리걸줌(LZ) 2026년 3분기 실적 발표회: 구독 성장, EBITDA 전망 하향

리갈줌(NASDAQ: LZ)은 구독 성장이 거래 매출 부진을 상쇄함에 따라 2026 회계연도 3분기 매출이 전년 동기 대비 3% 증가한 1억 9,500만 달러를 기록했다고 발표했습니다. 조정 EBITDA는 5,000만 달러로 8% 증가했으나, 경영진은 고객 유치 채널 다변화 및 고부가가치 서비스 투자를 위해 연간 수익성 전망을 하향 조정했습니다.

핵심 요약

• 3분기 매출은 전년 동기 대비 3% 증가한 1억 9,500만 달러를 기록했습니다. 구독 매출은 1억 4,000만 달러로 11% 증가한 반면, 거래 매출은 5,500만 달러로 14% 감소했습니다.
• 조정 EBITDA는 8% 증가한 5,000만 달러를 기록했습니다. 조정 EBITDA 마진율은 약 130베이시스포인트(bp) 상승한 26%에 달했습니다.
• 하이브리드형(Human-in-the-loop) 구독 서비스는 전체 매출의 49%를 차지했으며 전년 동기 대비 약 17% 성장했습니다. 비즈니스 매니저(Business Manager) 구독은 전분기 대비 약 25% 증가했습니다.
• 리갈줌은 기존 검색 채널의 압박이 지속되면서 사업자 등록 건수가 13% 감소한 약 110,000건을 처리했습니다. 거래당 평균 주문 금액은 12% 하락한 222달러를 기록했습니다.
• 경영진은 연간 매출 전망치의 중간값인 8억 달러를 유지했지만, 채널 투자 및 고객 유치 경제성 약화를 주로 반영해 조정 EBITDA 가이던스를 1억 8,000만~1억 8,500만 달러로 하향 조정했습니다.
• 회사는 3분기 말 기준 부채 없이 1억 8,200만 달러의 현금을 보유 중이며, 연초 대비 누적 잉여현금흐름은 1억 900만 달러를 기록했습니다.

주요 재무 데이터

사업 및 운영 성과

하이브리드형 서비스는 리갈줌의 핵심 성장 동력으로 자리 잡았습니다. 이 서비스는 등록 대리인(Registered Agent) 및 버추얼 메일과 같은 컴플라이언스 제품에 비즈니스 매니저, 변호사 및 기타 전문가 상담을 결합한 것입니다. 경영진은 이 모델이 단일 사업자 등록 거래에서의 매출 극대화보다는 장기적인 고객 관계 형성을 목적으로 한다고 설명했습니다.

회사는 고객이 원하는 지원 수준에 맞춘 사업자 등록 라인업을 시범 도입했습니다. 10월 말까지 최상위 요금제를 선택한 비중이 50% 이상 증가했습니다. 리갈줌은 더 광범위한 출범을 지원하기 위해 영업 및 서비스 역량을 확충하고 있습니다.

비즈니스 매니저 구독은 2분기 대비 약 25% 성장했습니다. 또한 리갈줌은 플랫폼을 통해 약 26만 9,000개의 활성 기업이 설립된 부동산 등 특화 산업에 맞춘 맞춤형 서비스를 제공하고 있습니다. 경영진은 정기 컴플라이언스, 자산 보호, 인수 및 포트폴리오 확장을 이러한 고객들을 위한 유망 서비스 기회로 꼽았습니다.

버추얼 메일은 강한 구독 건수 성장을 지속했습니다. 고객은 클로드(Claude) 및 챗GPT(ChatGPT)와의 연동을 통해 실물 우편물을 관리할 수 있습니다. 고가 계정에서의 이러한 AI 연동 채택률은 초급 계정보다 약 10배 높았습니다.

리갈줌은 기존 검색 채널을 넘어 고객 유치 경로를 다변화하고 있습니다. 3분기 체이스 오퍼(Chase Offers) 프로그램을 통한 매출은 전분기 대비 2배로 증가했습니다. 또한 회사는 아메리칸 익스프레스 애즈(Amex Ads), 라이브플랜(LivePlan), 터보테넌트(TurboTenant)와 파트너십을 체결했습니다.

