管理層發言
Good day, and thank you for standing by. Welcome to LegalZoom's Second Quarter '26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Madeline Crane, Head of Investor Relations. Please go ahead.
Thank you, operator. Welcome to LegalZoom's second quarter '26 earnings conference call. Joining me today is Jeffrey 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 measure are set forth in our investor presentation which can be found on the Investor Relations section of our website at investors.legalzoom.com. I will now turn the call over to Jeff.
Thank you, Madeleine, and thank you all for joining our call. LegalZoom continues to execute against our strategy of building the leading services and expertise platform for small businesses, combining AI with trusted human expertise. We delivered second quarter revenue of $205 million, up 7% year over year and in line with our guidance. Adjusted EBITDA of $46 million increased approximately 18% year over year, well ahead of the high end of our guidance. Q2 also marked our fifth consecutive quarter of double-digit subscription growth. Since late '24, we have steadily increased the mix of recurring subscription revenue in our business by acquiring customers who find ongoing value in our platform. These results reflect the momentum of the growth levers we have been building for the last year: expanding our portfolio of expert and service offerings, accelerating the use of AI across the business, and intentionally diversifying how we acquire customers, making our go-to-market model more resilient and less dependent on any single channel.
Those investments in diversification were built for exactly this moment. During the quarter, Google accelerated their shift to AI-powered search, with AI-generated answers increasingly replacing traditional clicks. This is affecting top-of-funnel traffic across our industry, and I want to be specific about what it means for us because there are two very different currents underneath it. The first is the pressure reflected in our updated outlook, and it is concentrated in one place. The majority of our traditional search traffic, both organic and paid, historically runs through Google. As AI-generated answers replace clicks on informational queries, fewer of those visits reach us, and paid inventory has become more expensive. That pressure is real, and we are feeling it now. To be clear, this is the repricing of a single legacy channel. It is significant but bounded. The second current runs the other way.
Across the AI platforms where discovery is moving, we start from essentially zero, so every visit is incremental. That traffic grew more than 250% quarter over quarter. Today, we have the highest brand references across AI platforms of any competitor. Our exposure to the old channels being repriced and our position in the new channels represent upside. Our outlook reflects the full weight of the first and very little of the second. This is a change in how customers find us, not in what they need from us. We have responded by doubling down on channel diversification, expanding partnerships, strengthening our brand, and increasing our presence across AI-driven channels. I will discuss those efforts in more detail shortly. Across each of our key growth levers, one principle remains constant: AI has made answers abundant, but it has not made them accountable. When entrepreneurs move from asking questions to completing important legal, compliance, and business tasks, human expertise, accountability, and trusted execution still matter.
We have seen this directly in our engagement data, and that is where LegalZoom has differentiated itself for more than 25 years. Our first growth lever is expanding our portfolio of human-in-the-loop offerings. We have discussed these offerings for several quarters, but we now have real scale and real growth to show for it. We want to give more color on both. This lever is working, increasingly displacing our older, lower-value products. We believe this remains one of our strongest competitive advantages and one of our most attractive long-term growth opportunities. Our portfolio spans two complementary layers across our subscription and transaction offerings. First, our service layer, including registered agent and virtual mail subscriptions, which provide the operational infrastructure businesses rely on to stay organized and operate with confidence. Second, our expert layer. This includes legal plans, IP-related services, and our do-it-for-me concierge offerings that have now been rebranded as Business Manager.
This layer combines professional guidance and technology to help customers solve more complex business needs. In Q2, revenue from our human-in-the-loop subscription services grew approximately 20% year over year and now represents about 65% of subscription revenue. On a total company basis, our human-in-the-loop subscriptions are now over 40% of total revenue. That growth reflects both increased adoption of our higher-value products and our ability to thoughtfully price services like registered agent and Business Manager as we continue expanding our service offerings. We also experienced significant growth in our legal plans, where bundling legal subscriptions into formation packages is introducing more customers to ongoing legal guidance and driving higher engagement with attorney consultations. We believe AI is educating customers more, but they are still turning to us for answers. This is evidenced by a greater than 35% year-over-year increase in customer utilization of our legal plans this past quarter.
