Doximity, Inc. (NYSE:DOCS) Q2 2024 Earnings Call Transcript

Doximity, Inc. (NYSE:DOCS) Q2 2024 Earnings Call Transcript November 9, 2023

Doximity, Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.18.

Operator: Good afternoon. My name is Krista and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Doximity’s Fiscal Second Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Perry Gold, Vice President of Investor Relations. Perry, you may begin your conference.

Perry Gold: Thank you, operator. Hello and welcome to Doximity’s fiscal 2024 second quarter earnings call. With me on the call today are Jeffrey 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. 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. Any subsequent Form 10-Qs 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, November 9, 2023. 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 onetime 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, Jeffrey Tangney. Jeff?

Jeffrey Tangney: Thanks, Perry and thank you, everyone, for joining our second quarter earnings call. We have 3 updates today, our financials, network highlights and new products. First, our top line. I’m pleased to report that we delivered $114 million in revenue for the second quarter of our fiscal 2024, a 4% beat over the high end of our guidance and 11% growth year-on-year. Our 20 largest clients who know and measure us best, continue to be our fastest growing with a net revenue retention rate of 119%. Our bottom line was also strong in Q2, with an adjusted EBITDA margin of 48% or $54 million which was 20% above the high end of our guidance. Looking ahead, we’re raising our annual revenue guidance midpoint by $6 million or 1% to 11% growth year-on-year.

We’re also raising our EBITDA guidance midpoint by 6% to $213 million or a 46% margin. We will remain fiscally prudent and we are reiterating our long-term model guide of 45-plus% EBITDA margins. However, given continued macro uncertainties today, we’re withdrawing our 5-year growth target. This said, we still fully expect to be a $1 billion company and 2028 will remain our internal stretch goal to get there. Our CFO, Anna will provide more color on this in a minute. So that’s our Q2 financial highlights, a 4% beat, a 1% raise and 48% EBITDA margins. Turning now to our physician network. In short, we’ve never been more used or more useful. Our unique active users on a quarterly, monthly, weekly and daily basis all hit record highs last quarter and all are up double-digit percentages year-on-year.

Notably, it’s our daily users that grew the most, underscoring the integral role we now play in day-to-day patient care. Our news feed did particularly well in Q2 and hit both record reach and usage. Our AI algorithms are playing an increasing role in our success as they read over 0.5 million articles each month to personalize news briefs for each doctor based on their subspecialties procedures and interests. We’re also now using AI to rewrite medical journal headlines, making them more succinct and readable, leading to higher engagement. With each tap on our news feed, our algorithms learn and improve and our decade-long data mode widens. We’re proud to help doctors stay up-to-date on the research that matters most to them. Our workflow products, scheduling, AI writing tools and Telehealth also hit fresh highs in Q2, with over 550,000 unique active prescribers.

And we continue to gain share here post COVID, signing more top hospitals to our EHR integrated tools. We now count 16 of the top 22 U.S. hospitals as workflow clients and over 44% of all U.S. physicians on our enterprise platform. Now for our product spotlight. We have 2 new products in Q2, DocDefender and our pharmaceutical client portal. DocDefender.com is our new free privacy service for doctors. Just as our popular Doc dialer product protects doctor cell phone numbers from off-hour callbacks, DocDefender protects their family’s home address or phone numbers from being easily found online. Sadly, Ocean reports that half of U.S. health care workers will experience violence in their careers. And a full 35% of physicians we served had already had a patient find their home address.

Or personal information online. DocDefender works by requesting takedowns or removals from the many people Finder websites out there. Similar delete Me services exist but they’re expensive. We believe doctors who increasingly serve on the front lines of society’s toughest problems, deserve this basic protection for free. Like many of our best products, the idea for DocDefender came out of our annual 200 Physician Summit, This year, the recent spike in physician shootings weighed heavily on the group and so we brainstorm a technological way to help. DocDefender was the top to [indiscernible] getter of the weekend. Thousands of doctors have already beta tested DocDefender and the reviews so far have been great. We’re excited to roll it out to all of our physician members this quarter.

Now for an update on our new self-serve pharma client portal, where we made incredible progress this last quarter and now have a strong Phase I beta product out and ready for our clients. As we did with our hospital client portal, we began by rolling out to a dozen or so pharma test clients. So far, the feedback has been very positive. Clients like the ability to monitor their programs in real time, to see their IQVIA ROI reports integrated seamlessly and leverage our AI brainstorm bot to write better headlines. Our plan is to open up this client portal to all of our pharma clients early next year. Then by next summer’s upsell season, we’ll layer in the ability to relaunch, add targets and expand existing programs directly from the site. We expect this client portal will not replace but instead strengthen our white glove service for our top clients.