AI 플랫폼을 통한 추천 유입 트래픽은 전분기 대비 50% 가깝게 증가했으나, 경영진은 아직 규모가 작은 수준이라고 언급했습니다. 회사는 구글(Google), 오픈AI(OpenAI) 등 기타 AI 파트너와의 탐색적 이니셔티브에 참여하고 있으며, 구글 AI 모드(AI Mode) 내 유료 광고 배치를 시범 운영하기 시작했습니다.

AI는 운영 효율성 향상도 지원했습니다. 리갈줌의 AI 에이전트는 채팅 상담의 절반 가까이, 고객 지원 전화의 4분의 1가량을 완전히 스스로 해결했습니다. 또한 AI 기반 상표 접수 시스템을 통해 구매부터 출원까지 걸리는 시간이 1분기 대비 3분기에 약 20% 단축되었습니다.

경영진 가이던스

리갈줌은 2026 회계연도 매출 전망치를 7억 9,700만~8억 300만 달러 범위로 좁혔으나, 중간값인 8억 달러는 유지했습니다. 이는 전년 대비 약 6% 성장을 의미합니다.

4분기 매출은 1억 9,000만~1억 9,600만 달러로 예상되며, 중간값 기준 약 1% 성장할 것으로 전망됩니다. 거래 매출은 검색 채널의 압박이 지속됨에 따라 전년 동기 대비 10%대 중반의 감소세를 보일 것으로 예상됩니다.

연간 조정 EBITDA는 1억 8,000만~1억 8,500만 달러로 예상되며, 이는 중간값 기준 약 23%의 마진율을 의미합니다. 4분기 조정 EBITDA는 4,800만~5,300만 달러로 예상되며, 중간값 기준 약 26%의 마진율이 전망됩니다.

경영진은 조정 EBITDA 중간값이 1,000만 달러 하향 조정된 원인 중 절반 이상을 파트너십, 제휴사 및 유료 AI 광고 배치에 대한 투자의 결과로 설명했습니다. 약 4분의 1은 고객 유치 경제성 약화를 반영하며, 나머지는 비즈니스 매니저 및 신규 사업자 등록 라인업 지원에 투입됩니다.

이 전망은 현재의 검색 환경이 연말까지 유지된다는 가정하에 작성되었으며, 구글 트래픽의 회복을 전제로 하지 않습니다.

리스크 및 관전 포인트

• 기존 검색 채널의 압박으로 고객 유치 비용이 증가하고 사업자 등록 건수가 감소하고 있습니다.
• 리갈줌이 신규 유치 채널을 테스트하고 최적화하는 동안 초기 수익률은 다소 낮을 수 있습니다.
• 구독 활동은 일반적으로 사업자 등록 활동보다 시차가 발생하기 때문에, 거래 건수 감소로 인한 영향이 구독 매출에 후행하여 나타날 수 있습니다.
• 거래 비중이 상대적으로 단가가 낮은 연례 보고서 제출 쪽으로 이동하면서 평균 주문 금액 하락 원인으로 작용했습니다.
• 영업 및 서비스 역량에 대한 투자는 단기 비용을 증가시키는 반면, 예상되는 고객 참여 및 유지율 개선 효과가 나타나기까지는 시간이 걸릴 것입니다.

애널리스트 Q&A 하이라이트

경영진은 하이브리드형 서비스를 리갈줌의 가장 지속 가능한 장기 성장 기회로 꼽았습니다. 전문가 지원, 비즈니스 매니저, 프리미엄 서비스 등급을 통해 시간이 지남에 따라 상단 유입 경로의 압박을 일부 상쇄할 수 있을 것으로 기대하고 있습니다.

경영진은 고객 유치 지출과 관련해 신규 채널이 안착할 수 있도록 시간을 줄 것이지만, 수익률 및 고객 생애 가치 기준을 계속해서 적용할 것이라고 밝혔습니다. 성과 데이터가 축적됨에 따라 지출은 경제성이 가장 우수한 채널로 이동할 예정입니다.

경영진은 제휴 고객의 경우 사업 개발이 더 진척되어 있고 구매 성향이 높으며 더 높은 생애 가치를 창출할 수 있어 파트너십이 대폭 확장될 수 있다고 밝혔습니다. 향후 성장은 파트너 추가 확보 및 차별화된 서비스 제공 여부에 달려 있습니다.

AI 광고와 관련하여 리갈줌은 구글 AI 모드 및 대화형 광고 내 배치를 테스트하고 있습니다. 경영진은 지출이 수익성 및 투자 수익률 요건을 엄격히 준수하는 선에서 이루어질 것이라고 밝혔습니다.

