Doximity, Inc. (NYSE:DOCS) Q3 2024 Earnings Call Transcript

Doximity, Inc. (NYSE:DOCS) Q3 2024 Earnings Call Transcript February 8, 2024

Doximity, Inc. beats earnings expectations. Reported EPS is $0.29, expectations were $0.24. Doximity, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Aaron, and I’ll be your conference operator for today. At this time, I would like to welcome everyone to the Doximity Fiscal Third Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Perry Gold, Vice President of Investor Relations. Please go ahead.

Perry Gold: Thank you, operator. Hello, and welcome to Doximity’s fiscal 2024 third quarter earnings call. With me on the call today are Jeff Tangney, Co-Founder and CEO of Doximity; Dr. Nate Gross, Co-Founder and CSO; and Anna Bryson, CFO. A complete disclosure of our results can be found in our press release issued earlier today as well as in our related Form 8-K, all of which are available on our website at investors.doximity.com. Starting this quarter, we published our prepared remarks in conjunction with the press release and you can find them on the IR website. As a reminder, today’s call is being recorded and a replay will be available on our website. As part of our comments today, we will be making forward-looking statements.

These statements are based on management’s current views, expectations and assumptions and are subject to various risks and uncertainties. Actual results may differ materially, and we disclaim any obligation to update any forward-looking statements or outlook. Please refer to the Risk Factors in our Annual Report on Form 10-K and any subsequent Form 10-Qs, and our other reports and filings with the SEC that may be filed from time to time, including our upcoming filing on Form 10-Q. Our forward-looking statements are based on assumptions that we believe to be reasonable as of today’s date, February 8, 2024. Of note, it is Doximity’s policy to neither reiterate nor adjust the financial guidance provided on today’s call, unless it is also done through a public disclosure, such as a press release or through the filing of a Form 8-K.

Today we will discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A historical reconciliation to comparable GAAP metrics can be found in today’s earnings release. Finally, during the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be one-time in nature and we may or may not provide updates on those metrics in the future. I would now like to turn the call over to our CEO and Co-Founder, Jeff Tangney. Jeff?

Jeffrey Tangney: Thanks, Perry, and thank you, everyone, for joining our third quarter earnings call. We have three updates today: our financials, product highlights and a new leadership hire. First, our top line. I’m pleased to report that we delivered $135 million in revenue for the third quarter of our fiscal 2024, a 6% beat versus the high end of our guidance and 17% growth year-on-year. Our bottom line was also strong in Q3 with an adjusted EBITDA margin of 54% or $73 million, which was 18% above the high end of our guidance. Looking ahead, we’re raising our fiscal 2024 annual revenue guidance midpoint by $8 million or 2%. We’re also raising our EBITDA guidance midpoint by 6% to $225 million or a 47% margin. So that’s our Q3 financial highlights, a 6% beat, 2% raise and a 54% EBITDA margin.

Okay. Turning now to our physician network. Our Q3 engagement reached a new high watermark. Our unique active users on a quarterly, monthly, weekly and daily basis were all up double-digit percentages year-on-year. As with last quarter, our daily users grew the most, underscoring how much our EHR integrated workflow tools continue to gain share and daily use among doctors. On that front, we’re thrilled to announce that for the third year in a row, Doximity has been ranked the number 1 best-in-class telehealth video platform by health system CIOs and their staff, beating out Microsoft Teams, Zoom and many others. This positive word of mouth, allowed us to add several major new hospital clients in Q3. Go-lives at these hospital systems contributed to a record 560,000 unique prescribers using our workflow software in Q3.

We now count 17 of the top 22 U.S. hospitals as enterprise software clients and all of them as marketing clients. Alongside our workflow products, our personalized physician newsfeeds also hit new highs in Q3 with both record reach and usage. We’re proud to be the newsfeed of medicine, the place where doctors go when they have a few minutes to check in on the latest news in their field. Our next phase of growth, we believe, will be AI fueled. Our HIPAA-compliant GPT product has organically grown to thousands of users each day, and we love all the ways it’s already helping doctors cut the skat and reduce their administrative load. To that end, we’re excited to convene our 12th Annual Docs Tech Summit in San Francisco next month. It will be 150 of our nation’s top digital doctors, rolling up their sleeves alongside our engineers designing software to save time and improve patient care.

We also can’t wait for our Pharmaceutical Client Summit in early May to unveil our new client portal. We’ve opened up the portal now to about 10% of our brand partners, and the early reviews have been great. Our portals AI brainstorm bot is a hit, but it’s our real-time engagement reports and seamless prescription sales data that keeps them coming back. As one pharma brand manager put it, “This is great. I can tweak it, run it, tweak it again until we get the right content to the right doctors.” The portal’s transparency and ease of use also gets high marks. Another top client told us, “I love that I can see my results anytime, anywhere without someone else touching it first.” To be clear, we don’t yet allow clients to actually purchase on the portal.

