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DATE

Wednesday, Aug. 5, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Head of Investor Relations - Madeline Crane
• Chairman and Chief Executive Officer - Jeffrey Stibel
• Chief Operating Officer and Chief Financial Officer - Noel Watson

TAKEAWAYS

• Revenue -- $205.3 million, up 7% year over year driven by an 11% increase in subscription revenue.
• Subscription Revenue -- $133.4 million, increasing 11% year over year reflecting strength in human-in-the-loop offerings and pricing initiatives.
• Transaction Revenue -- $71.9 million, a 1% year-over-year decrease resulting from lower business formation volumes.
• Adjusted EBITDA -- $45.9 million, up 18% year over year and exceeding the high end of guidance due to improved gross margins.
• Free Cash Flow -- $33.7 million, growing 7% year over year from strong profitability and cash generation.
• Business Formations -- 125,000, down 5% year over year due to reduced search traffic from Google's informational query changes.
• Subscription Units -- approximately 1.9 million, down 3% year over year as the company shifts focus to higher-value offerings.
• Average Revenue Per Subscription Unit -- $270, up 5% year over year benefiting from pricing actions in human-in-the-loop services.
• Partnership Order Volume -- 11% of total orders, up from 4% in the prior year as the company diversifies customer acquisition.
• Workforce Reduction -- 13% of headcount, intended to simplify the organizational structure and align resources with priority growth initiatives.
• Full Year Revenue Guidance -- $795 million to $805 million, reflecting a 6% year-over-year growth midpoint and a more cautious acquisition outlook.
• Full Year Adjusted EBITDA Guidance -- $190 million to $195 million, representing a 24% margin at the midpoint.
• Third Quarter Revenue Guidance -- $192 million to $196 million, representing 2% growth at the midpoint.
• Third Quarter Adjusted EBITDA Guidance -- $49 million to $51 million, implying a 26% margin.
• Gross Margin -- 71% on a non-GAAP basis, expanding 250 basis points due to automation and favorable product mix.
• Human-in-the-Loop Subscription Revenue -- Growing approximately 20% year over year and now comprising over 40% of total revenue.
• AI Platform Traffic -- Growing more than 250% quarter over quarter and accounting for approximately 3% of LLC formation traffic in June.
• Share Repurchases -- $45.5 million in the quarter, with $80.4 million remaining under the current authorization.
• Transaction Units -- 281,000, up 1% year over year driven by higher annual report filing volumes.
• Average Order Value -- $256, down 2% year over year primarily from changes in bundled small business offering compositions.

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RISKS

• Stibel stated, "The majority of our traditional search traffic both organic and paid, historically run through Google. As AI generated answers replace clicks on informational queries, fewer of those visits reach us. And paid inventory has become more expensive. That pressure is real, and we are feeling it now."

SUMMARY

Management at LegalZoom.com, Inc. (LZ -0.18%) reported a strategic shift toward subscription-based relationships and human-led expertise to offset headwinds in traditional search environments. The company is actively diversifying its customer acquisition strategy by expanding its partner ecosystem and investing in generative engine optimization. Strategic organizational changes, including a significant headcount reduction, aim to streamline operations and leverage AI-enabled workflows. Financial guidance for the remainder of the year reflects a cautious outlook on customer acquisition while maintaining focus on profitability and cash flow generation.

• Management noted that changes in search engine behavior impact customer discovery pathways while core customer needs remain consistent.
• The company is embedding its services directly into AI workflows, with CEO Stibel noting a new agent integration with Microsoft 365 Copilot for business formation and compliance management.
• CEO Stibel attributed growth in AI discovery to "authority advantage" as the only online formation provider with an owned law firm, which helps earn citations in AI responses.
• CFO Watson noted that the 13% headcount reduction is expected to generate $14 million in annualized savings.
• Management reported that unaided brand awareness increased approximately 10% year over year, while aided awareness rose 18%.
• The company recently added USAA, AAA, PayPal, and Adobe to its strategic partner portfolio to drive higher intent customer acquisition.

