LegalZoom.com Inc.
11/04/2026 | Press release | Distributed by Public on 11/04/2026 16:07
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Part II, Item 8, "Financial Statements and Supplementary Data" included in our 2025 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 23, 2026 and our other filings with the SEC. The following discussion contains forward-looking statements based upon current plans, expectations and beliefs and that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q. See "Forward-Looking Statements" preceding Part I of this Quarterly Report on Form 10-Q.
Overview
LegalZoom is a leading online platform for legal services, transforming how individuals and small businesses navigate the legal system. By combining intuitive technology with access to experienced attorneys-whether through our vast independent attorney network or our own law firm-we offer the tools and guidance people need to confidently manage everything from business formation and compliance to intellectual property protection and ongoing business management and legal support. Our ongoing business management services include virtual mail, legal forms, bookkeeping and estate planning services, among others. We operate across all 50 states and in over 3,000 counties in the U.S. With over two decades of experience and millions of customers served, LegalZoom helps individuals and small businesses navigate legal needs with confidence.
Recent Developments
•In September 2026, we entered into an amended partnership agreement (the "Amended Agreement") with Accounting Fulfillment Services, LLC ("1-800Accountant"), which supersedes the original agreement dated December 15, 2024 (the "Original Agreement"), pursuant to which 1-800Accountant agreed to certain minimum revenue commitments to us across the term of the Original Agreement in exchange for us agreeing to certain obligations to market 1-800Accountant services to our customers, including agreeing to refer a minimum number of our customers to 1-800Accountant. The Amended Agreement extends the initial term through December 31, 2030, after which the Amended Agreement will automatically renew for successive annual terms unless either we or 1-800Accountant provides written notice of non-renewal pursuant to the terms of the Amended Agreement.
Key Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
•Our share of small and medium-sized businesses (SMBs). Business formations act as an entrance point for many customers to the LegalZoom ecosystem, where they then often purchase a mix of transaction and subscription offerings alongside and after the initial formation transaction. However, changes that Google is making, including changes in search algorithms and the prioritization of AI-generated summaries within the search experience, as well as the ways in which Google chooses to enforce its policy regarding the advertisement of federal filings, are reshaping how potential customers find and engage with LegalZoom. We have seen these changes result in a reduction in organic traffic and a higher emphasis on paid search, and we expect these customer acquisition dynamics to continue to evolve. In response, we are continuing to optimize our go-to-market and customer acquisition strategy, including by diversifying our marketing investments across media channels and increasing our level of brand marketing, which has resulted and may continue to result in an increase in our marketing costs. We are also expanding beyond traditional search through strategic partnerships and collaborations, including with AI platforms and other emerging channels. Over time, we expect partnership-driven and AI-platform channels to represent a greater share of customer acquisition, and we are investing accordingly. As a result, our operating results depend on the continuation of new business formations in the U.S. and even more so, on our ability to attract new and existing businesses to our platform via various acquisition channels.
•Ability to enhance customer lifetime value. Our future performance depends on our ability to integrate new products and services into our LegalZoom ecosystem and to increase recurring revenue through subscription offerings. We are continuing to optimize our subscription business, including by testing various commercialization and pricing strategies for our offerings and introducing new, higher value, full-service do-it-for-me ("DIFM") subscription offerings, including our business manager
(formerly concierge) suite of offerings. As a result, we have experienced and we expect to continue to experience increased volatility across our key business metrics.
•Ability to integrate augmented legal expertise. We believe that the future of legal and small business services involves a combination of scaling AI while strategically integrating our human-in-the-loop offerings to provide the judgment and trust that customers need. These offerings have two layers: experts (which includes our business managers and our independent network of attorneys) and service (which includes our virtual mail and registered agent providers). The extent to which we are able to combine AI with our human expertise in order to increase the consumption of our higher-value offerings will impact our future results of operations.
Key Business Metrics
In addition to the measures presented in our unaudited condensed consolidated financial statements, we regularly monitor the financial and operating metrics below to evaluate the growth of our business, measure the effectiveness of our marketing efforts, identify trends, formulate financial forecasts and make strategic decisions. Except with respect to annual small business retention rate, Formation Nation, Inc. ("Formation Nation") has been included in the key business metrics below starting on February 10, 2025, the date we acquired Formation Nation.
Number of business formations
We define the number of business formations in a given period as the number of limited liability company ("LLC"), incorporation, not-for-profit and doing business as ("DBA") orders placed on our platform in such period. We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription revenue as customers adopt additional products and services throughout the lifecycle of their business.
We believe that including customers filing DBAs on our platform provides a more accurate representation of the number of newly formed businesses we serve. These transactions are most often completed by sole proprietors who represent potential future transaction and subscription cross-sell opportunities as their businesses mature.
The below table sets forth the number of business formations for the three and nine months ended September 30, 2026 and 2025:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
|
Number of business formations
|
110 | 126 | 377 | 388 | ||||||||||||||||||||||
During the three and nine months ended September 30, 2026, we experienced a 13% and 3% decrease, respectively, in business formation transactions compared to the three and nine months ended September 30, 2025 primarily due to the impact of changing customer acquisition dynamics partially offset by an increase in business formations driven by strategic partnerships.
