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    LZ
    Earnings call· Jun 2026(Q2 FY26)

    LEGALZOOM.COM Q2 FY26 earnings call LZ

    Aug 5, 2026 Source

    Executive summary

    LegalZoom Q2 FY26 — Navigating AI-Driven Search Shifts with Diversified Growth

    LegalZoom delivered solid Q2 results, exceeding EBITDA expectations, driven by strong growth in human-in-the-loop subscription services and successful channel diversification. However, the company faces significant headwinds from Google's recent AI-powered search changes, impacting traditional customer acquisition and leading to a more cautious outlook for transaction revenue. Management is accelerating investments in partnerships, brand, and emerging AI channels to offset these structural shifts, while leveraging AI internally to enhance efficiency and profitability.

    Highlights

    5

    • Q2 revenue of $205 million, up 7% year-over-year, in line with guidance.

    • Adjusted EBITDA of $46 million, increased 18% year-over-year, well ahead of guidance.

    • Fifth consecutive quarter of double-digit subscription growth, with subscription revenue up 11% to $133 million.

    • Human-in-the-loop subscription services grew approximately 20% year-over-year, now 65% of subscription revenue and over 40% of total revenue.

    • Partnership orders increased to 11% of total orders, up from 4% a year ago, with new partners including USAA, AAA, PayPal, and Adobe.

    Concerns

    4

    • Q2 business formations declined 5% due to Google's AI-powered search shift, affecting traditional search traffic and increasing paid inventory costs.

    • Full-year revenue guidance lowered to $795 million to $805 million (6% growth at midpoint) due to cautious customer acquisition outlook.

    • Q3 revenue guidance of $192 million to $196 million (2% growth at midpoint), assuming high single to low double-digit decline in transaction revenue.

    • Workforce reduction of approximately 13% announced, resulting in $6 million of restructuring charges primarily in Q3.

    Guidance & targets

    7
    CategoryTargetConfidence
    Full-year revenue
    $795M-$805M
    high materiality
    Medium
    Full-year adjusted EBITDA
    $190M-$195M
    high materiality
    High
    Q3 revenue
    $192M-$196M
    medium materiality
    Medium
    Q3 adjusted EBITDA
    $49M-$51M
    medium materiality
    High
    Transaction revenue decline
    high single to low double-digit decline
    high materiality
    Medium
    ARPU growth driver
    primary driver of subscription growth
    low materiality
    High
    Lower value subscriptions decline
    continue through the remainder of the year
    low materiality
    High

    Operational metrics

    30
    Adjusted EBITDA
    $46Mup 18% YoY
    Q2 FY26

    Well ahead of the high end of guidance, driven by significant improvement in gross margin.

    Adjusted EBITDA margin
    22%expanded approximately 220 bps
    Q2 FY26

    Translated into strong free cash flow generation.

    Subscription revenue
    $133Mincreased 11% YoY
    Q2 FY26

    Represented 65% of total revenue, an increase of 300 basis points year-over-year.

    Human-in-the-loop subscription services revenue growth
    approximately 20%YoY
    Q2 FY26

    This portfolio includes registered agent, virtual mail, legal plans, IP-related services, and business manager.

    Human-in-the-loop subscriptions as % of total revenue
    over 40%
    Q2 FY26

    Reflects increased adoption of higher value products and thoughtful pricing.

    ARPU
    5%increased
    Q2 FY26

    Benefiting primarily from higher pricing in human-in-the-loop offerings.

    Subscription units
    1.9Mdown 3%
    Q2 FY26

    Decline due to shift towards higher value offerings, with expected decline in lower value subscriptions bundled within formation packages.

    Transaction revenue
    $72Mdown 1% YoY
    Q2 FY26

    Reflecting lower business formations, partially offset by growth in consumer and IP-related offerings.

    Transaction units
    281,000increased 1%
    Q2 FY26

    Driven primarily by higher annual report filing volumes for compliance customers.

    Business formations
    125,000decline of 5%
    Q2 FY26

    Reflecting the shift to AI-powered search.

    Transaction AOV
    $256down 2%
    Q2 FY26

    Primarily due to changes in composition of bundled small business offerings, shifting order value to subscription products.

    Gross profit
    $146M
    Q2 FY26

    Gross margin expanded approximately 250 basis points to 71%.

    Gross margin
    71%expanded approximately 250 bps
    Q2 FY26

    Reflects favorable subscription mix and continued customer care and fulfillment efficiencies due to increasing automation.

    Sales and marketing expenses
    increased 14%YoY
    Q2 FY26

    Reflecting dynamic search environment and investment in diversified customer acquisition initiatives.

    Non-CAM sales and marketing expenses
    $3Mincreased 20%
    Q2 FY26

    Largely from targeted investments in the sales organization supporting expert-led revenue growth.

