What happened

Shares of LegalZoom (LZ 1.71%) were falling today after the legal assistance platform posted in-line results in its second-quarter earnings report but said prices were falling in the industry.

The stock finished the session down 20.5%.

So what

LegalZoom, which provides a platform that makes it easy for businesses to incorporate or to create other legal documents, said revenue in the quarter grew just 4% to $168.9 million, though that was ahead of the analyst consensus at $167.1 million.

Transaction revenue was down 7% in the quarter to $60.5 million, which the company said was due to a 26% reduction in average order value due to its rollout of free LLC formations in Q1. Transaction volume was up 26%, and subscription revenue increased 12% to $102.2 million as the company added 159,000 new subscribers over the last year.

Gross margin in the period fell from 65% to 62% due to higher filing fees and the impact of its free LLC product.

On the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $18.1 million to $29.6 million, and adjusted earnings per share doubled from $0.05 to $0.10, matching estimates.

Management also touted the launch of LZ Books, a new accounting solution that was released after the quarter ended. CEO Dan Wernikoff said,

The recent launch of LZ Books reaches across all our strategic growth pillars while solving a large gap in the market. We are setting ourselves apart as the sole online platform providing solutions for small business needs required right at the time of formation and beyond, all under one roof.

Now what

LegalZoom's guidance called for Q3 revenue of $159 million to $161 million, in line with the consensus and representing an increase of 3.8% at the midpoint, and it sees adjusted EBITDA of $26 million to $28 million. 

For the full year, it forecast revenue of $642 million to $652 million, which compares to the consensus at $643.9 million and represents an increase of 4%. On the bottom line, it called for adjusted EBITDA of $105 million to $110 million. 

While those numbers were solid, comments on the earnings call about competitors lowering prices seemed to weigh on the stock, especially after the move to offer the LLC product for free.

Today's sell-off was surprisingly steep, though investors may also fear the company could be disrupted by AI like ChatGPT, which could also bring industry prices down.