Number of transactions
We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period. Transactions may include one or more services purchased at the same time. For example, a customer of our business formation services may choose to form an LLC and purchase an operating agreement and business licenses at the same time. This constitutes a single transaction. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee. We consider the number of transactions to be an important metric
considering that our customers generally begin their LegalZoom journey with a transaction, creating the foundation for generating subsequent subscription revenue.
The below table sets forth the number of transactions for the three and nine months ended September 30, 2026 and 2025:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
|
Number of transactions
|
249 | 259 | 905 | 878 | ||||||||||||||||||||||
We experienced a 4% decrease in the number of transactions during the three months ended September 30, 2026 compared to the three months ended September 30, 2025, primarily due to a decrease in business formations and related small business transactions, partially offset by an increase in Annual Report filings within our compliance offerings as a result of filing automation.
We experienced a 3% increase in the number of transactions during the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025 primarily due to an increase in Annual Report filings within our compliance offerings as a result of filing automation, partially offset by a decrease in beneficial ownership information report filings following a Financial Crimes Enforcement Network ("FinCEN") ruling on March 21, 2025 that eliminated this filing requirement for U.S. companies.
Average order value
We define average order value for a given period as total transaction revenue divided by total number of transactions in such period. We consider average order value to be an important metric given that it indicates how much customers are spending on average on our platform per transaction.
The below table sets forth the average order value for the three and nine months ended September 30, 2026 and 2025:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
|
Average order value
|
$ | 222 | $ | 251 | $ | 225 | $ | 233 | ||||||||||||||||||
Average order value decreased 12% and 3%, respectively, for the three and nine months ended September 30, 2026 compared to the three and nine months ended September 30, 2025 primarily due to a decrease in the volume of business formations and related small business transactions.
Number of subscription units
We define the number of subscription units in a given period as the number of paid subscriptions at the end of such period, including those that are not yet 60 days past their subscription order dates. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.
We consider the number of subscription units to be an important metric since subscriptions enable us to increase the lifetime value of a customer through deeper, longer-term relationships. In addition, as we continue to innovate our product line-up, including by testing various commercialization and pricing strategies, we believe the number of subscription units, when viewed together with the number of business formations during a particular period, provides insight into the effectiveness of our efforts to drive growth in our subscription business.
Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders and have an annual term. Our customers can have multiple subscriptions at the end of a period.
The below table sets forth the number of subscription units as of September 30, 2026 and 2025:
|
As of September 30,
|
||||||||||||||
| 2026 | 2025 | |||||||||||||
| (in thousands) | ||||||||||||||
|
Number of subscription units
|
1,854 | 1,959 | ||||||||||||
We experienced a 5% decrease in subscription units from September 30, 2025 to September 30, 2026 due to a decrease in accounting solution subscriptions, as well as lower forms and eSignature and registered agent subscriptions, partially offset by an increase in legal advisory subscriptions, as well as increases in compliance subscriptions and virtual mail subscriptions. The decrease in accounting solution subscriptions and the increase in legal advisory subscriptions were both due to changes in our business formation bundles as we continue to test various commercialization strategies for our offerings.
On a sequential basis, the number of subscription units decreased 2% as of September 30, 2026 compared to June 30, 2026.
Average revenue per subscription unit
We define average revenue per subscription unit ("ARPU") as of a given date as subscription revenue for the twelve-month period ended on such date ("LTM") divided by the average of the number of subscription units at the beginning and end of the LTM period. We consider ARPU to be an important metric because it helps to illustrate our ability to provide and monetize higher value subscriptions. In addition, when viewed together with subscription units, ARPU provides insight into the impact that higher-value subscriptions have on our ability to grow our subscription units.
The below table sets forth ARPU as of September 30, 2026 and 2025:
|
As of September 30,
|
|||||||||||
| 2026 | 2025 | ||||||||||
|
Average revenue per subscription unit
|
$ | 280 | $ | 256 | |||||||
ARPU increased 9% as of September 30, 2026 compared to September 30, 2025 benefiting from pricing initiatives on our registered agent subscriptions and an increase in higher-value legal advisory subscriptions.
On a sequential basis, ARPU as of September 30, 2026 increased 4% compared to June 30, 2026.
Annual small business retention rate
We define annual small business retention rate as the percentage of small business subscription units active as of the last day of the quarter one year ago that were still active subscriptions 12 months later. Small business subscription units represent our subscriptions targeted at our small business customers and include subscriptions for our registered agent and compliance services, our tax solution, our virtual mail, forms and eSignature solutions and our small business legal advisory plan, and exclude subscriptions from our enterprise customers, our prior operations in the U.K., Formation Nation and our consumer legal advisory plan. Annual small business retention rate includes both monthly and annual subscription units and reflects all subscription unit attrition, including as a result of actual business failures of certain of our customers. Our annual small business retention rate as of September 30, 2026 was approximately 57% which was impacted by lower retaining subscriptions bundled into our formation offerings.
We expect annual retention rate to fluctuate as we continue to test new products, subscription term lengths and price points and seek to optimize our product offerings across our lineup. While there may be a general correlation between annual small business retention rate and our ability to increase customer lifetime value and the growth of our customer base, we do not view it as a predictor of future revenue given the varying needs of a small business during its lifecycle and the varying use cases of the products underlying our subscription units.
Key Components of our Results of Operations
Revenue
We generate revenue from the following sources:
Transaction revenue-Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts, sales allowances and credit reserves. We also earn fees from third-party providers in connection with lead generation activities, where referred customers purchased services that are transactional in nature.