But when we do, we think it could unlock the longer tail of small and midsized clients that we’re not able to reach today. It will also make it easier for us to launch new modules that leverage our workflow engagement. As our CFO, Anna, will share in a moment, our new point of care and other modules grew over 100% year-on-year last quarter. So we believe we’re still in the early innings of monetizing our workflow platform. On that note, I’m pleased to announce the addition of Lisa Greenbaum as our new Chief Commercial Officer. Lisa joins us from Google, where she was Verily’s Chief Commercial Officer. Prior to that, she spent 15 years scaling and leading Medscape’s go-to-market as their Senior Vice President and General Manager. Lisa’s husband is a pediatrician and a long-time Doximity user.

So while she’s only been here a month, it feels like she’s known us for years. The team and I are excited to have her on board. We know our clients will appreciate Lisa’s deep relationships and unique insights from being both a successful tech and healthcare executive at market-leading firms. Okay. I’d like to end by thanking my Doximity teammates who continue to work incredibly hard to realize our mission. I personally have never been more excited or more proud about what we’re building together. And with that, I’ll hand it over to our CFO, Anna Bryson, to discuss our financials and guidance. Anna?

Anna Bryson: Thanks, Jeff, and thanks to everyone on the call today. Third quarter revenue grew to $135.3 million, up 17% year-over-year and exceeding the high end of our guidance range. Similar to prior quarters, our existing customers continued to lead our growth. We finished the quarter with a net revenue retention rate of 115% on a trailing 12-month basis. For our top 20 customers, net revenue retention was higher at 122%. So our biggest, most sophisticated customers remain our fastest growing. We ended the quarter with 289 customers contributing at least $100,000 each in subscription-based revenue on a trailing 12-month basis. This is a 2% increase from the 282 customers we had in this cohort a year ago. And these customers accounted for 89% of our total revenue.

Turning to our profitability. Non-GAAP gross margin in the third-quarter was 93% versus 91% in the prior year period. Adjusted EBITDA for the third quarter was $73.3 million and adjusted EBITDA margin was 54%, compared to $55.5 million and a 48% margin in the prior year period. These represent new highs for non-GAAP gross and adjusted EBITDA margins. This margin strength was driven by our Q3 revenue outperformance, continued optimization of our infrastructure costs and customer support engines, and a strategic application of AI across our R&D and G&A teams. Now turning to our cash flow, balance sheet, and an update on our share repurchase program. We generated free cash flow in the third quarter of $48.7 million compared to $47.5 million in the prior year period, an increase of 3% year-over-year.

As a reminder, we have utilized our NOL’s and are now paying cash taxes at a rate of roughly 25% to 30%. We ended the third quarter with $710 million of cash, cash equivalents and marketable securities. During the third quarter, we repurchased 3.2 million shares at an average price of $22.8, representing $71.7 million. Fiscal year-to-date, we have repurchased $262 million worth of shares at an average price of $22.89. These share repurchase efforts have decreased our fully diluted shares outstanding by roughly 6% from the quarter-ending March 31, 2023 to the quarter ending December 31st, 2023. We still have over $60 million of our most recent share repurchase authorization remaining. Share repurchases have been funded by our free cash flow, and as a reminder, our IPO proceeds remain untouched and available to invest in the business and M&A.

Now I’ll turn to a recap of our annual buying season. As a reminder, our December quarter represents our largest sales quarter by a significant amount. This is when our pharma customers sign on for next year’s programs, committing the majority of their annual marketing budgets. While we’ve signed these contracts in Q3, we will primarily recognize revenue over the next 12 months, depending on the timing of program launches. This upfront season, we saw strong growth with our brand partners, particularly amongst the number of brands spending at least $1 million with us. This cohort grew to 75 brands this selling season, an increase of roughly 30% year-over-year. Of these $1 million plus brands, we have three brands that spent at least $10 million each, an increase from the one $10 million plus brand we had last year.

We also saw strength in our modules that often sit outside of traditional marketing budgets, such as Peer-to-Peer, Point-of-Care and Formulary. These modules combined grew by more than 100% year-over-year during our upfront season. We have benefited from our increased focus on selling newer modules on a packaged basis as our customers continue to expand their reach across our entire platform. Now moving on to our outlook, for the fourth fiscal quarter of 2024, we expect revenue in the range of $115.9 million to $116.9 million, representing 5% growth at the midpoint. And we expect adjusted EBITDA in the range of $50.5 million to $51.5 million, representing a 44% adjusted EBITDA margin. For the full fiscal year, we are raising our revenue guidance to the range of $473.3 million to $474.3 million, representing 13% growth at the midpoint.