회사는 또한 조직 개편이 AI 자동화를 통한 효율성 증대와 크게 연결되어 있다고 덧붙였습니다. 경영진은 제품 개발의 지속적인 지연은 없으며, 전환 이후 의사 결정이 더욱 신속해지고 분권화되었다고 설명했습니다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

[Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Madeleine Crane, Head of Investor Relations. Please go ahead.

Madeleine Crane

Thank you, operator. Welcome to LegalZoom's third quarter 2026 earnings conference call. Joining me today is Jeff 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 and 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 measures are set forth in our investor presentation and 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 us. Third quarter revenue was $195 million, up 3% year over year. Adjusted EBITDA was $50 million, representing a 26% margin. For the full year, we are reiterating the $800 million midpoint of our revenue outlook, or 6% year-over-year growth, while narrowing the range to $797 million to $803 million. We are lowering our adjusted EBITDA outlook to $180 million to $185 million, or a margin of approximately 23%, reflecting both a more challenging acquisition environment and targeted investment. Customer acquisition remains under pressure, and we are making strategic investments to protect our position over the long term.

We are spending more into partners and affiliates, which diversify how we acquire customers, and investing in our Business Manager product and service line, which helps to increase the value of each customer we win. We are also encouraged by what Google has most recently done to expand its ads in AI Mode. We've begun spending into those opportunities. Noel will walk through the details. Of note this quarter, we are approaching an important milestone in our transformation toward higher-value recurring customer relationships. Company-wide human-in-the-loop subscription services now represent 49% of our total revenue. Revenue from these services increased approximately 17% year over year.

Our goal is to help owners start, run, and grow their businesses with AI, experts, and partners all working together. Our objective is not to maximize the value of a single formation, but to build a long-term relationship, which is why we are bringing human-in-the-loop services in from the first day. In late Q3, we began testing a new formation lineup organized around how much help an owner wants: getting started on their own, receiving ongoing business support, or working with credentialed experts. The response has been encouraging, with a larger share of customers choosing our top tier, which includes our highest level of expert support. Our goal is to roll this out more broadly, and we are currently adding talent and service capabilities to support this opportunity. It adds to our Q4 costs, but with benefits we expect to build over time that will increase sales, deeper engagement, and stronger retention. Let me discuss what we are seeing in human-in-the-loop in more detail.

As a reminder, the portfolio has two layers: a service layer, products like Registered Agent and Virtual Mail to keep businesses compliant and connected, and an expert layer, attorneys and business managers that help them grow by putting accountable people behind the decisions that matter. This portfolio is built on 25 years of brand trust, a nationwide attorney network, and a compliance infrastructure and customer experience that are increasingly powered by AI. That is what customers value, and it is where we are growing. Business Manager subscriptions grew approximately 25% sequentially in Q3. We believe that growth underscores customers' demand for ongoing support beyond a single transaction, which reinforces our decision to make lasting service and expertise a core part of the customer journey from day one. That is the idea behind the new formation lineup I mentioned earlier, which makes the level of human support the central choice at the first purchase. The tiers of service range from a business advisor who assists with LLC startup and compliance to full-service support from a business manager, attorney, and accountant.

In the initial rollout, the share of customers selecting our top-tier formation offering increased over 50% as of the end of October. We are also tailoring Business Manager to specific industries, starting with almost 269,000 active real estate businesses that formed with LegalZoom. Many real estate investors manage multiple LLCs with recurring filings and compliance requirements across their portfolios. They subscribe to Business Manager today, giving us a specific opportunity to deepen relationships with businesses we already serve. We'll build on our compliance services with support, including asset protection, acquisition, and portfolio expansion. That means a more relevant, valuable offering for customers and a repeatable model we can take into other industries. Virtual Mail is another human-in-the-loop product with strong subscription unit growth.

And AI is changing how our customers use the service. In addition to our app experience, customers can now manage their physical mail through LegalZoom Virtual Mail integrations in Claude and ChatGPT, asking what has arrived, finding tax and financial documents, and identifying deadlines and legal notices. Adoption of our AI integrations among higher-tier Virtual Mail accounts is roughly 10x that among starter accounts. Put AI and expert service together, and we believe the opportunity is significant. Many small business owners have access to AI tools, but aren't sure how to put them to work. We can help. During the quarter, we launched a pilot with Perplexity, in which Business Managers get customers started with AI, and early usage is encouraging. We can bring that help alongside our services and partner services, beginning the moment an owner forms a business with LegalZoom.

