What Happened:

Shares of online legal service provider LegalZoom (NASDAQ:LZ) fell 23.7% in the afternoon session after the company reported first quarter earnings. Its revenue guidance for next quarter missed analysts' expectations and its revenue growth was quite weak. Transaction revenue drove the underperformance, down 3%, driven by a 10% decline in average order value, partially offset by a 9% increase in transaction units. While the subscription revenue recorded positive growth, it was impacted by the exit of legacy partners. This affected ARPU as the company focused on more offerings with lower price points. Looking ahead, full-year revenue guidance, while maintained from the previous, also missed. Moving to the bottom line, gross margin fell, while free cash flow narrowly missed expectations. Overall, this was a mediocre quarter for LegalZoom.

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What is the market telling us:

LegalZoom's shares are quite volatile and over the last year have had 14 moves greater than 5%. But moves this big are very rare even for LegalZoom and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 12 months ago, when the stock gained 17.3% on the news that the company reported a "beat and raise" quarter. First quarter results exceeded analysts' revenue, adjusted EBITDA, and earnings per share (EPS) estimates. Business formations and transaction units, two usage KPIs, also beat. Revenue and adjusted EBITDA guidance for the next quarter were above Consensus, and the full-year revenue guidance was lifted. It was an impressive overall quarter for the company.

LegalZoom is down 15.6% since the beginning of the year, and at $9.23 per share it is trading 40.5% below its 52-week high of $15.51 from August 2023. Investors who bought $1,000 worth of LegalZoom's shares at the IPO in June 2021 would now be looking at an investment worth $243.59.

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