INDUSTRY GLOSSARY

• AEO (Answer Engine Optimization): The process of optimizing content to appear in the direct answers provided by AI-powered search engines.
• ARPU (Average Revenue Per Subscription Unit): A metric calculated by dividing total subscription revenue by the total number of subscription units.
• CAM (Customer Acquisition Marketing): Spending specifically targeted at acquiring new customers through various media and search channels.
• GEO (Generative Engine Optimization): Strategies used to improve a brand's visibility and ranking within generative AI models like ChatGPT or Google SGE.
• Human-in-the-Loop: A model that combines automated technology or AI with human oversight and expertise to deliver services.
• LLC (Limited Liability Company): A business structure in the United States that protects its owners from personal liability for business debts or legal disputes.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to LegalZoom's Second Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Madeline Crane, Head of Investor Relations. Please go ahead.

Madeleine Crane: Thank you, operator. Welcome to LegalZoom's second quarter 26 earnings conference call. Joining me today is Jeffrey Stibel, our Chairman and Chief Executive Officer and Noel Watson, our chief operating officer and chief financial officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, will, intend, and similar expressions. And are not and should not be relied upon as a guarantee of future performance or results. Such forward-looking statements are based on management's assumptions and expectations, information available to us as of today's date.

These forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in the press release we issued today and in the Risk Factors section of our most recent quarterly report on Form 10 Q filed with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements whether as a result of any new information, future events, or otherwise. In addition, we will also discuss certain non GAAP financial measures. We use non GAAP measures in making decisions regarding our business, and we believe these measures provide helpful information to investors.

These non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of all non GAAP measures to the most directly comparable GAAP measure are set forth in our investor presentation which can be found on the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.

Jeffrey Stibel: Thank you, Madeleine. and thank you all for joining our call. LegalZoom continues to execute against our strategy of building the leading services and expertise platform for small businesses. Combining AI with trusted human expertise. We delivered second quarter revenue of $205 million up 7% year over year, and in line with our guidance. Adjusted EBITDA of $46 million increased approximately 18% year-over-year. Well ahead of the high end of our guidance. Q2 also marked our fifth consecutive quarter of double digit subscription growth. Since late 24, we have steadily increased the mix of recurring subscription revenue in our business by acquiring customers who find ongoing value in our platform.

These results reflect the momentum of the growth levers we have been building for the last year. Expanding our portfolio of expert and service offerings, accelerating the use of AI across the business, and intentionally diversifying how we acquire customers. Making our go to market model more resilient, less dependent on any single channel. Those investments in diversification were built for exactly this moment. During the quarter, Google accelerated their shift to AI powered search. With AI generated answers increasingly replacing traditional clicks. This is affecting top-of-funnel traffic across our industry. And I want to be specific about what it means for us because there are 2 very different currents underneath it.

The first is the pressure in our updated outlook, and it is concentrated in 1 place. The majority of our traditional search traffic both organic and paid, historically run through Google. As AI generated answers replace clicks on informational queries, fewer of those visits reach us. And paid inventory has become more expensive. That pressure is real, and we are feeling it now. To be clear, this is the repricing of a single legacy channel. It is significant but bounded. The second current runs the other way. Across the AI platforms where discovery is moving, we start from essentially zero. So every visit is incremental. That traffic grew more than 250% quarter-over-quarter.

Today, we have the highest brand references across AI platforms of any competitor. Our exposure to the old channels being repriced, Our position in the new channels represents upside. And our outlook reflects the full weight of the first and very little of the second. This is a change in how customers find us not in what they need from us. We have responded by doubling down on channel diversification. Expanding partnerships, strengthening our brand, and increasing our presence across AI driven channels. I will discuss those efforts in more detail shortly. Across each of our key growth levers, 1 principle remains constant. AI has made answers abundant, but it has not made them accountable.

When entrepreneurs move from asking questions to completing important legal, compliance, and business tasks, human expertise, accountability, and trusted execution still matter. We have seen this directly in our engagement data, and that is where LegalZoom has differentiated itself for more than 25 years. Our first growth lever is expanding our portfolio of human in the loop offerings. We have discussed these offerings for several quarters, but we now have real scale and real growth to show for it. And we want to give more color on both. This lever is working, increasingly displacing our older, lower value products. We believe this remains 1 of our strongest competitive advantages. And 1 of our most attractive long term growth opportunities.

Our portfolio spans 2 complementary layers across our subscription and transaction offerings. First, our service layer. Including registered agent, and virtual mail subscriptions. Which provides the operational infrastructure businesses rely on to stay organized and operate with confidence. Second, our expert layer. This includes legal plans, IP related services, and our do it for me concierge offerings, that have now been rebranded as business manager. This layer combines professional guidance, technology, to help customers solve more complex business needs. In Q2, revenue from our human in the loop subscription services grew approximately 20% year-over-year. And now represents ~65% of subscription revenue. On a total company basis, our human in the loop subscriptions are now >40% of total revenue.