AI, expert support, and the services owners need, all in one place. This brings me to the top-of-funnel, where we are broadening the ways customers find us. Over the past year, we've been intentional about making our go-to-market more resilient through partners, brand, and AI channels. These channels will not replace traditional search overnight, but together they're helping to offset its impact. As a result, we will continue to invest foremost in diversification away from search. Partnerships remain the clearest example. A recent partnership with Chase Bank shows how we can access new channels with stronger engagement and higher purchase propensity. Chase serves over 7 million small business customers.

After launching with Chase Offers in March, sales from the program doubled from Q2 to Q3. When forming an LLC, Chase customers have turned to us for Registered Agent service, annual reports, and state compliance filings, the services that keep a business in good standing. That tells us we are reaching owners with real intent, at formation, and as they grow and run their business. In Q3, we signed new partnerships with Amex Ads and LivePlan, extending our reach across trusted brands that serve small businesses. In line with our real estate focus, we also added TurboTenant, a property management software provider. Turning next to AI, where the authority of our brand helps us get discovered. AI referral traffic is still small, but growing. Traffic from AI platforms grew almost 50% quarter over quarter.

Visitors from organic AI traffic continue to arrive with high intent and convert at meaningfully higher rates than traditional organic search traffic. We are currently participating in beta discovery environments with Google, OpenAI, and other AI partners with some success. For example, earlier cohorts from ChatGPT are generating higher lifetime value compared with our traditional paid channels. Volumes are small, but we expect ad opportunities in these AI experiences to grow materially over time, alongside improvements in tooling to support enhanced targeting and campaign optimization.

In closing, one stat is worth repeating. Our human-in-the-loop subscription services now generate 49% of revenue and grew 17% year over year in Q3. Our direction is to help owners start, run, and grow through our platforms, our experts, and our partner services. We're now bringing that model to customers from the very first purchase, expanding the channels that reach them, and using AI to improve service delivery. Discovery remains challenging, but we have concrete results to build on and a clear focus for our investment. I'm confident in the path ahead. I want to thank our team for their tireless work testing, learning, and executing through a demanding period. And with that, I'll turn the call over to Noel to walk through our financial results and outlook. Noel?

Noel Watson

Thank you, Jeff, and good afternoon, everyone. Unless otherwise stated, all comparisons in my remarks today will be on a year-over-year basis. We ended the quarter with a strong balance sheet. We have $182 million in cash, no debt, and strong free cash flow, all of which give us the needed flexibility to help navigate this changing environment. Those advantages shape how we make decisions, and they are the lens I'll use as I walk through our third quarter results and our outlook for the rest of the year. Third quarter revenue was $195 million, representing 3% growth. Subscription revenue increased 11% to $140 million, exceeding our expectations.

Growth came from legal advisory plans, the result of increased adoption through bundling within select formation offerings, price increases in our compliance offering, and continued growth in our Virtual Mail subscription offering. ARPU rose 9%, benefiting primarily from higher pricing in our Registered Agent and compliance subscriptions, as well as an increase in our higher-value service offerings. In the third quarter, total subscription units were approximately 1.9 million, down 5%, driven by a decline in lower-value forms, e-signature, and bookkeeping subscriptions bundled with certain formation packages. Excluding those, our subscription base grew slightly. Our 12-month small business retention rate held steady at 57%, in line with both the prior quarter and the prior year.

While retention has been steady, we are focused on customer experience enhancements that aim to drive engagement and improve retention. For example, we are introducing a redesigned LegalZoom account and mobile app, bringing a business's status, deadlines, and documents into one place with a personalized action plan that flags compliance gaps and an AI assistant built around each customer's business. Early engagement is encouraging. Customers opening or downloading their documents rose 28% versus the prior experience. And mobile app users were nearly twice as active as similar customers who hadn't engaged. Transaction revenue was $55 million, down 14%, below the high-single to low-double-digit decline built into our outlook as formations and related small business transactions fell more than expected with traditional search under pressure. We processed approximately 110,000 business formations during the quarter, a decline of 13%.

