Key Points
A major one was a cut in revenue guidance.
Another was the negative effect of changes in the world's No. 1 search engine.
A shift in online search algorithms and lowered revenue guidance were the two key factors sending LegalZoom (NASDAQ: LZ) down by 30%. This happened after the company reported second-quarter earnings on Wednesday that raised significant concerns.
Zooming in the wrong direction
For the period, LegalZoom collected revenue of $205.3 million, a 7% year-over-year increase. This was largely due to subscription revenue, which rose by 11%; the company noted that this was the fifth consecutive quarter of double-digit growth in the category.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now, when you join Stock Advisor. See the stocks »
Image source: Getty Images.
As for profitability, net income not under generally accepted accounting principles (non-GAAP, or adjusted) fell by 3% to $27.4 million, or $0.16 per share.
Both figures were broadly in line with the consensus analyst estimates of $205.7 million for revenue and adjusted net earnings per share (EPS) of $0.15.
In the conference call discussing the results, LegalZoom's management said the company was challenged by what it characterized as abrupt changes to search algorithms by Alphabet's Google. This negatively affected the company's online traffic from the No. 1 search engine.
Unwelcome adjustments
LegalZoom cut its full-year 2026 revenue guidance and trimmed the high end of its forecast for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
The top line is now expected to be $795 million to $805 million for the year, down from the previous estimate of $810 million to $830 million; the midpoint is 6% higher than the 2025 revenue line. The new adjusted EBITDA range is $190 million to $195 million; the top end of this was formerly $200 million.
LegalZoom said the changes are due to its ongoing efforts to promote subscription services and more specialized products. This will be mitigated by what it calls "a more cautious view of customer acquisition."
While Google matters to a business like LegalZoom and no pivot is easy, I wouldn't be so eager to bail on the stock -- LegalZoom is still widely recognized as a go-to purveyor of legal products and services. Still, investors should keep a sharp eye on how those developments continue to affect its business.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.