That growth reflects both increased adoption of our higher value products and our ability to thoughtfully price services like registered agent, and business manager as we continue expanding our service offerings. We also experienced significant growth in our legal plans. Where bundling legal subscriptions into formation packages is introducing more customers to ongoing legal guidance and driving higher engagement with attorney cons consultations. We believe AI is educating customers more but they are still turning to us for answers. This is evidenced by a >35% year over year increase in customer utilization of our legal plans this past quarter. We are seeing similar demand in our transactional expert services, including attorney assisted trademark filings, and business manager reinstatements.

Early evidence that customers will pay for expertise at each stage of the business life cycle. Ultimately, our human-in-the-loop portfolio is allowing us to address a greater portion of our addressable market beyond business formations. By combining technology, with trusted human expertise, we believe we are well positioned to serve both new entrepreneurs and the millions of established small businesses that need ongoing legal and compliance support as their business evolves and grows. Moving to our next growth lever. As a reminder, over the past year, we have been intentionally diversifying our customer acquisition channels by expanding partnerships strengthening our brand, investing in AI driven distribution. The evolving search landscape reinforces the importance of that strategy.

To clarify the mechanics behind what I described earlier, in the second quarter, we saw fewer high intent visits from Google's informational search query. As AI-generated answers, reduced click through to websites. While competition for paid inventory increased. Driving higher cost per click and making paid search less efficient. Those dynamics have translated into lower customer acquisition through our traditional search channels. And ultimately, lower business formation volume. Importantly, the pressure is most concentrated in informational search traffic. And does not reflect a structural change in the underlying opportunity we see across partnerships brand, and AI driven channels. We are accelerating execution on each of those fronts. At the same time, our objective is not simply to maximize formation volume.

It is to acquire new and existing small businesses who are more likely to build long term relationships with LegalZoom. 1 of the clearest examples is our partnerships business. 12 months ago, partnerships represented a relatively small portion of our acquisition strategy. Today, leveraging our category leadership, we have created meaningful momentum as we continue to expand both the breadth of our partner ecosystem and the depth of those relationships. Customers who come through our partners typically arrive with higher intent and stronger engagement. Creating better opportunities to introduce our subscription offerings and build deeper customer relationships. In Q2, total order volumes from partnerships increased to ~11% of total orders. Up from ~4% a year ago.

We achieved this through the continued expansion of our partner portfolio. Deeper embedded integrations, and investing in our partner go to market program. We continue to see a healthy pipeline of opportunities and remain confident this channel will play an increasingly important role in our growth over time. We have recently welcomed new partners, including USAA, AAA, PayPal, and Adobe. Further expanding LegalZoom's presence across trusted brands serving small businesses. We are systematically building this new acquisition engine. 1 focused on repeatability, attractive unit economics, and growing customer lifetime value. Our marketing investments remain focused on improving both awareness and customer quality. In response to the recent traffic changes, we are deepening our investments beyond traditional search into new channels.

Including strategic partnerships, emerging AI referral channels, and upper-funnel media. Additionally, we are closely monitoring and aggressively adapting to new AI enabled features within the traditional search space. such as AI Max. We are focused on widening our competitive differentiation through attorney backed experiences, bundled offerings, and industry leading guarantees. Giving customers more reason to choose LegalZoom. Returns from our brand investments remain strong. In Q2, unaided brand awareness increased approximately 10% year over year. While aided awareness increased ~18%. Today, >70% of US households are familiar with LegalZoom. As awareness grows, we are experiencing improvements in the efficiency of our performance marketing helping us attract more qualified customers across our paid channels. Finally, our approach to emerging AI channels.

Over the past year, we have announced integrations across ChatGPT, Claw, Copilot, Perplexity. We have also been testing, selling, and onboarding AI products directly to small business customers through our business managers. We view these as components of a broader AI distribution strategy rather than stand alone partnerships. As entrepreneurs incorporate AI tools into how they form, operate, and grow their businesses our objective is simple. Ensure they look to LegalZoom as the legal layer of AI throughout the small business life cycle. This approach has 3 components. First, we are investing in visibility. Helping ensure LegalZoom's position as 1 of the most trusted and frequently referenced brands for business formations and compliance across leading AI platforms.