We are raising our adjusted EBITDA guidance to the range of $224.5 million to $225.5 million, representing a 47% adjusted EBITDA margin. The increased annual outlook reflects stronger-than-expected upsells at calendar year end. As mentioned previously, incremental budgets unlocked later than typical this past year. As those dollars became available, we are encouraged that Doximity remained a top choice for our customers, which is evident in the large step-up in our Q3 revenue. Looking ahead we’re excited that our upfront selling season saw deeper investment in our newer modules and the addition of several large new brands. In fiscal Q4, we are focused on getting these new programs live, which in many cases will require new content. As a result, our Q4 revenue outlook reflects growth more indicative of program launch timing than underlying sales growth.

We expect the overall pharma HCP digital market to grow roughly 5% to 7% in calendar year 2024. Based on our upfront selling season, we are confident our pharma business can once again outpace the markets. We are encouraged by the levels of investment our customers are making in Doximity, and are excited by the opportunity to continue delivering innovative solutions, real-time insights and industry-leading ROI. With that. I will turn it over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brian Peterson with Raymond James. Your line is live.

Brian Peterson: Thanks for taking the question, and congrats on the strong quarter. So, Anna, it was great to hear the strength in the buying season. I’d love to understand how some of the customers are looking at new products like peer-to-peer? Is that seen as a new budget category? Would just love to understand about kind of how they’re looking at some of these new products?

Anna Bryson: Yes. Thanks, Brian, and thanks for the question. So we’re really excited by the growth we saw amongst our newer modules. So as I mentioned in the prepared remarks, the cohort of new modules that we’re selling, which includes Peer-to-Peer, Point-of-Care, and Formulary was up over 100% during our buying season. And I think one of the things our clients are really appreciating about the way we’re selling these products now is we’re working on packaging these new modules together, which actually allows us to increase the scale of the overall program and reach across the different budget lines. The other thing that the packaged products approach does is, it allows us to maximize the reach across our platform, which I believe in turn could yield better results for our clients. So we’re really excited about what we’re doing here, and the strength we’re seeing amongst these new modules.

Brian Peterson: Well, that’s great to hear. And I know you mentioned in kind of the budgets for next year, tracking to 5% to 7%. I know you guys have consistently grown faster than that. If you had to think about the levers for share gains relative to budgets. What do you think those key swing factors would be? Thanks, guys.

Anna Bryson: Yes, sure. Absolutely. So yes, as mentioned in the prepared remarks, we believe the market is going to grow roughly 5% to 7% in calendar year 2024. We’ve proven over the past several years that we can outperform the market, and we don’t think this year will be any different. So a couple of things that we’re excited by is, continuing to invest in these newer modules, and sell these newer modules. We’re also really excited about the client portal and having the client portal available over the summer to relaunch, to add targets, and to expand existing programs directly from the site. And that’s something that we’ve been spending a lot of time on internally, and we’re really excited about delivering that for our clients for next year.

Operator: Thanks for your question. Our next question comes from the line of Scott Berg with Needham and Company. Your line is live.

Ryan MacDonald: Hi, this is Ryan MacDonald, on for Scott Berg. Thanks for taking my questions, and again, congrats on a nice quarter. Anna, you mentioned the summer portal or the portal is on track. It sounds like to be available by this summer season selling season. Can you just talk about with — now with 10% of customer sort of live and using it sort of what you need to see in order in terms of progression on the usage to be comfortable and opening up the purchasings for the portal by the summer season? Thanks.

Jeffrey Tangney: Ryan, this is Jeff. I’ll take that question since I’ve been working a lot on the portal. Yes, we’re really pleased that we’ve grown the aperture. We’ve added quite a few new clients onto our portal, and the reactions have been uniformly positive. They appreciate the transparency. They appreciate the real-time data. At the end of the day, our clients spend a lot of money with us and with others, and I think we’re leading the pack in terms of our ability to show them real-time return on investment and data that they need to power their business to optimize their programs. The decision to focus on reporting first was really our own internal decision. We could have started with pricing and upsells. So we really thought it best to take a step back and really try to use the portal as a way to improve our physician experience to make the content that they see more personalized and better.

And the AI tool, as I mentioned in the prepared remarks, has been a real hit. We’re helping our clients personalize, do better headlines. We’re helping them do video content, which is really fun. The ability to take of their detail aids and turn that into a short video more easily we think, will be a big unlock for us in the coming years. But the long story short is really, our decision to not focus on the pricing, the upsell motion first. It’s really just us beating our features in a way that rolls us out to clients. I’ll end by just saying while we’re very excited about the portal, we also appreciate the feedback that a lot of Wall Street and others have given us about the right way to do this sort of transition is over multiple quarters and even years.