    Technology and development expenses
    declined 4%YoY
    Q2 FY26

    Improving overall operating leverage.

    G&A expenses
    declined 10%YoY
    Q2 FY26

    Improving overall operating leverage.

    Cash and cash equivalents
    $167Msequential decline from Q1
    Q2 FY26

    Decline includes $46 million for share repurchases, partially offset by free cash flow generation.

    Share repurchases
    $46M
    Q2 FY26

    Partially offset by free cash flow generation.

    Remaining share repurchase authorization
    $80M
    as of Jun 30, 2026

    Provides flexibility for capital allocation.

    Partnership orders as % of total orders
    11%up from 4% a year ago
    Q2 FY26

    Achieved through expansion of partner portfolio, deeper integrations, and investment in partner go-to-market program.

    Unaided brand awareness
    increased approximately 10%YoY
    Q2 FY26

    Returns from brand investments remain strong.

    Aided brand awareness
    increased 18%YoY
    Q2 FY26

    More than 70% of US households are familiar with LegalZoom.

    Traffic from AI platforms growth
    more than 250%QoQ
    Q2 FY26

    Accounts for approximately 3% of LLC formations traffic in June, with visitors arriving with high intent and converting at higher rates.

    Customer utilization of legal plans
    over 35%YoY increase
    Q2 FY26

    Evidenced by increased bundling of legal subscriptions into formation packages.

    Workforce reduction
    approximately 13%
    Q2 FY26

    Part of organizational evolution to simplify structure and align resources, effective immediately.

    In-year savings from workforce reduction
    $7M
    FY26

    Expected to further strengthen operating leverage and support sustained profitable growth.

    Annualized savings from workforce reduction
    $14M
    Annualized

    Expected to further strengthen operating leverage and support sustained profitable growth.

    Restructuring and related charges
    $6M
    Q3 FY26

    Primarily in the third quarter due to workforce actions.

    Customer acquisition marketing (CAM) spend
    step up a couple pointsrelative to prior year
    FY26

    Reflects investment in channel diversification, including brand and partner channels.

    Industry KPIs

    2
    MetricValueDetails
    Retention ratestable
    Revenue model mix65%%

    Product announcements

    1
    ProductTypeDetails
    Microsoft 365 Co-Pilot integrationlaunch

    Deals & partnerships

    8
    USAANew partner to expand LegalZoom's presence across trusted brands serving small businesses.

    Part of continued expansion of partner portfolio and deeper embedded integrations.

    AAANew partner to expand LegalZoom's presence across trusted brands serving small businesses.

    Part of continued expansion of partner portfolio and deeper embedded integrations.

    PayPalNew partner to expand LegalZoom's presence across trusted brands serving small businesses.

    Part of continued expansion of partner portfolio and deeper embedded integrations.

    AdobeNew partner to expand LegalZoom's presence across trusted brands serving small businesses.

    Part of continued expansion of partner portfolio and deeper embedded integrations.

    ChatGPTIntegration to embed LegalZoom directly into AI workflows.

    Part of broader AI distribution strategy to ensure LegalZoom is the legal layer of AI for small businesses.

    ClaudeIntegration to embed LegalZoom directly into AI workflows.

    Part of broader AI distribution strategy to ensure LegalZoom is the legal layer of AI for small businesses.

    CopilotIntegration to embed LegalZoom directly into AI workflows.

    Part of broader AI distribution strategy to ensure LegalZoom is the legal layer of AI for small businesses.

    PerplexityIntegration to embed LegalZoom directly into AI workflows.

    Part of broader AI distribution strategy to ensure LegalZoom is the legal layer of AI for small businesses.

    Capital programs

    1
    Workforce Reductionunderway
    Start: Q2 FY26

    Benefit: $7M net in-year savings; $14M annualized savings

    Organizational evolution to simplify structure, sharpen strategic focus, and align resources behind highest priority growth opportunities. Expected to strengthen operating leverage and support sustained profitable growth. Follows a 5% workforce reduction earlier in the year.

    Risks & headwinds

    4
    Google's AI-powered search shiftOngoing, started in H2 Q2 FY26

    Q2 business formations declined 5%; lower customer acquisition; increased cost per click for paid inventory; Q3 transaction revenue expected to decline high single to low double-digits.

    Mitigation: Accelerating channel diversification (partnerships, brand, AI-driven channels); investing in generative engine optimization (GEO) and AI engine optimization (AEO); deepening investments beyond traditional search into upper funnel media.

    Increased uncertainty in traditional search channelsRemainder of FY26

    Outlook assumes current search environment remains broadly consistent through year-end, but acknowledges increased uncertainty.

