LegalZoom.com (NASDAQ:LZ) lowered its full-year adjusted earnings outlook after a tougher customer acquisition environment weighed on business formations in the third quarter, even as subscription revenue continued to grow.
The company reported third-quarter revenue of $195 million, up 3% from a year earlier, and adjusted EBITDA of $50 million, up 8%. Adjusted EBITDA margin was 26%, an increase of approximately 130 basis points.
LegalZoom maintained the $800 million midpoint of its 2026 revenue outlook but narrowed the range to $797 million to $803 million. It reduced its adjusted EBITDA forecast to $180 million to $185 million, a $10 million reduction at the midpoint, as it spends more on customer acquisition and service capabilities.
Chairman and CEO Jeff Stibel said customer acquisition remains under pressure, particularly through traditional search. The company is investing in partnerships, affiliates and its Business Manager offering to diversify its acquisition channels and increase the value of customer relationships.
Subscriptions Grow as Formations Decline
Third-quarter subscription revenue rose 11% to $140 million, exceeding the company’s expectations. Chief Operating Officer and Chief Financial Officer Noel Watson attributed the growth to increased adoption of legal advisory plans, higher compliance pricing and continued growth in Virtual Mail subscriptions.
Average revenue per subscription unit rose 9%, helped primarily by higher Registered Agent and compliance prices and a greater mix of higher-value services. Total subscription units fell 5% to approximately 1.9 million, reflecting declines in lower-value forms, eSignature and bookkeeping subscriptions bundled with certain formation packages. Excluding those products, the subscription base grew slightly, Watson said.
The company’s 12-month small business retention rate was 57%, unchanged from both the prior quarter and the year-earlier period.
Transaction revenue fell 14% to $55 million, a steeper decline than the company had anticipated. LegalZoom processed approximately 110,000 business formations, down 13%, as pressure on traditional search reduced customer acquisition. Transaction units declined 4% to approximately 249,000, while average transaction order value fell 12% to $222.
Watson cautioned that transaction trends can take longer to appear in subscription results. He said the company expects some resulting drag on subscription revenue, reflected in its fourth-quarter guidance.
Investment Shifts Toward Services and New Channels
LegalZoom’s human-in-the-loop subscription services, which combine technology with service or expert support, accounted for 49% of total revenue and grew approximately 17% year over year. Business Manager subscriptions rose approximately 25% from the prior quarter.
Stibel said LegalZoom began testing a new formation lineup in late September with tiers based on the level of human support customers want. The largest share of customers selected the top tier, he said, and the share choosing that offering had increased more than 50% as of the end of October.
Stibel described the combination of expert support and technology as a potential durable growth opportunity as do-it-yourself services adapt to artificial intelligence. LegalZoom is adding service capacity to support a broader rollout, increasing near-term costs.
The company is also pursuing customers through partnerships. Sales from its Chase Offers program doubled from the second to the third quarter, Stibel said. LegalZoom signed new partnerships with Amex Ads and LivePlan during the quarter and added property management software provider TurboTenant.
Traffic from AI platforms grew almost 50% quarter over quarter, although it remains small. LegalZoom has begun spending on expanded advertising opportunities in Google’s AI Mode. Stibel said the company is testing the channel and would stop spending there if it is not profitable.
Outlook Reflects Higher Acquisition Costs
For the fourth quarter, LegalZoom expects revenue of $190 million to $196 million and adjusted EBITDA of $48 million to $53 million. Its forecast assumes the current search environment persists through year-end and does not assume a recovery in Google traffic. The company expects fourth-quarter transaction revenue to decline at a mid-teens rate year over year.
Watson said more than half of the reduction in the full-year adjusted EBITDA midpoint reflects investment in channels intended to reduce reliance on search, including partnerships, affiliates and paid AI placements. Approximately a quarter reflects weaker acquisition economics, with the remainder tied to sales and service capacity for Business Manager and the new formation lineup.
LegalZoom generated $34 million in third-quarter free cash flow and ended the period with $182 million in cash and no debt. It repurchased approximately $15 million of shares during the quarter, leaving about $66 million under its authorization as of September 30.
On operating efficiency, Watson said the company’s AI agent fully resolves almost half of customer-care chat conversations and nearly a quarter of customer-care calls. Asked about a workforce reduction, he said it was largely to almost entirely tied to efficiencies from AI automation.
About LegalZoom.com (NASDAQ:LZ)
LegalZoom.com, Inc is an online platform that provides legal, compliance and tax-related products and services to individuals, families and small businesses. The company’s platform is designed to make common legal and administrative processes more accessible through digital tools, guided services and access to independent professionals.
LegalZoom’s offerings include business formation services for limited liability companies and corporations, registered-agent services, annual compliance support, business licensing and trademark services.