Much like we previously established our position in traditional search, we have been deliberately focused on generative engine optimization or GDO, Over the past year, to ensure we surface favorably inside AI generated answers. And we are doubling down on that investment. What differentiates our approach is authority. A factor we know carries significant weight in how AI platforms rank and surface brands. As the only online formations provider with an owned law firm, we have a structural advantage our peers cannot replicate. Attorney written content, That positions us earn citations and AI generated responses in a way that is genuinely unique to LegalZoom. Second, we are testing and scaling customer acquisition within emerging AI experiences.

Including paid AI environments, as new distribution models develop. As I noted earlier, traffic from AI platforms grew more than 250% quarter-over-quarter. And accounted for ~3% of our LLC formations traffic in June. These visitors also arrive with high intent, and convert at higher rates than traditional organic search traffic. And third, we are embedding LegalZoom directly into AI workflows. Through integrations like ChatGPT, Claude, and most recently Microsoft Copilot. Making it easier for customers to move seamlessly from asking questions to taking action. We recently announced a new agent integration directly into the Microsoft 365 Copilot. Allowing users to evaluate business formation options, manage business compliance, and connect with attorneys without leaving their daily Microsoft workflow.

We are pleased with our early progress. Today, LegalZoom has partnered with the leading AI companies and is at the forefront of AI integrations. Giving us confidence we are well positioned as AI becomes an increasingly important source of customer discovery. Lastly, we continue to focus on leveraging AI to improve both the customer experience and how we operate our business. Today, we announced the next step in our organizational evolution, a transformation we began more than a year ago. We are simplifying how LegalZoom is organized, sharpening our strategic focus, and aligning resources behind our highest priority growth opportunities. That work is enabled in part by AI. Which is now embedded across our operations.

Allowing us to serve customers with greater speed and consistency. As part of these changes, we have reduced our workforce by ~13%. These decisions are never easy. And I want to thank our departing colleagues for their many contributions to LegalZoom. We believe these changes position us to execute with greater focus, quality, and speed. While continuing to invest behind our key growth initiatives. Stepping back, while the current search environment has created near term pressure, it reinforces, not changes, the strategy we have been building. We are growing higher value, human in the loop subscription relationships. We are expanding beyond traditional customer acquisition through partnerships, brand, and AI.

And we are using AI not only to help customers succeed, but to make LegalZoom a faster, more efficient, and more agile company. We believe the companies that win in this next chapter will not simply be the ones that answer questions. But be the ones that help customers take action with confidence. For more than 25 years, that is been LegalZoom's role. We believe our combination of technology, trust and expertise, and long term customer relationships positions us well for the future. I am personally proud of our team for their unwavering dedication to our company and to 1 another. To each of you, you continue showing up for our customers, and that says everything about who you are.

I am grateful to be part of LegalZoom. Thank you, and I will now turn it over to Noel to discuss our second quarter financial results and updated outlook in more detail. Noel?

Noel Watson: Thanks, Jeffrey, and good afternoon, everyone. We continue to make disciplined investments to drive higher quality subscription revenue growth. Diversify customer acquisition, and improve operating efficiency while delivering strong profitability. Our second quarter results demonstrate meaningful progress across each of these priorities. In Q2, subscription revenue represented 65% of total revenue. An increase of 300 basis points year-over-year, supported by stable retention, and ARPU growth. Adjusted EBITDA of $46 million came in above the high end of our guidance range, driven by a significant improvement in gross margin, as we leverage AI and automation to improve both the quality and efficiency with which we deliver our services to our customers.

Adjusted EBITDA margin was 22%, which translated into strong free cash flow generation of $34 million. Turning now to our second quarter results in more detail. Unless otherwise stated, all comparisons will be on a year-over-year basis. Revenue for the quarter was $205 million representing 7% growth and in line with the midpoint of our guidance range. Subscription revenue increased 11% to $133 million We are continuing to shift the composition of our business toward recurring revenue streams as we aim to drive stronger customer lifetime value and more durable long term growth. Subscription revenue showed continued momentum across our human in the loop subscription portfolio, including our legal advisory subscriptions, reflecting increased bundling within select formation offerings.

