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Doximity (NYSE:DOCS) Exceeds Q1 Expectations But Stock Drops 17.5%


Full Report / August 04, 2022
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Healthcare professional network Doximity (NYSE:DOCS) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 24.7% year on year to $90.6 million. However, guidance for the next quarter was less impressive, coming in at $100 million at the midpoint, being 4.79% below analyst estimates. Doximity made a GAAP profit of $22.3 million, down on its profit of $26.3 million, in the same quarter last year.

Doximity (DOCS) Q1 FY2023 Highlights:

  • Revenue: $90.6 million vs analyst estimates of $89.6 million (1.1% beat)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.11 (28.5% beat)
  • Revenue guidance for Q2 2023 is $100 million at the midpoint, below analyst estimates of $105 million
  • The company dropped revenue guidance for the full year, from $456 million to $428 million at the midpoint, a 6.14% decrease
  • Free cash flow of $42.6 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 85.5%, down from 89% same quarter last year

Founded in 2010 and named for a combination of “docs” and “proximity”, Doximity (NYSE: DOCS) is the leading professional network for U.S. medical professionals.

The U.S.healthcare system has lagged other sectors and industries in creating innovative technology solutions for basic issues. A primary example are electronic health records, which were mandated a decade ago, but still face interoperability issues. Additionally, doctors are challenged by fragmented knowledge bases which makes it difficult to stay on top of the latest developments in treatment and research, and it is often difficult to connect with top specialists around the country. Likewise, many pharmaceutical manufacturers and health systems don’t have a good source for targeted marketing campaigns or recruiting initiatives.

Doximity was created as a professional cloud-based platform to solve these issues, sort of a cross between LinkedIn and Salesforce.com. Membership for physicians is free, and Doximity provides workflow tools that enable them to collaborate with their colleagues, securely coordinate patient care, conduct virtual patient visits, stay up-to-date with the latest medical news and research, and manage their careers. With a majority of US doctors on the platform, Doximity has become the default US medical professional network, with network effects helping it to sustain its position.

The company’s business model is largely subscription based marketing, with large pharmaceutical companies and health care systems able to direct tailored content to an aggregated collection of specialists across any field. Other revenue generators include Dialer, Doximity’s Telehealth tool, and Hiring solutions, which are recruiting tools.

The coronavirus pandemic has underscored the importance of high-quality health infrastructure in times of crisis. Coupled with intense competition between drugmakers and the growing volume of data in the health care sector, demand for data management solutions in the healthcare space is expected to remain strong in the years ahead.

Doximity’s competitors on the advertising side of the business include Microsoft’s LinkedIn (NASDAQ: MSFT), Facebook (NASDAQ: FB), along with Google (NASDAQ: GOOGL), and Twitter (NASDAQ: TWTR). On the telehealth side, Doximity’s chief rivals include American Well Corporation (NYSE: AMWL) and Teladoc Health (NYSE: TDOC).

Sales Growth

As you can see below, Doximity's revenue growth has been exceptional over the last year, growing from quarterly revenue of $72.6 million, to $90.6 million.

Doximity Total Revenue

This quarter, Doximity's quarterly revenue was once again up a very solid 24.7% year on year. But the revenue actually decreased again in Q1 by $3.01 million, compared to $4.22 million decrease in Q4 2022. While one-off fluctuations don't always have to be concerning, we have no doubt that shareholders would like to see the revenue rebound soon.

Guidance for the next quarter indicates Doximity is expecting revenue to grow 26% year on year to $100 million, slowing down from the 75.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 34.6% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Doximity's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 85.5% in Q1.

Doximity Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.85 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a great gross margin, that allows companies like Doximity to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Doximity's free cash flow came in at $42.6 million in Q1, up 31.7% year on year.

Doximity Free Cash Flow

Doximity has generated $131.1 million in free cash flow over the last twelve months, an impressive 36.2% of revenues. This robust FCF margin is a result of Doximity asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Doximity's Q1 Results

With a market capitalization of $8.12 billion Doximity is among smaller companies, but its more than $776.2 million in cash and positive free cash flow over the last twelve months give us confidence that Doximity has the resources it needs to pursue a high growth business strategy.

Doximity delivered solid revenue growth this quarter. On the other hand, it was unfortunate to see that Doximity's revenue guidance for the full year missed analyst's expectations. Overall, this quarter's results could have been better. The company is down 17.5% on the results and currently trades at $33.16 per share.

Is Now The Time?

Doximity may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are numerous reasons why we think Doximity is one of the best software as service companies out there. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from Doximity given its price to sales ratio based on the next twelve months is 17.8x. Looking at the tech landscape today, Doximity's qualities really stand out, and it is not hard for us to argue that the multiple is well deserved. We really like the stock at this price.

The Wall St analysts covering the company had a one year price target of $48.3 per share right before these results, implying that they saw upside in buying Doximity even in the short term.

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