LegalZoom Inc. (Nasdaq: LZ) reported third-quarter 2026 revenue growth of 3%, with an 11% increase in subscription revenue offsetting a sharp decline in transaction revenue. Profitability also improved, with adjusted EBITDA growing by 8% and profit margins further expanding; despite continued pressure on the client side, the company maintained the midpoint of its full-year revenue guidance.
Revenue for the quarter ended September 30 was $195.1 million, up from $190.2 million a year earlier. Among them, subscription revenue increased from $125 million to $140 million, while transaction revenue fell 14% from $65 million to $55 million.
GAAP net income increased to US$8.1 million from US$4.5 million in the same period last year, with a net profit margin of 4%. Adjusted EBITDA increased from US$46.3 million to US$50 million, and the adjusted EBITDA margin expanded from 24% to 26%.
Non-GAAP gross profit increased by 6% to US$143.1 million, and the corresponding gross profit margin increased from 71% to 73%. LegalZoom attributes its profit margin outlook in part to rigorous cost management and AI-driven efficiency improvements. Free cash flow in the third quarter was $34.1 million, or 17% of revenue, compared with $47 million, or 25% of revenue, in the same period a year ago.
Increased revenue per unit supports subscription business growth
LegalZoom’s subscription business covers registered agent and compliance packages, lawyer consultation, virtual mailboxes, bookkeeping, legal documents and electronic signature services, and remains the company’s main source of growth.
Average revenue per subscription unit increased to $280 from $256 a year earlier. The increase was more than enough to offset a decline in the number of subscription units (from 1.96 million to 1.85 million). The company is focusing on high-end legal and compliance products for high-value new and existing small and micro business customers, including its Business Manager suite of managed services.
Judging from a number of operating indicators, the trading business performed weakly. The number of enterprise registrations dropped from 126,000 to 110,000, and the total number of transaction units dropped from 259,000 to 249,000. The average price per customer dropped from US$251 to US$222. Transaction revenue covers corporate registration business, as well as annual reports, filing fees, trademark registration applications and estate planning products.
Sales and marketing investments have increased as LegalZoom works to expand customer acquisition channels beyond traditional search. Non-GAAP sales and marketing expenses increased 15% to $70 million, accounting for 36% of revenue, compared with 32% in the year-ago period. Customer acquisition marketing expenses increased from US$44.2 million to US$51.1 million.
AI and expert-led services remain the focus of operations
The core of management’s strategy is to optimize subscription business, expand diversified marketing channels, and combine AI with human experts. LegalZoom said its AI-driven trademark acceptance process shortened the time between purchase and application submission by 20% in the third quarter compared with the first quarter, improving lawyer productivity and improving product gross margins.
The company also revealed that agent AI is handling thousands of customer care online chat interactions and can completely resolve nearly 50% of inquiries. An initial rollout of customer calls achieved a resolution rate of about 25%; internal company data shows that AI-powered sales coaching reduced missed sales opportunities by about one-third.
In addition, LegalZoom is expanding partnerships and investing in social, video, audio, streaming and AI-based distribution channels. The company said these initiatives are aimed at attracting high-intent small and micro businesses and reducing reliance on traditional search channels.
Full-year guidance remains near midpoint
For fiscal year 2026, LegalZoom expects revenue to be US$797 million to US$803 million, and adjusted EBITDA to be US$180 million to US$185 million. Management said the outlook implies year-over-year growth of approximately 6% for both revenue and adjusted EBITDA, and reiterated the midpoint of its full-year revenue guidance.
For the fourth quarter, the company expects revenue of $190 million to $196 million and adjusted EBITDA of $48 million to $53 million. LegalZoom expects that the scale-up of high-value projects and the continued momentum of the partner channel will provide support for revenue, but continued customer acquisition pressure during the remainder of the year will partially offset this benefit.
The profit outlook takes into account the expected gross profit benefits brought about by cost control and AI efficiency improvements, as well as continued expenditures on channel diversification, higher paid customer acquisition costs, expert-led services, and the reserve of seasonal sales capacity before the peak period of corporate registration in the first quarter.
LegalZoom pointed out several uncertain factors that may affect performance, including its reliance on business registration business, the conversion of transaction customers to subscription customers, subscription renewals, macroeconomic conditions and industry competition. In addition, its prospects depend on its ability to maintain service quality, continue product innovation, protect its own brand, respond to regulatory requirements and maintain third-party partnerships.