Importantly, formations from strategic partnerships continued to partially offset the pressure from search. As a result, transaction units declined 4% to approximately 249,000. Transaction AOV of $222 declined 12%, resulting from a decline in higher-value business formations and an increase in lower-value annual report filings. Finally, deferred revenue declined $1 million sequentially. Turning to profitability, where all metrics are on a non-GAAP basis, gross margin was 73%, up 2 percentage points year over year. In customer care, our AI agent now fully resolves almost half of chat conversations, up from roughly 1/3 earlier this year. Based on this success, we have expanded the surface of AI agent support to voice, with almost 1/4 of customer care calls now fully resolved by AI.

At our LegalZoom law firm, AI-powered trademark intake reduced purchase-to-filing time by approximately 20% in Q3 versus Q1 and contributed to higher product gross margins. These capabilities lower our cost to serve, improve the customer experience, and allow people to focus on more complex customer needs. Sales and marketing expenses increased 15%, driven by a 15% increase in customer acquisition marketing as we expand and invest in channel diversification across partnerships, brand, and AI-driven acquisition. Non-CAM sales and marketing expenses increased 14%, largely from targeted investments in our sales organization.

Technology and development expenses declined 27% as a result of our reorganization, while G&A declined 3%, improving overall operating leverage. As a result, adjusted EBITDA of $50 million grew 8%, with adjusted EBITDA margin of 26%, expanding approximately 130 basis points. During the quarter, we generated $34 million of free cash flow, reflecting the continued profitability and cash-generating nature of our business. We remain debt-free with $109 million of free cash flow year to date and our $100 million revolving credit facility undrawn. In Q3, we repurchased approximately $15 million of LegalZoom shares at an average price of $5.90. As of September 30, 2026, we had approximately $66 million remaining under our authorization. Share repurchases have reduced our weighted average diluted share count by approximately 10% versus the third quarter of 2025. We also continue to evaluate M&A opportunities that would add durable growth, differentiated distribution, or meaningful cross-sell potential.

Now turning to our outlook. Our guidance assumes the current search environment remains in place through year-end, and it does not assume a recovery in Google traffic. For the full year, we are reiterating the midpoint of our revenue guidance of $800 million, or approximately 6% growth, and narrowing the range to $797 million to $803 million. For the fourth quarter, this implies revenue of $190 million to $196 million or growth of 1% year over year at the midpoint. Consistent with the third quarter, we expect transaction revenue to decline at a mid-teens rate year-over-year, reflecting continued search headwinds. For adjusted EBITDA, we now expect $180 million to $185 million for the full year, an approximately 23% margin at the midpoint. For the fourth quarter, we expect adjusted EBITDA of $48 million to $53 million, or an approximately 26% margin at the midpoint.

Let me bridge the $10 million reduction to our adjusted EBITDA midpoint. More than half is investment in channels that reduce our reliance on search, including partnerships, affiliates, and paid AI placements. In some cases, we are deliberately accepting lower near-term marketing efficiency as these newer channels typically start at lower returns and improve as we optimize them. We are willing to carry that cost while they scale. We continue to hold every channel to return and lifetime value thresholds with a focus on high-quality customers, and as these channels mature, we will shift spend towards those with the most attractive economics. Approximately 1/4 reflects weaker acquisition economics as we manage through this environment.

With search under pressure, it costs more to win each customer, and we are absorbing that cost to protect our position rather than pulling back. The remainder is deliberate investment in sales and service capacity behind our Business Manager offering and the new formation lineup. The sales portion is temporary, tied to seasonality ahead of peak season. The service capacity is a lasting capability with benefits we expect to build over time through deeper engagement and stronger retention. Our cash generation allows us to fund these priorities while continuing to evaluate spending against customer quality and returns.

In closing, we remain focused on what we can control: growing human-in-the-loop subscriptions, investing into diversified acquisition channels, and using AI to improve operating efficiency. We are confident these are the right priorities for the business at this time and we will report our progress against each. Before we open the call for questions, I want to thank the LegalZoom team for their consistent hard work and commitment to our customers. With that, I'll turn the call back to the operator for questions. Thank you.

Operator

[Operator Instructions]

Your first question comes from the line of Eleanor Smith with JPMorgan.

질의응답

Eleanor Smith

Maybe for you first, Jeff. You've introduced quite a few new avenues for growth as CEO, from more partnerships, new premium products, and advertisements with the major LLM partners. What are you most optimistic about contributing to growth? And do you think we would still primarily see this show up as growth on the subscription ARPU side?

