GAAP profit of $0.02 per share was in line with analysts’ consensus estimates.

Company Overview

Founded by famous lawyer Robert Shapiro, LegalZoom (NASDAQ:LZ) offers online legal services and documentation assistance for individuals and businesses.

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.

Competitors offering online legal or document services include H&R Block (NYSE:HRB) as well as private companies Jackson Hewitt and Rocket Lawyer.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, LegalZoom’s sales grew at a sluggish 5.7% compounded annual growth rate over the last three years. This wasn’t a great result compared to the rest of the consumer internet sector, but there are still things to like about LegalZoom.

This quarter, LegalZoom reported year-on-year revenue growth of 12.8%, and its $190.2 million of revenue exceeded Wall Street’s estimates by 3.9%. Company management is currently guiding for a 13.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.9% over the next 12 months, similar to its three-year rate. Although this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average. At least the company is tracking well in other measures of financial health.

User 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 subscription units, a key performance metric for the company, increased by 12.1% annually to 1.96 million in the latest quarter. This growth rate is strong for a consumer internet business and indicates people love using its offerings.

In Q3, LegalZoom added 242,000 subscription units, leading to 14.1% year-on-year growth. The quarterly print was higher than its two-year result, suggesting its new initiatives are accelerating user growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and LegalZoom’s take rate, or "cut", on each order.

LegalZoom’s ARPU has been roughly flat over the last two years. This isn’t great, but the increase in subscription units is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if LegalZoom tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.

This quarter, LegalZoom’s ARPU clocked in at $256. It declined 3% year on year, worse than the change in its subscription units.

A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.

For online marketplaces like LegalZoom, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.

LegalZoom’s gross margin is ahead of the broader industry and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 64.9% gross margin over the last two years. That means for every $100 in revenue, roughly $64.94 was left to spend on selling, marketing, and R&D.

LegalZoom’s gross profit margin came in at 67.3% this quarter, in line with the same quarter last year. On a wider time horizon, LegalZoom’s full-year margin has been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Consumer internet businesses like LegalZoom grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It’s expensive for LegalZoom to acquire new users as the company has spent 51.3% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that LegalZoom’s product offering can be easily replicated and that it must continue investing to maintain an acceptable growth trajectory.

EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view of the business’s profit potential.

LegalZoom has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 21.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, LegalZoom’s EBITDA margin rose by 15.7 percentage points over the last few years, as its sales growth gave it operating leverage.

This quarter, LegalZoom generated an EBITDA margin profit margin of 24.4%, down 3.6 percentage points year on year. Since LegalZoom’s EBITDA margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

In Q3, LegalZoom reported EPS of $0.02, down from $0.06 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects LegalZoom’s full-year EPS of $0.12 to grow 55.9%.

Although EBITDA is undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

LegalZoom has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 16.6% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that LegalZoom’s margin expanded by 17.1 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

LegalZoom’s free cash flow clocked in at $46.99 million in Q3, equivalent to a 24.7% margin. This result was good as its margin was 11.7 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

LegalZoom is a profitable, well-capitalized company with $237.2 million of cash and $14.68 million of debt on its balance sheet. This $222.5 million net cash position is 12.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see LegalZoom’s revenue guidance for next quarter top analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its number of subscription units missed. Overall, this print had some key positives. The stock traded up 8.3% to $11.02 immediately following the results.

Updated: December 4, 2025 at 9:31 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in LegalZoom.

LegalZoom is a fine business. Although its revenue growth was uninspiring over the last three years, its growth over the next 12 months is expected to be higher. And while LegalZoom’s ARPU was flat over the last two years, its impressive EBITDA margins show it has a highly efficient business model. On top of that, its rising cash profitability gives it more optionality.

LegalZoom’s EV/EBITDA ratio based on the next 12 months is 9.2x. Looking at the consumer internet landscape right now, LegalZoom trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $12.36 on the company (compared to the current share price of $9.51), implying they see 30% upside in buying LegalZoom in the short term.