Subscription revenue-Subscription revenue is generated primarily from subscriptions to our registered agent, compliance packages, attorney advice, legal forms, tax and accounting, virtual mail and eSignature services, and software-as-a-service ("SaaS") subscriptions. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue also includes amounts earned from third-party providers in connection with lead generation activities, where referred customers purchased services that are subscription in nature. Subscription revenue includes the transaction price allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third party service providers such as legal plan law firms.
The timing of revenue recognition, billings and cash collections results in accounts receivable and contract assets. For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered. We record amounts collected for services that have not been performed as deferred revenue on our unaudited condensed consolidated balance sheet. We record amounts recognized as revenue but not yet billed as contract assets within accounts receivable on our unaudited condensed consolidated balance sheets. The transaction price that we record is generally based on the contractual amounts and is reduced for estimated sales allowances for price concessions, charge-backs, sales credits and refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize.
See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates-Revenue Recognition" in our 2025 Annual Report on Form 10-K for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.
Cost of revenue
Cost of revenue includes all costs of providing and fulfilling our services. Cost of revenue primarily includes government filing fees, costs of fulfillment, customer care, and payroll services, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation, telecommunications and data center costs, amortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal-use software, printing, shipping and handling charges, credit and debit card fees, allocated overhead, legal document kit expenses, and sales and use taxes. We defer direct and incremental costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. These contract assets are recognized as cost of revenue in the same period the related revenue is recognized.
Gross profit and gross margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, primarily the mix between transaction and subscription revenue. Our gross margin expansion is also expected to be driven by automation improvements and digitization efforts. Further, our acquisitions of other companies have negatively impacted our gross margin in the past, and any such future acquisitions could have a similar effect. Our gross margin could fluctuate from period to period due to fulfillment rates and seasonality.
Operating expenses
Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, gain on sale of assets held for sale.
Sales and marketing
Sales and marketing expenses consist of customer acquisition media costs, compensation and related benefits, including stock-based compensation for marketing and sales personnel, media production, public relations and other promotional activities, general business development activities, an allocation of depreciation and amortization and allocated overhead. Customer acquisition media costs consist primarily of search engine marketing, television and social media costs. Marketing and advertising costs to promote our services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired.
Customer acquisition media spend has historically been highest in the first quarter of the year to align with business formation seasonality. We expect to continue to invest in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness. We anticipate that sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future.
Technology and development
Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation for technology and development personnel, expenses for outside consultants, an allocation of depreciation and amortization and allocated overhead. These expenses include costs incurred in the development and implementation of our products, websites, mobile applications, online legal platform, research and development and related infrastructure. Technology and development expenses are expensed as incurred, except to the extent that such costs are associated with internal-use software costs that qualify for capitalization.
Excluding stock-based compensation, we expect our technology and development expenses to decrease as a percentage of our revenue as we continue to invest in process efficiency initiatives, which includes the use of AI, although our technology and development expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.
General and administrative
Our general and administrative expenses relate primarily to compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, an allocation of depreciation and amortization, allocated overhead and legal costs. We expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term. However, our general and administrative expenses may fluctuate as a percentage of our revenue from period-to-period due to the timing and extent of the foregoing expenses and seasonality.
Gain on sale of assets held for sale
Gain on sale of assets held for sale relates to the sale of our operational headquarters on March 31, 2025.
Interest expense
Interest expense consists primarily of amortization of debt issuance costs related to our amended and restated credit and guaranty agreement (as amended, the "Amended Revolving Facility") as well as interest incurred on the deferred cash consideration associated with the acquisition of Formation Nation.
We expect interest expense to remain insignificant in the near term as we have no outstanding indebtedness. However, we would incur interest expense in the longer term should we borrow on our Amended Revolving Facility or incur other indebtedness.
Interest income
Interest income consists primarily of interest income generated from our investment in money market funds.
Other (expense) income, net
Other (expense) income, net consists primarily of realized and unrealized foreign currency gains and losses, changes in fair value of investments, and other non-operating gains and losses.
Income taxes
Our provision for income taxes consists of current and deferred federal, state and foreign income taxes.