We are seeing similar demand in our transactional expert services, including attorney-assisted trademark filings and Business Manager reinstatements—early evidence that customers will pay for expertise at each stage of the business life cycle. Ultimately, our human-in-the-loop portfolio is allowing us to address a greater portion of our addressable market beyond business formations. By combining technology with trusted human expertise, we believe we are well positioned to serve both new entrepreneurs and the millions of established small businesses that need ongoing legal and compliance support as their business evolves and grows. Moving to our next growth lever: as a reminder, over the past year we have been intentionally diversifying our customer acquisition channels by expanding partnerships, strengthening our brand, and investing in AI-driven distribution. The evolving search landscape reinforces the importance of that strategy.
To clarify the mechanics behind what I described earlier: in the second quarter, we saw fewer high-intent visits from Google's informational search queries as AI-generated answers reduced click-through to websites while competition for paid inventory increased, driving higher cost-per-click and making paid search less efficient. Those dynamics have translated into lower customer acquisition through our traditional search channels and ultimately, lower business formation volume. Importantly, the pressure is most concentrated in informational search traffic and does not reflect a structural change in the underlying opportunity we see across partnerships, brand, and AI-driven channels. We are accelerating execution on each of those fronts. At the same time, our objective is not simply to maximize formation volume; it is to acquire new and existing small businesses who are more likely to build long-term relationships with LegalZoom.
One of the clearest examples is our partnerships business. Twelve months ago, partnerships represented a relatively small portion of our acquisition strategy. Today, leveraging our category leadership, we have created meaningful momentum as we continue to expand both the breadth of our partner ecosystem and the depth of those relationships. Customers who come through our partners typically arrive with higher intent and stronger engagement, creating better opportunities to introduce our subscription offerings and build deeper customer relationships. In Q2, total order volumes from partnerships increased to about 11% of total orders, up from about 4% a year ago. We achieved this through the continued expansion of our partner portfolio, deeper embedded integrations, and investing in our partner go-to-market program. We continue to see a healthy pipeline of opportunities and remain confident this channel will play an increasingly important role in our growth over time.
We have recently welcomed new partners including USAA, AAA, PayPal, and Adobe, further expanding LegalZoom's presence across trusted brands serving small businesses. We are systematically building this new acquisition engine—one focused on repeatability, attractive unit economics, and growing customer lifetime value. Our marketing investments remain focused on improving both awareness and customer quality. In response to the recent traffic changes, we are deepening our investments beyond traditional search into new channels including strategic partnerships, emerging AI referral channels, and upper-funnel media. Additionally, we are closely monitoring and aggressively adapting to new AI-enabled features within the traditional search space, such as AI Max. We are focused on widening our competitive differentiation through attorney-backed experiences, bundled offerings, and industry-leading guarantees, giving customers more reason to choose LegalZoom.
Returns from our brand investments remain strong. In Q2, unaided brand awareness increased approximately 10% year over year while aided awareness increased about 18%. Today, more than 70% of U.S. households are familiar with LegalZoom. As awareness grows, we are experiencing improvements in the efficiency of our performance marketing, helping us attract more qualified customers across our paid channels. Finally, our approach to emerging AI channels: over the past year, we have announced integrations across ChatGPT, Claude, Copilot, and Perplexity. We have also been testing, selling, and onboarding AI products directly to small business customers through our Business Managers. We view these as components of a broader AI distribution strategy rather than standalone partnerships. As entrepreneurs incorporate AI tools into how they form, operate, and grow their businesses, our objective is simple: ensure they look to LegalZoom as the legal layer of AI throughout the small business life cycle.
This approach has three components. First, we are investing in visibility to help ensure LegalZoom's position as one of the most trusted and frequently referenced brands for business formations and compliance across leading AI platforms. Much like we previously established our position in traditional search, we have been deliberately focused on generative engine optimization, or GDO, over the past year to ensure we surface favorably inside AI-generated answers, and we are doubling down on that investment. What differentiates our approach is authority, a factor we know carries significant weight in how AI platforms rank and surface brands. As the only online formations provider with an owned law firm, we have a structural advantage our peers cannot replicate. Attorney-written content positions us to earn citations in AI-generated responses in a way that is genuinely unique to LegalZoom. Second, we are testing and scaling customer acquisition within emerging AI experiences, including paid AI environments, as new distribution models develop.
As I noted earlier, traffic from AI platforms grew more than 250% quarter over quarter and accounted for about 3% of our LLC formation traffic in June. These visitors also arrive with high intent and convert at higher rates than traditional organic search traffic. And third, we are embedding LegalZoom directly into AI workflows through integrations like ChatGPT, Claude, and most recently Microsoft Copilot, making it easier for customers to move seamlessly from asking questions to taking action. We recently announced a new agent integration directly into Microsoft 365 Copilot, allowing users to evaluate business formation options, manage business compliance, and connect with attorneys without leaving their daily Microsoft workflow. We are pleased with our early progress. Today, LegalZoom has partnered with the leading AI companies and is at the forefront of AI integrations, giving us confidence we are well positioned as AI becomes an increasingly important source of customer discovery.