Registered agent, building on last year's pricing and value initiatives, and continued growth in virtual mail, and business manager. As a result, ARPU grew 5%, benefiting primarily from higher pricing in our human in the loop offerings. We continue to expect ARPU to be the primary driver of subscription growth throughout the year, As we focus on shifting our mix towards higher value offerings, we are seeing an expected decline in lower value subscriptions bundled within the formation package, we expect to continue through the remainder of the year. As a result, we ended the quarter with ~1.9 million subscription units. down ~3%.

Importantly, retention remained stable, supported by strength across our compliance offerings and human in the loop services and ongoing improvements to our customer experience. Transaction revenue was $72 million down 1%. Reflecting lower business formations, partially offset by continued growth in our consumer and IP related offerings. Once again, the growth in IP reflects increasing demand for our expert led services. Transaction units increased 1% to ~281 thousand driven primarily by higher annual report filing volumes for our compliance customers. We processed approximately 125 thousand businesses during the quarter, a decline of ~5%. Reflecting the shift to AI powered search that Jeffrey described earlier.

Importantly, formations from strategic partnerships continued to offset a portion of that pressure and represented a growing share of overall formation volume. Transaction AOV was $256, down ~2% primarily due to changes in composition of our bundled small business offerings resulting in an increased allocation of order value shifting to subscription products. This decrease was partially offset by an increase in higher value consumer and IP related offerings. Finally, deferred revenue declined ~$2 million sequentially. Turning to profitability. All metrics are on a non GAAP basis. We continue to expand profitability, while investing behind the long term growth priorities Jeffrey outlined. Gross profit increased to $146 million while gross margin expanded approximately 250 basis points to 71%.

This improvement reflects a favorable subscription mix and continued customer care and fulfillment efficiencies due to increasing automation across our operation. Sales and marketing expenses increased 14%, including a 13% increase in customer acquisition marketing. Reflecting the dynamic search environment, and investment in our diversified customer acquisition initiatives. Consistent with our focus on customer quality over volume, we are prioritizing acquisition spend in channels we believe will have the strongest defensibility and unit economics, over the long term. Non CAM sales and marketing expenses increased ~$3 million or 20%. Largely from targeted investments in our sales organization. Which is supporting the expert led revenue growth you are seeing in these results.

Technology and development expenses declined 4%, while G&A declined 10%. Improving overall operating leverage. Those efforts resulted in adjusted EBITDA of $46 million an increase of 18% with adjusted EBITDA margin expanding approximately 22 basis points. Our balance sheet remains a source of strength, and continues to provide us with significant financial flexibility During the quarter, we generated $34 million in free cash flow an increase of 7%. Reflecting the continued profitability and cash generating nature of our business. We maintain a debt free balance sheet and our $100 million revolving credit facility remains fully undrawn. We ended the quarter with $167 million in cash and cash equivalents.

A sequential decline from the first quarter includes approximately $46 million for 7.3 million shares repurchased. Partially offset by the free cash flow generation. As of June 30, 2026, we had ~$80 million remaining under our authorization. Looking ahead, we continue to expect strong free cash flow generation for the full year, providing the flexibility to execute a balanced capital allocation strategy. That includes investing behind our key growth opportunities, evaluating strategic M&A opportunities, and the ability to return excess capital to shareholders. Turning now to our outlook. For the full year, we expect revenue in the range of $795 million to $805 million representing year over year growth of approximately 6% at the midpoint.

Our guidance assumes the continued scaling of our subscription growth initiative. And ongoing momentum from our partner channel, partially offset by a more cautious view of customer acquisition for the remainder of the year. This is based on the impact of the experience changes Google implemented during the quarter and that have persisted through today. Our outlook assumes the current search environment remains broadly consistent through year end. As customer discovery continues to evolve, we expect to be navigating increased uncertainty with regard to the performance of traditional search channels.

While we are encouraged by the progress we are making through partnerships, increased investment in our brand and emerging AI distribution channels, those initiatives will take time to fully compensate the near term impact of these recent changes. For the third quarter, we expect revenue of $192 million to $196 million representing year over year growth of approximately 2% at the midpoint. Our guidance assumes a high single to low double digit decline in transaction revenue based on the aforementioned acquisition trend. Turning to profitability. We continue to execute against the AI enabled operating model we have been building for more than a year.

As we have discussed in prior earnings calls, our profitability outlook has assumed continued productivity improvements from AI disciplined cost management, the evolution of our operating model. The organizational actions we announced today represent the next phase of that evolution. Over the past year, we have invested in AI capabilities, redesigned workflows, and simplified how work gets done across the company. Earlier this year, we announced a 5% workforce reduction as part of that Today's actions continue that work by further simplifying our organizational structure and aligning resources behind our highest priority growth initiatives. Resulting in a 13% headcount reduction. Over time, we expect this to further strengthen operating leverage and support sustained profitable growth.