We account for income taxes in accordance with Accounting Standard Codification 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from stock-based compensation and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
Results of Operations
The following table sets forth our unaudited condensed consolidated statement of operations data for each of the periods indicated. The period-to-period comparison of financial results should not be considered as a prediction or indicative of our future results:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenue | $ | 195,146 | $ | 190,158 | $ | 607,216 | $ | 565,777 | ||||||||||||||||||
|
Cost of revenue(1)(2)
|
57,083 | 62,271 | 196,970 | 196,229 | ||||||||||||||||||||||
| Gross profit | 138,063 | 127,887 | 410,246 | 369,548 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
|
Sales and marketing(1)(2)
|
76,909 | 67,835 | 234,426 | 198,793 | ||||||||||||||||||||||
|
Technology and development(1)(2)
|
14,297 | 19,485 | 53,949 | 62,442 | ||||||||||||||||||||||
|
General and administrative(1)(2)
|
33,313 | 34,074 | 94,913 | 110,291 | ||||||||||||||||||||||
| Gain on sale of assets held for sale | - | - | - | (14,337) | ||||||||||||||||||||||
| Total operating expenses | 124,519 | 121,394 | 383,288 | 357,189 | ||||||||||||||||||||||
| Income from operations | 13,544 | 6,493 | 26,958 | 12,359 | ||||||||||||||||||||||
| Interest expense | (77) | (152) | (879) | (499) | ||||||||||||||||||||||
| Interest income | 1,427 | 2,139 | 4,702 | 5,691 | ||||||||||||||||||||||
| Other (expense) income, net | (31) | (102) | 47 | 897 | ||||||||||||||||||||||
| Income before income taxes | 14,863 | 8,378 | 30,828 | 18,448 | ||||||||||||||||||||||
|
Provision for income taxes
|
6,802 | 3,869 | 16,480 | 9,078 | ||||||||||||||||||||||
| Net income | $ | 8,061 | $ | 4,509 | $ | 14,348 | $ | 9,370 | ||||||||||||||||||
(1)Includes stock-based compensation expense as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Cost of revenue | $ | 1,005 | $ | 1,421 | $ | 3,699 | $ | 4,159 | ||||||||||||||||||
| Sales and marketing | 3,325 | 4,445 | 10,752 | 12,685 | ||||||||||||||||||||||
| Technology and development | 1,938 | 2,893 | 8,947 | 11,575 | ||||||||||||||||||||||
| General and administrative | 12,731 | 19,610 | 40,511 | 60,344 | ||||||||||||||||||||||
| Total stock-based compensation expense | $ | 18,999 | $ | 28,369 | $ | 63,909 | $ | 88,763 | ||||||||||||||||||
Stock-based compensation expense decreased for the three and nine months ended September 30, 2026 compared to the three and nine months ended September 30, 2025, primarily due to lower expense from performance stock units ("PSUs"), including certain PSUs with market conditions granted in prior periods, as well as lower expense from time-based restricted stock units ("RSUs"). See Note 8 to our accompanying unaudited condensed consolidated financial statements and Note 14 to our consolidated financial statements included in our 2025 Annual Report on Form 10-K for additional information.
(2)Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software and intangible assets as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Cost of revenue | $ | 4,040 | $ | 5,343 | $ | 12,717 | $ | 15,771 | ||||||||||||||||||
| Sales and marketing | 3,578 | 2,513 | 10,007 | 6,682 | ||||||||||||||||||||||
| Technology and development | 1,790 | 2,081 | 6,024 | 6,459 | ||||||||||||||||||||||
| General and administrative | 1,464 | 1,436 | 4,535 | 4,206 | ||||||||||||||||||||||
| Total depreciation and amortization expense | $ | 10,872 | $ | 11,373 | $ | 33,283 | $ | 33,118 | ||||||||||||||||||
Comparison of the Three Months Ended September 30, 2026 and 2025
Revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Revenue by type
|
||||||||||||||||||||||||||
| Transaction | $ | 55,473 | $ | 64,799 | $ | (9,326) | (14) | % | ||||||||||||||||||
| Subscription | 139,673 | 125,359 | 14,314 | 11 | % | |||||||||||||||||||||
| Total revenue | $ | 195,146 | $ | 190,158 | $ | 4,988 | 3 | % | ||||||||||||||||||
The increase in total revenue for the three months ended September 30, 2026 compared to the three months ended September 30, 2025 was driven by continued growth in subscription revenue. Subscription revenue represented 72% and 66% of total revenue for the three months ended September 30, 2026 and 2025, respectively. Transaction revenue represented 28% and 34% of total revenue for the three months ended September 30, 2026 and 2025, respectively.
Transaction revenue decreased 14% year-over-year for the three months ended September 30, 2026 due to a 17% decrease in revenue from business formations and related small business transactions.
Subscription revenue increased 11% year-over-year for the three months ended September 30, 2026 primarily due to a 33% increase in revenue from our legal advisory subscriptions due to the bundling of this subscription into certain business formation offerings, as well as a 14% increase in revenue from our compliance offerings due to certain pricing initiatives, and strength in our virtual mail subscription offering. The increase in subscription revenue was partially offset by a decrease in revenue from accounting solution subscriptions due to changes in the commercialization of certain business formation bundles, as well as lower revenue from forms and eSignature subscriptions.
Cost of revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Cost of revenue | $ | 57,083 | $ | 62,271 | $ | (5,188) | (8 | %) | ||||||||||||||||||
Cost of revenue for the three months ended September 30, 2026 decreased by $5.2 million compared to the three months ended September 30, 2025, primarily due to a $2.5 million decrease in filing fees, a $1.8 million decrease in payroll and related benefits, largely driven by a lower average headcount, and a $1.3 million decrease in depreciation and amortization expense.
Gross profit
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Gross profit | $ | 138,063 | $ | 127,887 | $ | 10,176 | 8 | % | ||||||||||||||||||
Gross profit for the three months ended September 30, 2026 increased by $10.2 million compared to the three months ended September 30, 2025 due to a $5.0 million increase in revenue and a $5.2 million decrease in cost of revenue.
Sales and marketing
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Sales and marketing | $ | 76,909 | $ | 67,835 | $ | 9,074 | 13 | % | ||||||||||||||||||
Sales and marketing expenses for the three months ended September 30, 2026 increased by $9.1 million compared to the three months ended September 30, 2025, primarily due to a $6.9 million increase in customer acquisition marketing spend. Customer acquisition marketing spend was $51.1 million and $44.2 million for the three months ended September 30, 2026 and 2025, respectively, reflecting changes in the mix of investments across customer acquisition channels. Additionally, there was a $1.4 million increase in consulting costs and a $1.1 million increase in depreciation and amortization.