Lastly, we continue to focus on leveraging AI to improve both the customer experience and how we operate our business. Today, we announced the next step in our organizational evolution, a transformation we began more than a year ago. We are simplifying how LegalZoom is organized, sharpening our strategic focus, and aligning resources behind our highest-priority growth opportunities. That work is enabled in part by AI, which is now embedded across our operations, allowing us to serve customers with greater speed and consistency. As part of these changes, we have reduced our workforce by approximately 13%. These decisions are never easy, and I want to thank our departing colleagues for their many contributions to LegalZoom. We believe these changes position us to execute with greater focus, quality, and speed while continuing to invest behind our key growth initiatives. Stepping back, while the current search environment has created near-term pressure, it reinforces, not changes, the strategy we have been building.
We are growing higher-value, human-in-the-loop subscription relationships. We are expanding beyond traditional customer acquisition through partnerships, brand, and AI. And we are using AI not only to help customers succeed but to make LegalZoom a faster, more efficient, and more agile company. We believe the companies that win in this next chapter will not simply be the ones that answer questions but will be the ones that help customers take action with confidence. For more than 25 years, that has been LegalZoom's role. We believe our combination of technology, trust and expertise, and long-term customer relationships positions us well for the future. I am personally proud of our team for their unwavering dedication to our company and to one another. To each of you, you continue showing up for our customers, and that says everything about who you are. I am grateful to be part of LegalZoom. Thank you, and I will now turn it over to Noel to discuss our second quarter financial results and updated outlook in more detail. Noel?
Thanks, Jeffrey, and good afternoon, everyone. We continue to make disciplined investments to drive higher-quality subscription revenue growth, diversify customer acquisition, and improve operating efficiency while delivering strong profitability. Our second quarter results demonstrate meaningful progress across each of these priorities. In Q2, subscription revenue represented 65% of total revenue, an increase of 300 basis points year over year, supported by stable retention and ARPU growth. Adjusted EBITDA of $46 million came in above the high end of our guidance range, driven by a significant improvement in gross margin as we leverage AI and automation to improve both the quality and efficiency with which we deliver our services to our customers. Adjusted EBITDA margin was 22%, which translated into strong free cash flow generation of $34 million. Turning now to our second quarter results in more detail.
Unless otherwise stated, all comparisons will be on a year-over-year basis. Revenue for the quarter was $205 million, representing 7% growth and in line with the midpoint of our guidance range. Subscription revenue increased 11% to $133 million. We are continuing to shift the composition of our business toward recurring revenue streams as we aim to drive stronger customer lifetime value and more durable long-term growth. Subscription revenue showed continued momentum across our human-in-the-loop subscription portfolio, including our legal advisory subscriptions, reflecting increased bundling within select formation offerings; registered agent, building on last year's pricing and value initiatives; and continued growth in virtual mail and Business Manager. As a result, ARPU grew 5%, benefiting primarily from higher pricing in our human-in-the-loop offerings. We continue to expect ARPU to be the primary driver of subscription growth throughout the year as we focus on shifting our mix towards higher-value offerings.
We are seeing an expected decline in lower-value subscriptions bundled within the formation package; we expect that decline to continue through the remainder of the year. As a result, we ended the quarter with approximately 1.9 million subscription units, down about 3%. Importantly, retention remained stable, supported by strength across our compliance offerings and human-in-the-loop services and ongoing improvements to our customer experience. Transaction revenue was $72 million, down 1%, reflecting lower business formations, partially offset by continued growth in our consumer and IP-related offerings. Once again, the growth in IP reflects increasing demand for our expert-led services. Transaction units increased 1% to approximately 281 thousand, driven primarily by higher annual report filing volumes for our compliance customers. We processed approximately 125 thousand businesses during the quarter, a decline of about 5%, reflecting the shift to AI-powered search that Jeffrey described earlier.