We expect these workforce actions to result in ~$7 million of net in year savings or ~$14 million on an annualized basis. We also expect ~$6 million of restructuring and related charges primarily in the third quarter. We now expect full year adjusted EBITDA of $190 million to $195 million representing an adjusted EBITDA margin of approximately 24% at the midpoint. Our profitability outlook expects continued gross margin improvement focused expense management and the benefits of our evolving AI enabled operating model. For the third quarter, we expect adjusted EBITDA of $49 million to $51 million or a margin of approximately 26% at the midpoint. Inclusive of the impact from the workforce actions announced today.

As we look ahead, our focus is on what is within our driving high value human in the loop subscriptions growth, accelerating our partnerships momentum, deepening our brand presence, and converting our early AI channel traction into durable opportunity. We are executing against each of those fronts staying focused on customer quality, margin expansion, and free cash flow generation. Finally, I would like to thank all of our employees for their continued resilience and commitment to our customers and our organization. Your hard work and focus have been instrumental in executing our strategy positioning LegalZoom for long term success. With that, I will turn the call back to the operator for questions.

Operator: Thank you. As mentioned, at this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Your first question comes from the line of Eleanor Smith with JPMorgan. Your line is now open.

Ella Smith: Good evening. Thank you for taking my questions. So first, I was hoping to ask about the higher value initiatives. It seems like they are taking longer to benefit the top What have you learned about the go to market motion on those new higher value products like in the last few months? And I am just wondering, they coming with any higher churn or tougher go to market motion than your existing subscription products?

Jeffrey Stibel: Sure. Thanks, Eleanor. We are 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 are we are actually seeing real strength there. You know, they are now approaching 20%, in terms of growth and ~40% of total revenue. So we are we are actually seeing what we believe is good strength there. We are just coming up on renewal cycles. We are just starting to reevaluate how we package, how we promote, and how we engage. But we are, you know, we are pretty encouraged.

Ella Smith: Perfect. Thank you, Jeffrey. And for a follow-up, you were early to partner with some of the AI majors, so I am just curious what you envision that you could still do to drive improvement in business formation traffic from those AI majors.

Jeffrey Stibel: Yeah. Great question. We continue to be excited I think we were, you know, very early to adopt generally and likely first in our category. I think there is 3 key areas, and we are starting to see proof points in each of them. The, you know, the first from our standpoint is just visibility and brand recognition. And, you know, we know we have the authority advantage and, you know, are, you know, are driving positive results there. The second is with respect to going in through GEO and AEO where we are having, you know, significant strength and then paid opportunities as those start to emerge particularly right now with ChatGPT.

And, you know, I think you are seeing growth already. it is starting from a small base, but we are talking about 250% growth, you know, and now approaching ~3% of traffic. So it is material. And it has the opportunity for us to, you know, to lap that structural step down from Google, much more quickly.

Ella Smith: Great. Thank you, Jeffrey. Thank you, Noel.

Noel Watson: Thank you, Eleanor.

Jeffrey Stibel: Thank you.

Operator: Your next question comes from the line of John Byun with Jefferies. Your line is now open.

Sang-Jin Byun: Thanks very much. This is Sang-Jin Byun for Brent Thill at Jefferies. Just a 2 question. I guess on the shift in traffic that you mentioned, I mean, looked like some of it had been happening for some time. So wondering, you know, did it during the quarter? You know, is there a point in time during Q2 when this became much more noticeable? And, you know, is there are you is it possible it could get worse at this time? I have a quick follow-up.

Jeffrey Stibel: Yeah. You bet. that is that is a fair question. And, you know, let me let me answer directly. We have obviously seen that slow steady shift, you know, away from Google search into, you know, AI native environments. But what happened most recently was a structural shift. And you know, Google alone literally called it the biggest change to their search box since they introduced the search box. So this was a material change and a step down. We believe we understand it. We believe we fully take into account that change into our guidance, and we are trying to be proactive here.

We think it is the right thing to do because we are seeing this, you know, industry worldwide. This is a structural shift in terms of what Google is doing.