Technology and development
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Technology and development | $ | 14,297 | $ | 19,485 | $ | (5,188) | (27 | %) | ||||||||||||||||||
Technology and development expenses for the three months ended September 30, 2026 decreased by $5.2 million compared to the three months ended September 30, 2025, primarily due to a $7.8 million decrease in payroll and related benefits driven by a reduction in technology and development headcount. These decreases were partially offset by a $2.0 million increase in expense resulting from a decrease in capitalized software development costs.
General and administrative
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| General and administrative | $ | 33,313 | $ | 34,074 | $ | (761) | (2 | %) | ||||||||||||||||||
General and administrative expenses for the three months ended September 30, 2026 decreased by $0.8 million compared to the three months ended September 30, 2025. The decrease was primarily due to a $6.9 million decrease in stock-based compensation expense driven by lower expense from PSUs, including PSUs with market conditions granted in prior periods, as well as a reduction in expense from RSUs. This decrease was partially offset by a $5.7 million increase in restructuring costs, primarily related to the restructuring activity completed during the three months ended September 30, 2026.
Interest expense
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Interest expense | $ | (77) | $ | (152) | $ | 75 | (49 | %) | ||||||||||||||||||
Interest expense consists primarily of amortization of debt issuance costs related to our Amended Revolving Facility.
Interest income
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Interest income | $ | 1,427 | $ | 2,139 | $ | (712) | (33 | %) | ||||||||||||||||||
The change in interest income was primarily due to lower dividend income from money market investments during the three months ended September 30, 2026.
Other (expense), net
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Other (expense) income, net | $ | (31) | $ | (102) | $ | 71 | (70 | %) | ||||||||||||||||||
The change in other (expense) income, net, was primarily due to a $0.1 million loss on debt extinguishment recognized during the three months ended September 30, 2025, in connection with our Amended Revolving Facility, compared to foreign currency-related expenses recognized during the three months ended September 30, 2026.
Provision for income taxes
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Provision for income taxes
|
$ | 6,802 | $ | 3,869 | $ | 2,933 | 76 | % | ||||||||||||||||||
| Effective tax rate | 46 | % | 46 | % | ||||||||||||||||||||||
There was a $2.9 million increase in the provision for income taxes for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. The increase was primarily due to higher pre-tax income and decreased excess tax benefits from stock-based compensation for the three months ended September 30, 2026.
Comparison of the Nine Months Ended September 30, 2026 and 2025
Revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Revenue by type
|
||||||||||||||||||||||||||
|
Transaction
|
$ | 203,986 | $ | 204,263 | $ | (277) | - | % | ||||||||||||||||||
|
Subscription
|
403,230 | 361,514 | 41,716 | 12 | % | |||||||||||||||||||||
|
Total revenue
|
$ | 607,216 | $ | 565,777 | $ | 41,439 | 7 | % | ||||||||||||||||||
The increase in total revenue for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025 was primarily driven by an increase in subscription revenue. Subscription revenue was 66% and 64% of total revenue for the nine months ended September 30, 2026 and 2025, respectively, and transaction revenue was 34% and 36% of total revenue for the nine months ended September 30, 2026 and 2025, respectively.
Transaction revenue was flat year-over-year for the nine months ended September 30, 2026 primarily due to an increase in revenue from consumer and IP-related offerings, offset by a decrease in revenue from business formations and related small business transactions.
Subscription revenue increased 12% year-over-year for the nine months ended September 30, 2026 primarily due to a 28% increase in revenue from our legal advisory subscriptions from the bundling of these subscriptions into certain business formation offerings, and an increase in revenue from our registered agent and compliance subscriptions due to pricing initiatives. The increase in subscription revenue was partially offset by our prior discontinuation of new customer acquisition for our tax offering.
Cost of revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Cost of revenue
|
$ | 196,970 | $ | 196,229 | $ | 741 | - | % | ||||||||||||||||||
Cost of revenue for the nine months ended September 30, 2026 increased by $0.7 million compared to the nine months ended September 30, 2025, mainly due to a $5.4 million increase in filing fees and a $2.2 million increase in credit card fees. These increases were partially offset by a $3.1 million decrease in depreciation and amortization expense, a $2.5 million decrease in payroll and related benefits due to a decrease in average headcount and a $1.7 million decrease in third party fees for customer care.
Gross profit
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Gross profit
|
$ | 410,246 | $ | 369,548 | $ | 40,698 | 11 | % | ||||||||||||||||||
The increase in gross profit was driven by a $41.4 million increase in revenue partially offset by a $0.7 million increase in cost of revenue.
Sales and marketing
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Sales and marketing
|
$ | 234,426 | $ | 198,793 | $ | 35,633 | 18 | % | ||||||||||||||||||
Sales and marketing expenses for the nine months ended September 30, 2026 increased by $35.6 million compared to the nine months ended September 30, 2025, primarily due to a $23.6 million increase in customer acquisition marketing spend. Customer acquisition marketing spend was $158.8 million and $135.2 million for the nine months ended September 30, 2026 and 2025, respectively, reflecting changes in the mix of investments across customer acquisition channels. Sales and marketing expenses also increased due to a $5.2 million increase in payroll and related benefits, reflecting a $7.2 million increase in salaries and payroll-related costs, primarily due to higher average headcount during most of the period and a $3.3 million increase in amortization and depreciation, partially offset by a $1.9 million decrease in stock-based compensation expense.