Importantly, formations from strategic partnerships continued to offset a portion of that pressure and represented a growing share of overall formation volume. Transaction AOV was $256, down about 2%, primarily due to changes in composition of our bundled small business offerings resulting in an increased allocation of order value shifting to subscription products. This decrease was partially offset by an increase in higher-value consumer and IP-related offerings. Finally, deferred revenue declined about $2 million sequentially. Turning to profitability—all metrics are on a non-GAAP basis. We continue to expand profitability while investing behind the long-term growth priorities Jeffrey outlined. Gross profit increased to $146 million while gross margin expanded approximately 250 basis points to 71%. This improvement reflects a favorable subscription mix and continued customer care and fulfillment efficiencies due to increasing automation across our operation.
Sales and marketing expenses increased 14%, including a 13% increase in customer acquisition marketing, reflecting the dynamic search environment and investment in our diversified customer acquisition initiatives. Consistent with our focus on customer quality over volume, we are prioritizing acquisition spend in channels we believe will have the strongest defensibility and unit economics over the long term. Non-CAM sales and marketing expenses increased about $3 million, or 20%, largely from targeted investments in our sales organization, which is supporting the expert-led revenue growth you are seeing in these results. Technology and development expenses declined 4% while G&A declined 10%, improving overall operating leverage. Those efforts resulted in adjusted EBITDA of $46 million, an increase of 18%, with adjusted EBITDA margin expanding approximately 22 basis points. Our balance sheet remains a source of strength and continues to provide us with significant financial flexibility.
During the quarter, we generated $34 million in free cash flow, an increase of 7% reflecting the continued profitability and cash-generating nature of our business. We maintain a debt-free balance sheet and our $100 million revolving credit facility remains fully undrawn. We ended the quarter with $167 million in cash and cash equivalents. A sequential decline from the first quarter includes approximately $46 million for 7.3 million shares repurchased, partially offset by the free cash flow generation. As of June 30, 2026, we had approximately $80 million remaining under our authorization. Looking ahead, we continue to expect strong free cash flow generation for the full year, providing the flexibility to execute a balanced capital allocation strategy that includes investing behind our key growth opportunities, evaluating strategic M&A opportunities, and the ability to return excess capital to shareholders.
Turning now to our outlook: for the full year, we expect revenue in the range of $795 million to $805 million, representing year-over-year growth of approximately 6% at the midpoint. Our guidance assumes the continued scaling of our subscription growth initiative and ongoing momentum from our partner channel, partially offset by a more cautious view of customer acquisition for the remainder of the year. This is based on the impact of the experience changes Google implemented during the quarter and that have persisted through today. Our outlook assumes the current search environment remains broadly consistent through year end. As customer discovery continues to evolve, we expect to be navigating increased uncertainty with regard to the performance of traditional search channels. While we are encouraged by the progress we are making through partnerships, increased investment in our brand, and emerging AI distribution channels, those initiatives will take time to fully compensate for the near-term impact of these recent changes.
For the third quarter, we expect revenue of $192 million to $196 million, representing year-over-year growth of approximately 2% at the midpoint. Our guidance assumes a high single- to low double-digit decline in transaction revenue based on the aforementioned acquisition trend. Turning to profitability: we continue to execute against the AI-enabled operating model we have been building for more than a year. As we have discussed in prior earnings calls, our profitability outlook has assumed continued productivity improvements from AI, disciplined cost management, and the evolution of our operating model. The organizational actions we announced today represent the next phase of that evolution. Over the past year, we have invested in AI capabilities, redesigned workflows, and simplified how work gets done across the company. Earlier this year, we announced a 5% workforce reduction as part of that work.
Today's actions continue that work by further simplifying our organizational structure and aligning resources behind our highest-priority growth initiatives, resulting in a 13% headcount reduction. Over time, we expect this to further strengthen operating leverage and support sustained profitable growth. We expect these workforce actions to result in approximately $7 million of net in-year savings, or about $14 million on an annualized basis. We also expect about $6 million of restructuring and related charges, primarily in the third quarter. We now expect full-year adjusted EBITDA of $190 million to $195 million, representing an adjusted EBITDA margin of approximately 24% at the midpoint. Our profitability outlook expects continued gross margin improvement, focused expense management, and the benefits of our evolving AI-enabled operating model. For the third quarter, we expect adjusted EBITDA of $49 million to $51 million, or a margin of approximately 26% at the midpoint, inclusive of the impact from the workforce actions announced today.
As we look ahead, our focus is on what is within our control: driving high-value human-in-the-loop subscription growth, accelerating our partnerships momentum, deepening our brand presence, and converting our early AI channel traction into durable opportunity. We are executing against each of those fronts, staying focused on customer quality, margin expansion, and free cash flow generation. Finally, I would like to thank all of our employees for their continued resilience and commitment to our customers and our organization. Your hard work and focus have been instrumental in executing our strategy and positioning LegalZoom for long-term success. With that, I will turn the call back to the operator for questions.