Noel Watson: And Sang-Jin, just to build on that, you know, the impact that we saw was really in the back half of the quarter. And the performance that we have seen after that structural step down been relatively consistent since then and quarter to date. And so that extrapolation is what we have included as a baseline expectation in our guidance. So the expectation is that it is consistent through the end of the year. Not building in any expectation around recovery, or further degradation. And that is what gives us confidence in our guide.

Sang-Jin Byun: Great. Thank you very much for that. And the 13% reduction in force just wanted to see if you get talk a little bit about the timeline. Is that pretty much complete? Is it broad based? Any particular departments that I more impacted? Thank you.

Noel Watson: Yeah. So the workforce reduction was effective today and was the announcement. We included specifics on the size of impact both in year and annualized. It was a company wide reorganization. We really looked cross at everywhere in terms of how we can reimagine work streams and speed up decision making and improve execution. So you will see it impact various funk all the functions kind of across the organization.

Sang-Jin Byun: Thank you.

Operator: Thank you. Your next question comes from the line of Matthew Condon with Citizens Bank. Your line is now open.

Matthew Condon: Thank you so much for taking my questions. My first 1, just on the on the Google search trends that you are seeing, are there any quantitative stats you can give us either as a percentage of business formations or anything to we can get comfortable with just the size of Google as far as your track today. So if anything gets worse in the future, we can start to think about what the what the impact could be.

Noel Watson: Yeah. Google, obviously, historically has been 1 of our primary channels. It speaks to the effort in the strategic focus that we have had around channel diversification here for a number of quarters. We have been heavily focused on investing in brand, heavily focused on our partner channel and driving new partnerships and investing in existing partnerships. And then Jeffrey talked earlier about progress we are making with GEO, AEO, and even spending into LLMs to drive progress. If you think about our the guidance that we provided, that is really a reflection of the impact that we are seeing from a new acquisition standpoint. We guided to high single digit to low double digit decline in transactions.

Revenue in the back half of the year. So I think you can you can size it off of that And you can read more broadly on know, on the stats with what is happening with Google traffic generally.

Jeffrey Stibel: You know, our confidence in part comes from the fact that this was rolled out, we believe, fully in the US First, and it is now being rolled out internationally. We have a diminished amount. de minimis amount of international traffic. So, you know, we think we have got a good handle on that.

Matthew Condon: that is very helpful. And then just as we think about some of the brand investments that you guys are making, why do you feel like that now is the time to do that? Is there some impacts to Google search traffic and that could ultimately affect the effectiveness of your brand spend, the return on your brand spend.

Jeffrey Stibel: Yeah. I would argue that brand recognition and, you know, in the power and authority of our brand is 1 of our biggest strengths. And, you know, we are able to see the, you know, the improvement in that recognition and that authority very quickly with brand recognition. And that immediately translates to authority with AI. So it helps significantly with AEO and GEO. So from, you know, from our from our standpoint, it is critically important as we migrate away from Google and into the partnership and AI channels to have strength in brand and have our brand be recognized as the trusted brand in the space.

Noel Watson: It also helps on the partnership front and in you know, direct to site traffic as well as when you think about search engines, there is a brand component of spend there that is, you know, a very high returning. Spend. So anything that can enhance our brand, is in today's environment, I think, is hugely positive for And I will close with the fact that, you know, when you look at our higher value services, particularly human in the loop, and them now at and above, you know, that 40% mark, Our goal is to push that further both in terms of the value that we offer and ultimately the price that we are able to receive.

And a lot of that comes from being a trusted brand.

Matthew Condon: Thank you so much. You bet. Thanks, Matt.

Operator: Thank you. Your next question comes from the line of Patrick McIlwee with William Blair. Your line is now open.

Patrick McIlwee: Hi, team. Thanks for taking the questions. So given the fluidity around Google search, can you just talk about how you evaluate the CAM spend and the overall marketing spend looking into the back half of the year? I think we had already expected lots of CAM in the back half given some of the front loading you did, but just any thoughts on how your spending plans have evolved would be helpful.

Noel Watson: Yeah. I think a couple of questions there. So first, in terms of our spend level, we are it is definitely an area where we are making some investments. Especially as we make this transition around channel diversification. So, again, brand is a slower returning spend. So as we ramp up spend there, we expect it to take more time for that to generate the same ROAS. And in our partner channels, as we onboard new partners, those start sub-optimized and we iterate and optimize those over time. So we have built in some space for us to make some investment in CAM.