Technology and development
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Technology and development
|
$ | 53,949 | $ | 62,442 | $ | (8,493) | (14 | %) | ||||||||||||||||||
Technology and development expenses for the nine months ended September 30, 2026 decreased by $8.5 million compared to the nine months ended September 30, 2025, primarily due to a $14.6 million decrease in payroll and related benefits, largely driven by a reduction in technology and development headcount. These decreases were partially offset by a $6.3 million decrease in capitalized software development costs.
General and administrative
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
General and administrative
|
$ | 94,913 | $ | 110,291 | $ | (15,378) | (14 | %) | ||||||||||||||||||
General and administrative expenses for the nine months ended September 30, 2026 decreased by $15.4 million compared to the nine months ended September 30, 2025. The decrease was primarily due to a $19.8 million decrease in stock-based compensation expense driven by lower expense from PSUs, including PSUs with market conditions granted in prior periods, as well as a reduction in expense from RSUs. The decrease was also due to a $0.8 million reduction in consulting costs, primarily due to transaction-related costs incurred during the prior-year period. These decreases were partially offset by a $5.9 million increase in
restructuring costs, primarily related to the restructuring activity completed during the three months ended September 30, 2026.
Gain on sale of assets held for sale
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Gain on sale of assets held for sale | $ | - | $ | (14,337) | $ | 14,337 | (100 | %) | ||||||||||||||||||
Gain on sale of assets held for sale for the nine months ended September 30, 2025 was $14.3 million due to the sale of our operational headquarters on March 31, 2025.
Interest expense
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Interest expense | $ | (879) | $ | (499) | $ | (380) | 76 | % | ||||||||||||||||||
The increase in Interest expense was primarily due to an increase in interest accrued in connection with certain sales tax matters during the nine months ended September 30, 2026.
Interest income
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Interest income
|
$ | 4,702 | $ | 5,691 | $ | (989) | (17 | %) | ||||||||||||||||||
The change in interest income was primarily due to lower dividend income earned on money market investments during the nine months ended September 30, 2026 compared to the prior-year period.
Other income, net
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Other income, net
|
$ | 47 | $ | 897 | $ | (850) | (95 | %) | ||||||||||||||||||
The change in other income, net, was primarily due to gains recognized in the prior-year period, including a $0.6 million gain from the sale of our investment in LegalVision Pty Ltd and a $0.3 million unrealized gain related to our investment in LawPath.
Provision for income taxes
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2026 | 2025 | $ change | % change | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
|
Provision for income taxes
|
$ | 16,480 | $ | 9,078 | $ | 7,402 | 82 | % | ||||||||||||||||||
| Effective tax rate | 53 | % | 49 | % | ||||||||||||||||||||||
There was a $7.4 million increase in the provision for income taxes for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. The change was primarily due to higher pre-tax income and decreased excess tax benefits from stock-based compensation for the nine months ended September 30, 2026.
Liquidity and Capital Resources
Overview
We fund our operations and capital expenditures from cash flows from operating activities. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. As of September 30, 2026, our principal sources of liquidity were cash and cash equivalents of $181.7 million, which consisted of cash on deposit with banks and money market funds, of which approximately $4.7 million related to our foreign subsidiaries. Our cash and cash equivalents decreased by $21.4 million from December 31, 2025 to September 30, 2026, primarily as a result of cash used in financing activities, including repurchases of common stock, shares surrendered for settlement of minimum statutory tax withholding and the payment of deferred consideration for the Formation Nation acquisition, as well as capital expenditures partially offset by cash provided by operating activities.
We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next twelve months and in the foreseeable future. We have the ability to supplement our liquidity needs with borrowings under our Amended Revolving Facility.
We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and accordingly no taxes have been provided on such earnings. We continue to evaluate our plans for reinvestment or repatriation of unremitting foreign earnings. We have not repatriated funds to the U.S. to satisfy domestic liquidity needs, nor do we anticipate the need to do so. If we determine that all or a portion of our foreign earnings are no longer indefinitely reinvested, we may be subject to foreign withholding taxes and U.S. state income taxes.
In October 2023, our board of directors approved a stock repurchase program authorizing repurchases of our common stock with no fixed expiration. In February 2026, our board of directors approved a $100.0 million increase in our stock repurchase program, bringing the aggregate amount authorized to $415.0 million. Approximately $65.8 million remained available for future repurchases under the stock repurchase program as of September 30, 2026. For additional information regarding our stock repurchase program, refer to Note 7 to our unaudited condensed consolidated financial statements.
Borrowings
Revolving Facility
We have entered into a $100.0 million amended and restated credit and guaranty agreement with JPMorgan Chase Bank, N.A., as the administrative agent, with a maturity date of July 14, 2030. We refer to the amended and restated credit and guaranty agreement, as amended from time to time, as the Amended Revolving Facility. The Amended Revolving Facility also provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million. As of September 30, 2026, we had no borrowings outstanding and $100.0 million was available for use under our Amended Revolving Facility.