分析師問答
Thank you. As mentioned, at this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Your first question comes from the line of Eleanor Smith with JPMorgan. Your line is now open.
Good evening. Thank you for taking my questions. First, I was hoping to ask about the higher-value initiatives. It seems like they are taking longer to benefit the top line. What have you learned about the go-to-market motion on those new higher-value products in the last few months? And are they coming with any higher churn or tougher go-to-market motion than your existing subscription products?
Sure. Thanks, Eleanor. We are actually pretty encouraged with the higher-value products. If you look at our human-in-the-loop offerings generally, both service and expertise, those are growing at orders of magnitude faster than the rest of the business. They are now approaching 20% in terms of growth and about 40% of total revenue, so we are seeing what we believe is good strength there. We are just coming up on renewal cycles and are starting to reevaluate how we package, promote, and engage. But we are pretty encouraged.
Perfect. Thank you, Jeffrey. And for a follow-up, you were early to partner with some of the AI majors, so I am just curious what you envision you could still do to drive improvement in business formation traffic from those AI majors.
Great question. We continue to be excited; I think we were very early to adopt and likely first in our category. I think there are three key areas, and we are starting to see proof points in each of them. The first from our standpoint is visibility and brand recognition. We know we have the authority advantage and are driving positive results there. The second is with respect to GDO and AEO where we are having significant strength. And the third is paid opportunities as those start to emerge, particularly right now with ChatGPT. You are seeing growth already. It is starting from a small base, but we are talking about 250% growth, and now approaching about 3% of traffic. So it is material and has the opportunity for us to offset that structural step down from Google more quickly.
Thank you, Eleanor.
Your next question comes from the line of John Byun with Jefferies. Your line is now open.
Thanks very much. This is Sang-Jin Byun for Brent Thill at Jefferies. Two questions: on the shift in traffic that you mentioned, it looked like some of it had been happening for some time. When during the quarter did this become much more noticeable? And is it possible it could get worse from here? I have a quick follow-up after that.
That's a fair question. We have obviously seen a slow, steady shift away from Google search into AI-native environments over time. But most recently there was a structural shift. Google called it the biggest change to their search box since they introduced the search box. So this was a material change and a step down. We believe we understand it, and we have fully taken that change into account in our guidance. We are trying to be proactive here. We think it is the right thing to do because we are seeing this across the industry worldwide. This is a structural shift in terms of what Google is doing.
And Sang-Jin, to build on that, the impact we saw was really in the back half of the quarter. The performance we have seen after that structural step down has been relatively consistent since then and quarter to date. That extrapolation is what we have included as a baseline expectation in our guidance. So the expectation is that it remains consistent through the end of the year. We are not building in any expectation around recovery or further degradation, and that is what gives us confidence in our guide.
Great. Thank you very much for that. On the 13% reduction in force, can you talk a little about the timeline? Is that pretty much complete? Is it broad-based? Any particular departments more impacted?
The workforce reduction was effective today and reflected in the announcement. We included specifics on the size of the impact both in year and annualized. It was a company-wide reorganization. We looked across the business at where we can reimagine work streams, speed up decision-making, and improve execution. You will see it impact various functions across the organization.
Thank you.
Your next question comes from the line of Matthew Condon with Citizens Bank. Your line is now open.
Thank you so much for taking my questions. First, on the Google search trends you are seeing, are there any quantitative stats you can give us—either as a percentage of business formations or anything—to help us get comfortable with just the size of Google as far as your traffic today? If anything gets worse in the future, we can start to think about what the impact could be.
Google has historically been one of our primary channels. This speaks to the strategic focus we've had around channel diversification for a number of quarters. We have been heavily focused on investing in brand, expanding our partner channel and driving new partnerships, and investing in GEO and AEO to drive progress. As Jeffrey talked about, we are even spending into LLMs to drive progress. If you think about our guidance, it reflects the impact we are seeing from acquisition trends. We guided to a high single-digit to low double-digit decline in transaction revenue in the back half of the year. So you can size it off of that. You can also read more broadly on the metrics about what is happening with Google traffic generally.
Our confidence in part comes from the fact that this was rolled out fully in the U.S. first, and it is now being rolled out internationally. We have a de minimis amount of international formation traffic, so we think we have a good handle on that.