And that is our timeline for getting this done. But we’re at a strong 10% today, and I think, give us a year or two, we’ll migrate the full business.

Ryan MacDonald: Super helpful color, Jeff. Thanks. Then for a follow-up, speaking on the budget environment. Now that the company’s a couple of quarters into say this lower market growth rate. How should we think about sales and marketing spend going forward? I think for the year, spend will be roughly flat over fiscal ’23 levels, suggesting maybe higher cost of customer acquisition against the new growth rate. Are there any opportunities to drive additional efficiencies here? Or should we expect a similar level of spend is required to prepare for what we hope is a better growth environment into fiscal ’26? Thanks.

Anna Bryson: Sure. I can take that one, Ryan. So we’ve been continuing to invest in our sales teams and particularly investing in the part of our R&D team that’s focused on commercial. As we think ahead over the next few years, I think one of the things that we’re really excited by, and Jeff just alluded to this is, how the client portal can help unlock the ability of us to capture more SMB. And if we think about it in terms of sales and marketing spend needed for that, it should be a pretty high incremental leverage association for us there. So I think when we think about sales and marketing spend as a percent of revenue, it should likely be pretty consistent, just due in fact, we’ll keep hiring the sales team but also not go higher because we think the client portal can be an unlock for us without needing to add too many more heads there.

Ryan MacDonald: Great, thanks for taking my questions.

Operator: Our next question comes from the line of Ryan Daniels with Blair. Your line is live.

Ryan Daniels: Yes, thank you for taking the questions. I’ll add my congratulations on the strong performance. Jeff, maybe one for you. You’ve talked a lot about AI. And I know in the past, you’ve referenced how you’re using it to really personalize newsfeeds and I’m curious what that’s done specifically for engagement, if that’s something you can track. I know you’re seeing record engagement really across all your metrics. And number one, can you provide a little bit of color on that? And then number two, is that providing an ROI lift to customers on the programs given how active these users are?

Jeffrey Tangney: This is Jeff. Thanks, Ryan. Great question. Yes. So our AI products really span all of what we do. So within our newsfeed, I think our newsfeed gets more and more relevant using machine learning, using AI, and that certainly has led to better program results for our clients, which is terrific. AI has also led to more usage. So doctors come in to write an insurance appeal letter or a service animal letter in our DocsGPT product, which as I mentioned in the prepared remarks, continues to grow nicely and organically. And so we see a lot of future engagement news there. But what’s nice is those sessions can also be monetized over time. And it does lead to breaks in the day. We’re seeing a lot of mid-days for doctors between telehealth calls, checking their newsfeed, staying up to date on what’s the latest in medicine, again, which accrues directly to our clients.

I’ll just end by saying we’re excited to get together with our top digital doctors, 150 of them here in San Francisco this month because what we’ve got queued on new products here, I think, is just very exciting. And while we’re not going to speak specifically to a road map here, we’ve had some alpha tests that have gone very, very well. And suffice it to say, the average doctor spends two hours doing administrative work for every one hour they spend seeing patients, which is an incredible problem in this country. And we’re helping them take that two hours and really shrink it down. There’s a lot of mediocre writing that has to be done in health care and what AI is really good at is mediocre writing. It’s really good at helping you get the administrative work done to fight with the insurance companies or others more quickly.

So we’re super excited that, that will drive a whole another wave of engagement for us, just like COVID did with our telehealth that will, again, accrue to our clients in terms of increased newsfeed and workflow platform usage.

Ryan Daniels: Perfect. That’s very helpful color. And then as a follow-up, I just wanted to ask about the client service portal, and I know it’s only rolled out to 10%, and you’re not allowing purchases on it yet. But it seems like a great opportunity to kind of show real-time ROI and maybe have more touch points during the year than you’ve had in the past in kind of emphasizing your value to clients. I’m curious if you’ve been able to look at those clients using it? And if they are actually purchasing more from you, again, not on that platform, but just purchasing more, doing more bundled solutions with you because of the value they’re seeing real time with your services? Thanks.

Jeffrey Tangney: The short answer is the end is pretty small, but we have seen some of the clients who have been early adopters of the portal become high-growth clients for us even in December and now January. So I do think that they are leaning in, they see as Doximity, grabbing the mantle, being an industry leaders here in bringing this transparency and optimization to what they do. And it had a lot of warm, warm reviews. I’d say the only criticism we’ve had on it so far is that they fear that we’ll lock them out of it if they don’t renew right away or don’t spend more. They’re asking us how much it will cost just to get access to it, which is a good problem to have.