Subject to the satisfaction of certain criteria, we will be able to increase the Amended Revolving Facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last twelve months cash earnings before interest expense, tax, depreciation and amortization ("LTM CEBITDA") plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM CEBITDA), plus (iii) an unlimited amount so long as we are in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.
We are required to pay a commitment fee in respect of unutilized commitments under the Amended Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00 and an additional reduction of 0.05% if the total net first lien leverage ratio does not exceed 1.00 to 1.00. We are also required to pay customary letter of credit fees and agency fees. U.S. dollar borrowings under the Amended Revolving Facility bear interest at a rate per annum equal to, at the borrower's option, either (a) the Secured Overnight Financing Rate ("Term SOFR") plus a margin ranging from 2.00% to 1.25% or (b) a margin ranging from 1.00% to 0.25% plus the highest of (i) the administrative agent's prime rate, (ii) the Federal Funds rate plus 0.50% or (iii) one-month Term SOFR plus 1%. The interest rate margins under the Amended Revolving Facility are subject to
one reduction of 0.25%, a second reduction of 0.25% and a further reduction of 0.25% each upon achieving total net first lien leverage ratios of 3.50 to 1.00, 2.50 to 1.00 and 1.00 to 1.00, respectively.
We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary "breakage" costs with respect to SOFR loans. There is no scheduled amortization under the Amended Revolving Facility. The principal amount outstanding is due and payable in full at maturity on July 14, 2030.
Obligations under the Amended Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Amended Revolving Facility is secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions.
The Amended Revolving Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries' ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates.
The Amended Revolving Facility requires compliance with a total net first lien leverage ratio not to exceed 4.50 to 1.00 (the "Financial Covenant"). The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35% of the total commitments under the Amended Revolving Facility on the last day of such fiscal quarter.
Cash flows
The following table sets forth a summary of our cash flows for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| 2026 | 2025 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 126,702 | $ | 144,068 | |||||||
| Net cash used in investing activities | (17,919) | (34,054) | |||||||||
| Net cash used in financing activities | (130,060) | (15,031) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (121) | 107 | |||||||||
|
Net (decrease) increase in cash and cash equivalents
|
$ | (21,398) | $ | 95,090 | |||||||
Net cash provided by operating activities
Our largest source of operating cash is cash collections from our customers for our transaction products and subscription services. Our primary uses of cash in operating activities are for our fulfillment, production and customer care costs, employee salaries and benefits, sales and marketing expenses and third-party consulting expenses. Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and gain on sale of assets held for sale, as well as the effect of changes in operating assets and liabilities.
In the nine months ended September 30, 2026, cash provided by operating activities was $126.7 million resulting from net income of $14.3 million, adjusted for stock-based compensation and other non-cash expenses of $111.1 million and net cash flows provided by changes in operating assets and liabilities of $1.3 million. The $111.1 million of stock-based compensation and other non-cash expenses resulted primarily from $63.9 million in stock-based compensation expense, $33.3 million in depreciation and amortization expense, and $3.0 million in amortization of right-of-use assets. The $1.3 million of net cash flows provided by changes in operating assets and liabilities resulted primarily from a $16.1 million increase in deferred revenue resulting from advance billings for subscription services, which are predominantly billed in advance of our revenue recognition, and an $9.9 million increase in accounts payable, partially offset by a $15.1 million decrease in accrued expenses and other liabilities, and a $4.3 million increase in prepaid expenses and other current assets.
Net cash used in investing activities
Our primary uses of cash in investing activities have consisted of capital expenditures to purchase property and equipment necessary to support our customer contact center, network and operations, the capitalization of internal-use software necessary to develop and maintain our platform and deliver new products and features, which provide value to our customers, business acquisitions and investments in other companies. As our business grows, we expect our capital expenditures to continue to increase.
In the nine months ended September 30, 2026, net cash used in investing activities was $17.9 million comprised of purchases of property and equipment, including capitalization of internal-use software.
Net cash used in financing activities
Our primary uses of cash in financing activities are for repurchases of common stock and settlements of stock-based compensation awards. Net cash used in financing activities is primarily impacted by exercises of stock options by our employees and issuance of common stock.
In the nine months ended September 30, 2026, net cash used in financing activities was $130.1 million, primarily resulting from $103.2 million in repurchases of common stock pursuant to our stock repurchase program, $12.5 million for the deferred consideration paid relating to the Formation Nation acquisition, and $14.8 million for settlement of minimum statutory tax withholding obligations related to equity awards.
Material Cash Requirements
We believe our current cash and cash equivalents, as well as cash expected to be generated by future operating activities, will be sufficient to meet our material cash requirements for the next twelve months. Our material cash requirements include the below contractual and other obligations:
Commitments
We have non-cancelable agreements with various vendors, which require us to pay $54.8 million over a three-year period, of which $31.7 million remains to be paid as of September 30, 2026.
Lease Obligations
At September 30, 2026, we had various non-cancelable operating leases for office space, which expire between May 2027 and June 2033. As of September 30, 2026, we had total minimum operating lease maturities of $15.8 million, $1.3 million of which mature within three months. See Note 8 of our consolidated financial statements included in our 2025 Annual Report on Form 10-K for additional information regarding our future operating lease payments.