It will allow our service teams to spend less time e-mailing about reports and more time on our newer point-of-care peer-to-peer and rep enablement products. It will also make it easier for us to reach and serve the longer-tail smaller clients. By virtue of our unique reach and usage, we believe we’re well positioned to become Pharma’s premier digital HCP partner. And we’re proud to now offer client service that’s both high touch and high tech. In closing, our Q2 saw record physician engagement, better-than-expected sales and profit and continued innovation with a new privacy product and our client portal. We believe health care is still in the early innings of its shift to digital. And with the advent of generative AI, we think tech will transform health care more this decade than ever before.

We’re honored to continue to put physicians first and to be the leading digital platform for doctors. I’ve personally never been more bullish about our long-term opportunity. 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. Second quarter revenue grew to $113.6 million, up 11% 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 114%. For our Top 20 customers, net revenue retention was higher at 119%, so our biggest, most sophisticated customers are still our fastest growing. We ended the quarter with 290 customers contributing at least $100,000 each in subscription-based revenue on a trailing 12-month basis. This is a 3% increase from the 281 customers that we had in this cohort a year ago and these customers accounted for 88% of our total revenue.

As mentioned, we are seeing the strongest growth come from our largest customers. To give some more color around this, we ended the quarter with 51 customers contributing at least $1 million each in subscription-based revenue on a trailing 12-month basis. This is a 28% increase from the 40 customers we had in this cohort a year ago. Turning to our profitability. Non-GAAP gross margin in the second quarter was 91% versus 90% in the prior year period. Adjusted EBITDA for the second quarter was $54.2 million and adjusted EBITDA margin was 48% compared to $46 million and a 45% margin in the prior year period. Now turning to our cash flow, balance sheet and an update on our share repurchase program. We generated free cash flow in the second quarter of $11.6 million compared to $37.7 million in the prior year period.

A decrease of 69% year-over-year. The cash outflow in Q2 included roughly $29 million in payments for estimated taxes for the first 6 months of the year, with roughly $10 million of that related to the capitalization of R&D expenses. Given we have utilized nearly all our NOLs, as you consider modeling the impact of taxes in the future, we estimate that our effective tax rate will be between 20% to 25% and our cash tax rate will be between 25% to 30%. These rates may vary depending upon deductions from stock-based compensation and the capitalization of R&D. During the second quarter, we repurchased 7.5 million shares at an average price of $22.45 representing $169 million. We ended the second quarter with $730 million of cash, cash equivalents and marketable securities.

As of today, we have completed all outstanding share repurchase programs and our Board has authorized an additional $70 million share repurchase plan. Following the share repurchase efforts, our total shares outstanding have decreased by roughly 5% or 8.8 million shares since our August earnings release. We are pleased by the positive impact these efforts have had on shareholder value. 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 moving on to our outlook. For the third fiscal quarter of 2024, we expect revenue in the range of $127 million to $128 million, representing 11% growth at the midpoint. And we expect adjusted EBITDA in the range of $61 million to $62 million, representing a 48% adjusted EBITDA margin.

For the full fiscal year, we now expect revenue in the range of $460 million to $472 million, representing 11% growth at the midpoint. We now expect adjusted EBITDA in the range of $207 million to $219 million, representing a 46% adjusted EBITDA margin. The increased outlook reflects an improvement in our close rates over the past 90 days. Incremental budgets have been unlocking but this has occurred later than typical due to the macro environment. As our customers deploy these dollars, we’re encouraged that Doximity remains a top choice. With engagement levels at all-time highs across our platform, we continue to deliver strong returns for our customers and their desire to increase their program reach is evident in our Q3 revenue step-up. As you consider our implied Q4 guidance, please remember we are providing wider ranges and making it more variability for the portion of revenue not yet contracted.

Now I’ll give an update on our long-term financial targets. Given the broader macro backdrop remains relatively unchanged over the last year, we believe next year’s market growth rate may look similar to this past year. With this in mind, we believe it prudent to withdraw our 2028 revenue and rule of 65 targets. We still have strong conviction in our long-term opportunity and ability to outperform the market. but we are aware that we may face cyclical headwinds in end market budget growth for longer than initially expected. As it pertains to our long-term profitability, we expect our highly efficient vertical sales model to continue to deliver a best-in-class margin profile. Due to this, we are reiterating our long-term operating model guidance.

of 85% to 90% non-GAAP gross margins and 45% plus adjusted EBITDA margins. As we look ahead, we are excited by the innovation we are bringing to the industry and the value we will continue to deliver for our customers. Our new pharma client portal has the potential to power a new level of personalization and efficiency on our platform, a win-win for our clients and for our members. We believe this is an exciting and natural evolution of our business. and will position us for market leadership for years to come. With that, I will turn it over to the operator for questions.

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Q&A Session

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

Brian Peterson: So I’d love to get any color that you guys have heard from customers about calendar year ’24 budgets and I appreciate the comment that you just gave. But what have you heard in terms of any feedback or how they’re thinking about budgets for next year?