Jeffrey Stibel

Sure, thanks, Ella. For me, what I'm most excited about is the success we've had in human-in-the-loop. And when you look at the strength we've seen in the core new offerings such as Business Manager, which had 25% quarter-over-quarter growth, as well as what we're doing with this new service lineup that we've been testing in-quarter and are beginning to accelerate, where we're really leaning in on service offerings and expert offerings, I think that this is the truly defensible position that we can take as more and more of those DIY solutions become adaptable in this new environment. And from my standpoint, that's the real durable growth opportunity we have. And now that that's approaching 50%, you can start to see where that will overcome some of the shortfall that we see on top-of-funnel. Of course, all the other things that we've done with respect to diversification is good and strong, and we need to do more of it, but I think long term, it's that human-in-the-loop offering that's going to define us in the future.

Eleanor Smith

Very clear. Thank you. And maybe for Noel, I was hoping to hear more about your philosophy surrounding ramping up or down customer acquisition marketing. What would you need to see in the next few months or quarters to lead you to spend more or less on CAM?

Noel Watson

Yes, thanks for the question, Ella. Certainly, we talked and outlined some of the investments that we're making this quarter. It's in reaction to some of the challenges that we've seen in traditional search with Google with rising costs and pressure on efficiencies. And so from our perspective, it's more important than ever that we diversify from a channel standpoint and reduce our reliance on traditional search. And so we've been leaning into spend around brand, partnerships, affiliates, etc., just to broaden that aperture. These investments for us, they have important strategic benefit because they benefit our brand, they can help with AOV. A lot of times these relationships are bilateral and we can more easily optimize them over time.

So for us, there's a halo effect to this as well. At the same time, we are a return-oriented performance marketing group. And so there are certain return profiles that we will set for these channels. We want to give them time because some of these take time to mature and to optimize, but we'll set the various return hurdles for them and monitor those and make adjustments, as we outlined in our remarks, over time to where we see the most economic benefit.

Eleanor Smith

Very clear. Thanks so much.

Noel Watson

Thank you.

Operator

Your next question comes from the line of John Byun with Jefferies.

Sang-Jin Byun

Great, thank you. This is John Byun on behalf of Brent Thill. I have two questions. One, if you could talk a little bit more about the developments around AI mode and ads there and how you're approaching that and what's interesting in that new avenue. Second, wondering if you can talk about the plans for the upcoming tax season and the partnership that you plan to work with or anything organic. Thank you.

Jeffrey Stibel

Sure, I'll take the first one, John. On AI mode, specifically with respect to Google, which is what I assume you're speaking towards, we talked about the acquisition pressure that we're seeing last quarter. We have been working very hard to do two things. First, diversify away from what Google is trying to do, not necessarily because we're averse to working with Google, but because we knew it was going to take time for them to work through what they needed to do to actually leverage advertising in their partner channel. And the good news is, as I think we've all seen and heard with Google's announcement, they are starting to lean in more on advertising within AI mode. And we are early adopters; we are testing into that. It is one of the reasons why we're increasing our spend into that channel.

That said, we're not going to do it inefficiently. So we will stop it if it is not profitable, but we're in the process of testing into it. We're encouraged, we're excited by the conversations that we're having with Google. But on top of that, we're also diversified.

Noel Watson

Yes, and on the partnership side, as it relates to tax, this is one of the areas where this partnership is maturing. We've made a number of experience changes, both through our sales team and our care team, as well as in our site experience, that's optimized how we bring customers to the opportunity that we provide around bookkeeping and taxes. And so we're scheduling more leads, we're seeing really strong conversion rates, and this is heading into an all-important tax season. So we really feel like this one is teed up and the partnership is strong and the groups are working very closely together to make sure we're ready to go.

Jeffrey Stibel

And the things that you'll see with this new service lineup that we're so excited about, as I brought up with Ella's question, our expert layer will now include accounting advice as well, which is a natural cross-sell and upsell into full accounting.

Sang-Jin Byun

Great, thank you.

Jeffrey Stibel

Thank you.

Operator

Your next question comes from the line of Matt Condon with Citizens JMP.

Matthew Condon

Hey guys, this is Carter Parlette on for Matt Condon. First one here on partnerships. Partnerships have grown pretty substantially to over 10% of the business. How much further do you think that channel can scale, and what are the biggest factors determining growth from here?