    Mitigation: Focus on what's within control: driving human-in-the-loop subscriptions, accelerating partnerships, deepening brand presence, and converting AI channel traction.

    Lag effect on subscription growth from new customer acquisition pressureH2 FY26 and into FY27

    Some impact on new customer acquisition, which creates pressure in H2 FY26 and into FY27, especially since there's some lag effect on the subscription side.

    Mitigation: Focus on durability of two-thirds subscription business; continued investments in higher-value services, engagement, and retention; pricing power across numerous subscriptions.

    Restructuring charges from workforce reductionQ3 FY26

    Approximately $6 million of restructuring and related charges, primarily in Q3 FY26.

    Mitigation: Expected to result in $7 million of net in-year savings and $14 million annualized savings, strengthening operating leverage and supporting profitable growth.

    What to watch in Q3 FY26

    5

    Transaction revenue decline

    Q3 FY26
    Current5% decline in Q2 business formations
    TargetHigh single to low double-digit decline in Q3 transaction revenue

    Why it matters

    This metric will indicate the immediate impact of Google's search changes and the effectiveness of initial mitigation efforts on new customer acquisition.

    Our guidance assumes a high single to low double-digit decline in transaction revenue based on the aforementioned acquisition trends.

    Q&A highlights

    7

    Why are higher-value initiatives taking longer to benefit the top line, and are there higher churn or tougher go-to-market motions for these products?

    Management is encouraged by the higher-value human-in-the-loop offerings, which are growing significantly faster than the rest of the business (approaching 20% growth and 40% of total revenue). They are just starting to re-evaluate packaging and promotion, but see good strength and stable retention.

    “we're actually pretty encouraged with the higher value products and you know if you look at our human in the loop offerings generally both service and expertise those are growing at orders of magnitude faster than the rest of the business so we're actually seeing real strength there”

    asked by Ella Smith · answered by Unknown Speaker

    2 min read5 chapters

    Detailed Narrative

    01

    Impact of Google's AI-Powered Search Shift

    Google's recent acceleration to AI-powered search, with AI-generated answers replacing traditional clicks, has significantly impacted LegalZoom's top-of-funnel traffic. The majority of traditional search traffic, both organic and paid, historically ran through Google. This shift has led to fewer visits from informational queries, increased cost per click for paid inventory, and lower customer acquisition through traditional search channels, resulting in a 5% decline in business formations in Q2. Management views this as a repricing of a legacy channel, not a structural change in underlying demand.

    02

    Channel Diversification and AI Strategy

    In response to the evolving search landscape, LegalZoom is doubling down on channel diversification. Partnerships now represent 11% of total orders, up from 4% a year ago, with new partners like USAA, AAA, PayPal, and Adobe. Traffic from emerging AI platforms (ChatGPT, Claude, Copilot, Perplexity) grew over 250% quarter-over-quarter and accounted for approximately 3% of LLC formations traffic in June, converting at higher rates. The company is investing in 'generative engine optimization' (GEO) and 'AI engine optimization' (AEO) to ensure favorable surfacing in AI-generated answers, leveraging its unique authority as the only online formations provider with its own law firm.

    03

    Human-in-the-Loop Offerings Driving Growth

    LegalZoom's strategy focuses on expanding its portfolio of human-in-the-loop offerings, combining AI with trusted human expertise. Revenue from these services grew approximately 20% year-over-year in Q2 and now represents 65% of subscription revenue and over 40% of total revenue. This includes registered agent and virtual mail subscriptions, as well as legal plans, IP-related services, and rebranded 'business manager' concierge offerings. Customer utilization of legal plans increased over 35% year-over-year, indicating strong demand for expert guidance.

    04

    Operating Efficiency and Workforce Reduction

    The company continues to improve operating efficiency through AI and automation. Gross margin expanded 250 basis points to 71% in Q2, driven by favorable subscription mix and customer care/fulfillment efficiencies. To further strengthen operating leverage and align resources, LegalZoom announced a 13% workforce reduction, effective immediately. This action is expected to result in approximately $7 million of net in-year savings and $14 million on an annualized basis, with $6 million in restructuring charges primarily in Q3.

    05

    Financial Performance and Capital Allocation

    LegalZoom reported Q2 revenue of $205 million, up 7% year-over-year, and adjusted EBITDA of $46 million, up 18%, exceeding guidance. Adjusted EBITDA margin expanded to 22%. The company generated $34 million in free cash flow, up 7%, and maintains a debt-free balance sheet with $167 million in cash and cash equivalents. During the quarter, $46 million was used for share repurchases (7.3 million shares), with $80 million remaining under authorization. The capital allocation strategy balances growth investments, strategic M&A, and returning capital to shareholders.

    AI-generated summary of the company’s earnings call. Not investment advice.