Anna Bryson: Sure. Happy to take that one, Brian. So listen, it’s still a little bit too soon for us know exactly what budgets will look like next year. Our best guess is that the calendar year budget growth rate will look roughly similar to what we saw this past year. So mid- to high single-digit growth. And now we do remain confident in our ability, regardless of what the growth rate is to outperform the market. And as we’re in the midst of our annual buying cycle right now, there are many things that both we and our customers are excited about around our new reporting tools, the potential to bring AI to their programs. And the returns demonstrated by our new products. So there’s a lot of really positive momentum happening in the business right now but it’s just too soon for us to give more color on the market growth rates.

Brian Peterson: Understood. And maybe just [indiscernible] moving to the product a little bit with DocDefender and I know with Amion, I just hoping to understand how you guys are thinking about potentially adding monetization to that? Or how we’re thinking about these new products in terms of when that will start to impact the growth rate?

Jeffrey Tangney: Yes. Thanks, Brian. This is Jeff. I’ll take that one. So first, we’re so thrilled to have double-digit percent growth across all of our active user categories. And the highest growth with daily users really is, I think, a true North signal for us that we’re becoming part of the doctors, daily workflow, treating patients, checking their schedules, using our AI tools to help. So we’re really proud of that and that, to me, is really the best out of the quarter. I think if you look at others in our space, our competition, they’re not seeing that, if anything, I think they’re seeing year-on-year declines as we move out of the sort of COVID, stay at home, heavy digital use. With regard to DocDefender specifically, we have no monetization in that product today.

But similar to our dialer product, we see a lot of opportunities for that and that’s something we’ll will phase in over time. The good news is it’s the sort of product that doctors once they start monitoring their privacy, they come back and check frequently as there are additional websites and other changes. And it’s the kind of thing that’s sort of whack a mole privacy wise, it drives a lot of ongoing engagement. Our AMM product which you mentioned, continues to grow and do great probably less new news on that front, except to cite as we did in our prepared remarks, we’re at 16 of the top 22 health systems now who have an enterprise BAA or business associate agreement with us inside their EHRs, inside their privacy agreements and powering their workflows.

Operator: Your next question comes from the line of Richard Close from Canaccord Genuity.

Richard Close: As we’re preparing for the next budget year and I’m curious if you could update us on demand for point of care. Maybe versus the traditional news feed? Are you seeing any major differences there, maybe point of care growing at the expense of the latter, the news feed?

Anna Bryson: Sure, Richard. The first thing I’ll say is that we’re excited to penetrate deeper into point of care and peer-to-peer budgets. And as we’ve had the conversations with our customers during this annual buying cycle, our customers are really excited about how these products can increase the value they’re receiving from our platform when coupled with our other product suites. So the programs we’ve run peer-to-peer point of care over the past year have demonstrated very strong returns. We’ve been able to prove to our customers that the more modules you buy, the higher your returns. So we’re looking forward to expanding our customer reach and deepening our penetration here over time.

Richard Close: Okay. And then with respect to the EBITDA margins, I guess, the long-term 45% plus. But is there any reason why you can’t keep up the current level that you just reported and what’s implied for the — yes, for the third quarter?

Anna Bryson: Sure. I’m happy to take that one. We plan to continue to invest in growth and invest in the business. We’re doing that today with new products, we have a new client portal that we’ll be investing in more and more. We have new business lines we’re investing in and we’re continuing to hire. So from our perspective, we’re certainly continuing to invest in growth. And so we think 45% plus margin as a long-term target is appropriate given those investments.

Operator: Your next question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels: I’m hoping you could dive a little bit deeper into the beta users on the new pharma client portal. Meaning, are you seeing quicker conversion on sales or better pricing? I know you’ve talked about some auction-based pricing based on ROI. So curious what you’re seeing initially with those users.

Jeffrey Tangney: Yes, Ryan, Jeff Tangney here. Yes, I’ll take that. So I’ve been joining quite a few of these calls with our clients. It’s fun, we just had a director to top 5 pharma company this week tell us it was his favorite meeting of the week to go through our client portal together. And that’s because it’s just a lot of insights that we can provide. It’s real-time data which she’s excited about. And the integration of the IQVIA results allows him a, again, real-time look at the incremental sales and ROI that we’re delivering which at the end of the day, it’s the bottom line for senior marketers inside pharma. So all that’s gone super well. I do want to be a front that are Phase I the product that we have out for clients to purchase additional waves or programs.

But they’ve already asked about that. And so I think it will be a natural extension of that in our Phase II which in our prepared remarks, we said we will have fully out for our next summer upsell season to make it really easy for them to take this video that so many docs like and deploy that to a broader audience or to a different audience or to take actually one of the more fun pieces of the demo has been our GPT brainstorm bot, where we can show physicians who’ve already seen all of your articles and messages are really engaged in your product, in your market. But then Brainstorm additional things that may relate to their practice, given that they see a lot of patients with co-morbidities or whatnot and how they put that together. And of course, the brainstorm bot just comes up with ideas.