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. We believe that these non-GAAP financial measures provide investors with useful information about our financial performance and liquidity, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision-making. We also believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. These non-GAAP measures should not be considered in isolation of, or as a substitute or an alternative to, measures prepared and presented in accordance with GAAP.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income adjusted to exclude interest expense, interest income, provision for income taxes, depreciation and amortization, other expense (income), net, stock-based compensation and certain non-recurring income and expenses from time to time. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue. We define net income margin as net income as a percentage of revenue based on our unaudited condensed consolidated financial statements.
Adjusted EBITDA is one of the primary performance measures used by our management and our board of directors to understand and evaluate our financial performance and operating trends, including period-to-period comparisons, preparing and approving our annual budget and operational performance. In assessing our performance, we exclude certain expenses that we believe are not comparable period over period or that we
believe are not indicative of our underlying operating performance. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which include that Adjusted EBITDA:
•may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure;
•does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;
•excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated may be replaced in the future;
•does not reflect changes in, or cash requirements for, our working capital needs;
•excludes stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy; and
•does not reflect certain expenses that we do not consider representative of our underlying operating performance, but that reduce cash available to us.
The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Reconciliation of net income to Adjusted EBITDA | ||||||||||||||||||||||||||
| Net income | $ | 8,061 | $ | 4,509 | $ | 14,348 | $ | 9,370 | ||||||||||||||||||
| Interest expense | 77 | 152 | 879 | 499 | ||||||||||||||||||||||
| Interest income | (1,427) | (2,139) | (4,702) | (5,691) | ||||||||||||||||||||||
|
Provision for income taxes
|
6,802 | 3,869 | 16,480 | 9,078 | ||||||||||||||||||||||
| Depreciation and amortization | 10,872 | 11,373 | 33,283 | 33,118 | ||||||||||||||||||||||
| Other expense (income), net | 31 | 102 | (47) | (897) | ||||||||||||||||||||||
| Stock-based compensation | 18,999 | 28,369 | 63,909 | 88,763 | ||||||||||||||||||||||
|
Transaction-related expenses(1)
|
863 | - | 1,467 | 1,543 | ||||||||||||||||||||||
| Gain on sale of assets held for sale | - | - | - | (14,337) | ||||||||||||||||||||||
|
Restructuring costs(2)
|
5,767 | 88 | 6,788 | 854 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 50,045 | $ | 46,323 | $ | 132,405 | $ | 122,300 | ||||||||||||||||||
| Net income margin | 4 | % | 2 | % | 2 | % | 2 | % | ||||||||||||||||||
| Adjusted EBITDA margin | 26% | 24% | 22% | 22% | ||||||||||||||||||||||
(1) For 2025, transaction-related expenses are primarily related to our acquisition of Formation Nation. For 2026, transaction-related expenses are related to the evaluation and pursuit of strategic transactions.
(2) For 2026 and 2025, restructuring costs are related to the reduction of our global headcount.
Adjusted EBITDA increased from $46.3 million for the three months ended September 30, 2025 to $50.0 million for the three months ended September 30, 2026. The increase of $3.7 million was primarily driven by a $5.0 million increase in revenue and a $3.5 million decrease in cost of revenue, excluding non-cash items, partially offset by a $4.7 million increase in operating expenses, excluding non-cash and non-recurring items.
Adjusted EBITDA increased from $122.3 million for the nine months ended September 30, 2025 to $132.4 million for the nine months ended September 30, 2026. The increase of $10.1 million was primarily driven by a $41.4 million increase in revenue, partially offset by a $27.1 million increase in operating expenses, excluding non-cash and non-recurring items, and a $4.3 million increase in cost of revenue, excluding non-cash items.
Free cash flow
Free cash flow is a liquidity measure used by management in evaluating the cash generated by our operations after purchases of property and equipment including capitalized internal-use software. We believe free cash flow provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet, once our business needs and obligations are met. The usefulness of free cash flow as an analytical tool has limitations because it excludes certain items that are settled in cash, does not represent residual cash flow available for discretionary expenses, does not reflect our future contractual commitments, and may be calculated differently by other companies in our industry.
The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable GAAP measure, to free cash flow:
| Nine Months Ended September 30, | ||||||||||||||
| 2026 | 2025 | |||||||||||||
| (in thousands) | ||||||||||||||
| Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | ||||||||||||||
| Net cash provided by operating activities | $ | 126,702 | $ | 144,068 | ||||||||||
| Purchase of property and equipment | (17,919) | (24,144) | ||||||||||||
| Free cash flow | $ | 108,783 | $ | 119,924 | ||||||||||
We experienced a decrease in our free cash flow from $119.9 million for the nine months ended September 30, 2025 to $108.8 million for the nine months ended September 30, 2026. The decrease was primarily due to a $17.4 million decrease in net cash provided by operating activities. Free cash flow was partially offset by a $6.2 million decrease in capital expenditures for the purchase of property and equipment, including capitalized internal-use software. The decrease in net cash provided by operating activities primarily reflected an $18.5 million unfavorable change in operating assets and liabilities and $3.9 million decrease in non-cash adjustments, partially offset by a $5.0 million increase in net income.
Critical Accounting Estimates
During the three and nine months ended September 30, 2026, there were no significant changes to our critical accounting estimates compared with those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" in our 2025 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for further information on certain accounting standards adopted in the period ended September 30, 2026 and recent accounting announcements that have not yet been required to be implemented and may be applicable to our future operations.
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