LegalZoom (LZ) 2026财年第三季度业绩电话会议：订阅增长，EBITDA展望下调

LegalZoom（NASDAQ: LZ）公布2026财年第三季度营收为1.95亿美元，同比增长3%，主要由于订阅业务的增长抵消了交易业务营收的下滑。调整后EBITDA增长8%至5000万美元，但管理层下调了全年盈利预期，以资助获取客户渠道的多样化及更高价值服务的拓展。

核心要点

• 第三季度营收同比增长3%至1.95亿美元。订阅业务营收增长11%至1.40亿美元，而交易业务营收下降14%至5500万美元。
• 调整后EBITDA增长8%至5000万美元。调整后EBITDA利润率达到26%，同比上升约130个基点。
• “人机协同”（Human-in-the-loop）订阅服务占总营收的49%，同比增长约17%。“业务经理”（Business Manager）订阅量环比增长约25%。
• LegalZoom处理了约11万家企业注册成立业务，同比下降13%，主要归因于传统搜索依然承压。交易平均订单金额（AOV）下降12%至222美元。
• 管理层维持了全年营收指引的中点8亿美元不变，但将调整后EBITDA指引下调至1.80亿至1.85亿美元，主要反映了渠道投资以及获客经济效益下降的影响。
• 截至第三季度末，公司拥有1.82亿美元现金，无债务，今年迄今的自由现金流达1.09亿美元。

主要财务数据

业务与运营表现

“人机协同”服务仍是LegalZoom的核心增长焦点。这些产品将注册代理（Registered Agent）和虚拟邮件等合规产品与业务经理、律师和其他专家的服务相结合。管理层表示，该模式旨在构建更长期的客户关系，而非追求单次注册交易的营收最大化。

公司开始根据客户所需的协助程度测试企业注册服务组合。截至10月底，选择顶级服务的客户比例增长了50%以上。LegalZoom正在扩大销售和服务能力，以支持更大范围的推广。

“业务经理”订阅量较第二季度增长约25%。LegalZoom还针对包括房地产在内的行业定制服务，通过该平台建立的活跃房地产企业已近26.9万家。管理层将日常合规、资产保护、并购及投资组合扩张视为针对这些客户的相关服务机遇。

虚拟邮件服务的订阅用户数继续保持强劲增长。客户可以通过与Claude和ChatGPT集成的功能来管理实体邮件。高级账户对这些AI集成功能的使用率约为入门级账户的10倍。

LegalZoom正在推动获客渠道多样化，超越传统搜索。第三季度，来自Chase Offers计划的销售额环比翻倍。公司还与Amex Ads、LivePlan和TurboTenant签署了合作协议。

来自AI平台的引流流量环比增长了近50%，不过管理层指出总量依然较小。公司正在与谷歌（Google）、OpenAI及其他AI合作伙伴参与探索性合作，并已开始在谷歌的“AI模式”（AI Mode）中测试付费广告植入。

AI也提升了运营效率。LegalZoom的AI代理完全解决了近一半的在线聊天咨询以及近四分之一的客户服务电话。与第一季度相比，第三季度基于AI的商标受理将从购买到提交备案的时间缩短了约20%。

管理层业绩指引

LegalZoom将2026财年全年营收指引收窄至7.97亿至8.03亿美元，同时维持8亿美元的中点不变，代表同比增长约6%。

对于第四季度，管理层预计营收为1.90亿至1.96亿美元，按中点计算同比增长约1%。由于搜索压力持续存在，预计交易业务营收将同比出现15%左右的下滑。

全年调整后EBITDA目前预计为1.80亿至1.85亿美元，按中点计算对应的利润率约为23%。第四季度调整后EBITDA预计为4800万至5300万美元，按中点计算利润率约为26%。

管理层将调整后EBITDA中点下调1000万美元中的一半以上归因于对合作伙伴关系、附属机构及付费AI广告植入的投资；约四分之一反映了获客经济效益下降；其余部分则用于支持“业务经理”和新的企业注册产品组合。

该指引假定当前的搜索环境将持续到年底，且未假定谷歌流量会发生复苏。

风险与关注要点

• 传统搜索承压推高了获客成本，并减少了企业注册数量。
• 在LegalZoom对新获客渠道进行测试和优化的初始阶段，这些渠道带来的回报可能较低。
• 交易量疲软对订阅业务营收的影响可能存在滞后，因为订阅活动通常滞后于企业注册活动。
• 交易组合已向较低价值的年报申报倾斜，导致平均订单金额下降。
• 对销售和服务能力的投资将在短期内增加成本，而预期的客户参与度和留存收益则需要时间才能显现。

分析师问答环节亮点

管理层将“人机协同”服务视为LegalZoom最具持久力的长期增长机遇。管理层预计，专家支持、“业务经理”以及高级服务层级随着时间推移将有助于抵消漏斗前端的部分压力。

关于获客支出，管理层表示LegalZoom将给予新兴渠道成熟的时间，但仍将继续坚持投资回报率和客户终身价值门槛。随着表现数据的积累，支出将逐步转向经济效益最佳的渠道。

管理层表示，合作伙伴关系具备显著的规模化潜力，因为被推荐过来的客户通常处于业务发展的更高级阶段、购买意愿更高，并可能产生更高的终身价值。未来的增长将取决于拓展更多合作伙伴以及开发差异化的服务产品。

关于AI广告投放，LegalZoom正在测试在谷歌“AI模式”和基于聊天的广告植入。管理层强调，投资仍须符合盈利能力和回报要求。

公司还表示，其组织架构重组很大程度上源于AI自动化带来的效率提升。管理层报告称产品开发并未出现持久性放缓，并指出过渡期后决策变得更加迅速且更加去中心化。

业绩电话会议完整文字实录

完整财报电话会议逐字稿

管理层陈述

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.

分析师问答

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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