Jeffrey Stibel

So short answer, significantly. I think we've had some great success this year, but not enough and certainly not fast enough, especially as that acquisition channel moves. What we've seen with working with partners, we get customers who are later in their stage, so they're less likely to go out of business, they have a higher propensity to buy, and tend to be better customers of ours. So what do we need to do? We need to establish more partnerships, we need to build richer products, we need to make sure that those products are differentiated in such a way that our service and expert layer, that human-in-the-loop, adds real value to the partner in a less tangible way than just paying a rev share or bounty because we're driving better customer experience. So that's what we're primarily focused on.

Noel Watson

Yes, and one add there is we continue to add new partners and really marquee brand name partners, Chase Bank being one that we just mentioned on this call. And what that means for us is we are the brand within our industry, within our space, that these providers, that leaders in each of their own industries and spaces want to work with. So, again, there's a halo effect in terms of brand equity, but also reinforcing of our positioning in our space.

Matthew Condon

Understood. That's very helpful. Moving to subscription revenue, it continues to grow at a double-digit rate, even as subscription units have declined. Can you help us better understand how that growth is being driven? Is it more on the pricing side, or is it more of consumers shifting towards the higher-value products? Thank you.

Noel Watson

Yes, there's a combination of drivers there. I think most importantly, we're seeing strong performance out of our human-in-the-loop services, particularly Business Manager, where we continue to invest in terms of the size of that team and also the service offerings that we provide. There's also some pricing in there. We've shown that we've had pricing power, and so we've looked at different products and where we can take pricing. And then subscription tends to lag behind transactions, so some of the headwinds we've seen on the transaction side take a little bit longer to show up in subscription. And so we'll see some drag here on the subscription line as we look forward, and you see that implied in our Q4 guidance.

Operator

Thank you. Your last question comes from the line of Pat Walravens with William Blair.

Patrick McIlwee

Hi, Jeff, Noel. First on the transactional side. So despite some pretty healthy macro-level trends in business formations, your formations obviously took a decent step down sequentially, and you're now expecting mid-teens declines for the year. So I just wanted to double-click on that and ask how much of that you feel reflects the challenges around search versus weaker conversion or weaker customer demand at large. And also any color on if trends have stabilized at all through October would be helpful.

Jeffrey Stibel

You bet. I'll take at least the first part of that. This largely is an impact from the change that we've seen with search and Google. And we saw a material shift when that happened. The reality is we've been positioning the company for quality share for quite some time, and I think we've been pretty successful in that respect. What that means is we're looking for higher propensity customers. So if you look at that macro, the EIN macro, it's split between high and low propensity. And on the high propensity side, we feel like we were actually driving good, strong success relative to the macro. We were shedding off some of the low propensity customers that we had in prior years and some of the growth that was coming there that wasn't really driving the core underlying business or yielding long-term good customers for us from an LTV standpoint.

Noel Watson

Yes, and as Jeff mentioned earlier, and we also mentioned in our remarks, a factor in all of this is the transition that's happening between traditional search and AI mode. And we're encouraged by the expansion of ad opportunities that we're seeing in AI mode that have started to take shape, and our expectation is that it's going to further expand and we'll lean into that. We're leaning into chat ads as well and excited about some of the tooling that is to come that will allow us to do better targeting and campaign optimization as those grow as channels for us.

Patrick McIlwee

Okay, great. And if I could sneak one more in. On the RIF, can you just help us distinguish how much of that reduction reflected AI-driven productivity improvements versus recalibration of your cost structure in response to some of the volatility around customer acquisition this year? And with that, just any update on if you've experienced any disruption in the product development function from some of those changes or if you still feel like you're falling behind?

Noel Watson

Full steam ahead there. Yes, I would say it was largely to almost entirely tied to efficiencies that we've gained through AI automation. It's something we've been focused on for a while. You see it in our service line and our gross margins and now through kind of our functional OpEx. As with any significant reorganization like that, there's always a transition period, and I think we've gone through some of that, but really the team has reacted very positively and it feels like we are operating at an increased and faster pace with decisioning more decentralized and people able to move very quickly. So it feels like it's been a really healthy decision for the organization overall.

Patrick McIlwee

Okay. Thank you both for the thoughts.

Noel Watson

Thank you.

Operator

Thank you. I'm showing no further questions at this time. Thank you for participating in today's conference. This concludes the program, and you may now disconnect.

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