That is very helpful. As you think about the brand investments you're making, why do you feel now is the time to do that? Could the changes to Google search ultimately affect the effectiveness of your brand spend and the return on that spend?
I would argue that brand recognition and the power and authority of our brand is one of our biggest strengths. We can see improvements in recognition and authority quickly with brand investment, which immediately translates to authority with AI. That helps significantly with AEO and GDO. So as we migrate away from Google and into partnership and AI channels, having a strong, trusted brand is critically important.
It also helps on the partnership front and in direct-to-site traffic. When you think about search engines, there is a brand component of spend that is a very high-returning spend. So anything that can enhance our brand in today's environment is hugely positive. When you look at our higher-value services, particularly human-in-the-loop, now at and above that 40% mark, our goal is to push that further both in terms of value offered and ultimately the price we can receive, and much of that comes from being a trusted brand.
Thank you so much.
Your next question comes from the line of Patrick McIlwee with William Blair. Your line is now open.
Hi, team. Thanks for taking the questions. Given the fluidity around Google search, can you talk about how you evaluate CAM spend and overall marketing spend looking into the back half of the year? I think we had already expected lots of CAM in the back half given some of the front-loading you did, but any thoughts on how your spending plans have evolved would be helpful.
A couple of points: in terms of spend level, it is an area where we are making investments, especially as we transition channels. Brand is a slower-returning spend, so as we ramp up spend there, we expect it to take more time for that to generate the same ROAS. In our partner channels, as we onboard new partners, those start sub-optimized and we iterate over time. We have built in space to make some investment in CAM, and we expect overall CAM on the full year to step up a couple of points relative to the prior year. Strategically, we are performance-oriented, but we are looking to shift spend away from Google wherever possible.
Okay. Your Q3 guide points to a pretty sharp deceleration to growth in the low single-digit range. What signals are you looking for before you can talk more confidently about optimizing your top of funnel and getting back to a reacceleration toward prior growth targets?
This happened relatively abruptly when Google made their changes, so we want to be conservative in the short term. We have been focused for more than 18 months on diversifying our channels because Google was a large concentration risk. Over time, we have been moving away from that concentration, but because the change was abrupt, we couldn't overcome it as quickly as we'd like right away. We have positioned ourselves to give ourselves flexibility and time to execute. We are continuing the work on partnerships—increasing partnerships from about 4% to 11% of orders—and increasing AI-driven traffic, which grew 250% and now represents about 3% of traffic. Those channels should continue to accelerate, and we will push on those diversification channels, but we wanted to make sure we built the short-term risk into our guide while leaving room for the upside we expect.
As we accelerate channel diversification, it's worth reminding everyone that the business is almost two-thirds subscription, so there is durability and some insulation while we make a shift. We continue to make investments on the subscription side—higher-value services and expert-led services—and are making improvements in engagement that we expect will lead to retention. We have also shown pricing power across numerous subscriptions. While the impact from Google is structural for now and creates some pressure on new customer acquisition, especially with the lag on subscription growth, we are confident that our efforts can work to offset that impact over time.
Okay. Thank you both for the thoughts.
Your last question comes from the line of Kishan Patel with Raymond James. Your line is now open.
Hey. This is Kishan Patel on for Josh Beck. Can you elaborate on the differences in conversion and acquisition costs you see between AI overviews and AI mode versus the traditional 10-blue-link referral traffic within the Google search channel? And what are you seeing in terms of SMB adoption for AI tools on your platform? What are the key opportunities and risks to keep in mind?
You bet. For now, paid AI is still quite small and coming largely from ChatGPT and, to a lesser extent, Google with some of their native AI search. It is largely similar in terms of conversion and other metrics, but we find that AI-sourced visitors have higher intent generally and convert at higher rates than traditional organic search traffic. That will change as it scales, but currently it is a higher-intent cohort. The important thing is that customers are going through an education process, which works well for our human-in-the-loop approach. We expect increased opportunities to upsell and cross-sell those customers to service-oriented and expert-oriented services. Regarding selling AI directly to SMBs, we just started testing that this quarter with a partner, and the tests have been encouraging. It's early, but many small businesses are curious about adopting AI and need onboarding. If we do this right, we could become a small business operating system, which is both encouraging and exciting but still in early stages.
Thanks very much.
Thank you. This does conclude the question-and-answer session. We want to thank you for your participation in today's conference. This concludes the program, so you may disconnect.