We expect overall CAM on the full year to step up a couple points relative to the prior year. And strategically, as we think about spend on the whole, I mean, we first are performance oriented, but we are looking clearly at opportunities to be shifting spend away from Google wherever possible.

Patrick McIlwee: Okay. Thanks, Noel, And so I understand it is a dynamic environment, but your Q3 guide points to a pretty sharp decel. To growth, I think, you know, in the low single digit range. Can you just talk about what signals you are looking for before you can talk a little bit more confidently about, you know, optimizing your top of funnel and, inevitably getting back to a reacceleration towards your prior growth targets?

Jeffrey Stibel: Yeah. I mean, look. I will I will say at a high level, this happened relatively abruptly. Google, you know, very recently made this announcement. So I think it behooves us and others to be conservative in the short term for the, you know, the opportunities and that shift. That said, our, you know, our focus has been for, you know, quite a long time, north of 18 months, to diversify our channels. And we knew that Google was a very, very large concentration risk for us. And we have been diversifying away from it. You know, over time.

Because this was abrupt, we were not able to, you know, to overcome it as quickly as we would like right now. But I think that we put ourselves in a position with this guide to give ourselves the flexibility and the time that we need to execute and, you know, and continue the effort that we have already done, you know, both from, you know, shifting our partnerships from 4% to now 11%, which is up from ~10% last quarter. AI going, you know, you know, 250% increase which is now representing 3% of traffic. That should continue to accelerate. And, you know, and we are going to push on those diversification channels.

But we wanted to make sure that we had the risk built in immediately. But left room for without baking into the opportunity that we believe we will achieve.

Noel Watson: Yeah. And in the meantime, as we focus on the acceleration of channel diversification, it is worth reminding that you know, the business is almost 2 thirds subscription, so there is a durability and a bit of an insulation there that helps while we are making a shift. And we continue to make investments on the subscription side as well. Jeffrey mentioned, you know, the higher value services and expert led services that we are focused on in driving subscription. Also, we continue to make improvements in engagement that we think will lead to retention. And, you know, we have also shown that we have had pricing power across numerous subscriptions.

So while the, you know, the impact from Google you know, is structural at least for now, and we will continue to try to optimize against that. It does have some impact on new customer acquisition, which creates some pressure in the back half of the year and into 2027, especially since there is some lag effect on the subscription side. With all of these efforts, we are excited about it, feel confident that we can work to offset that impact.

Patrick McIlwee: Okay. Thank you both for the thoughts. Thank you. Thank you, Patrick.

Operator: Thank you. Your last question comes from the line of Kishan Patel with Raymond James. Your line is now open.

Kishan Patel: Hey. This is Kishan Patel on for Josh Beck. Can you elaborate on the differences in conversion and acquisition costs you see between AI overviews and AI mode versus the traditional 10-blue link referral traffic within the Google search channel? And what are you seeing in terms of SMB adoption for AI tools on your platform? And what are key opportunities and risks to keep in mind? Thank you.

Jeffrey Stibel: You bet. So, Kishan, for now, paid AI is still quite small and really coming largely from ChatGPT and, to a lesser extent, Google with, you know, with some of their native AI search. it is largely similar in terms of, in terms of conversion and, you know, in other metrics and dynamics. But we find that we have got higher intent customers generally. that is going to change as this scales, and we expect it to scale, but it is, you know, it is higher intent And the important thing there is what it means is people are going through an education process, which works very well for what we are doing with human in the loop.

And, you know, what we hope and expect is we are going to find increased opportunities to be able to upsell and cross sell those customers to service oriented and expert oriented services. And I think that is part of the reason why that cohort has accelerated in terms of growth. Which I think is pretty important. In terms of the adoption of AI and being able to sell that directly to our SMBs. We actually just started testing that. And, you know, the tests have been pretty encouraging so far. So it is early We have, you know, we have started that largely this quarter, with a partner.

But, I think that this is a product that people are looking for in the subset of our customers are going to be encouraged to go through us to do it in part because you need a service layer. You have got to remember, these are naive small businesses. Are curious about how to use and adopt AI. But they need an onboarding process. And, you know, if we do this right, we could in effect become the small business operating system. And, you know, and that is something that, that is both encouraging and exciting for us, but quite early.

Kishan Patel: Thanks very much.

Operator: Thank you. Thank you. This does conclude the question and answer session. And we want to thank you for your participation in today's conference. This concludes the program, so you may disconnect.