LegalZoom (LZ)

Online legal service provider LegalZoom (NASDAQ:LZ) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 5.1% year on year to $183.1 million. The company expects next quarter’s revenue to be around $183 million, close to analysts’ estimates. Its GAAP profit of $0.03 per share was $0.02 above 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 performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, LegalZoom grew its sales at a sluggish 5% compounded annual growth rate. This fell short of our benchmark for the consumer internet sector and is a tough starting point for our analysis.

This quarter, LegalZoom reported year-on-year revenue growth of 5.1%, and its $183.1 million of revenue exceeded Wall Street’s estimates by 3.4%. Company management is currently guiding for a 3.2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

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 10.5% annually to 1.92 million in the latest quarter. This growth rate is solid for a consumer internet business and indicates people are excited about its offerings.

In Q1, LegalZoom added 319,000 subscription units, leading to 19.9% 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 $252. It declined 7.4% year on year, worse than the change in its subscription units.

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 64.2% gross margin over the last two years. Said differently, LegalZoom paid its providers $35.76 for every $100 in revenue.

In Q1, LegalZoom produced a 63.7% gross profit margin, up 2.9 percentage points year on year. LegalZoom’s full-year margin has also been trending up over the past 12 months, increasing by 2.6 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 relatively expensive for LegalZoom to acquire new users as the company has spent 47.5% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that LegalZoom operates in a competitive market and must continue investing to maintain an acceptable growth trajectory.

Investors frequently analyze operating income to understand a business’s core profitability. Similar to operating income, EBITDA is a common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of 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 20.7%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, LegalZoom’s EBITDA margin rose by 15 percentage points over the last few years, as its sales growth gave it operating leverage.

In Q1, LegalZoom generated an EBITDA profit margin of 20.2%, up 4.2 percentage points year on year. The increase was encouraging, and because its EBITDA margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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.

LegalZoom’s full-year EPS flipped from negative to positive over the last three years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, LegalZoom reported EPS at $0.03, in line with the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects LegalZoom to perform poorly. Analysts forecast its full-year EPS of $0.17 will hit $0.17.

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 15.6% 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 13.1 percentage points over the last few years. This is encouraging because it gives the company more optionality.

LegalZoom’s free cash flow clocked in at $41.33 million in Q1, equivalent to a 22.6% margin. This result was good as its margin was 8.4 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 $210 million of cash and $14.61 million of debt on its balance sheet. This $195.4 million net cash position is 14.8% 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.

We enjoyed seeing LegalZoom beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad its number of subscription units outperformed Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter slightly missed, though its full-year outlook was in line. Overall, we think this was a solid quarter with some key metrics above expectations. The stock traded up 8.7% to $7.90 immediately following the results.

Updated: July 8, 2025 at 10:31 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

LegalZoom possesses a number of positive attributes. Although its revenue growth was uninspiring over the last three years, its impressive EBITDA margins show it has a highly efficient business model. And while its ARPU was flat over the last two years, its rising cash profitability gives it more optionality.

LegalZoom’s EV/EBITDA ratio based on the next 12 months is 9.5x. 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 $9.79 on the company (compared to the current share price of $9.03), implying they see 8.4% upside in buying LegalZoom in the short term.