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Doximity (NYSE:DOCS) Posts Better-Than-Expected Sales In Q2


Full Report / November 10, 2022
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Healthcare professional network Doximity (NYSE:DOCS) reported Q2 FY2023 results topping analyst expectations, with revenue up 28.7% year on year to $102.1 million. However, guidance for the next quarter was less impressive, coming in at $111.2 million at the midpoint, being 4.03% below analyst estimates. Doximity made a GAAP profit of $26.2 million, down on its profit of $36 million, in the same quarter last year.

Doximity (DOCS) Q2 FY2023 Highlights:

  • Revenue: $102.1 million vs analyst estimates of $100.3 million (1.83% beat)
  • EPS (non-GAAP): $0.17 vs analyst estimates of $0.16 (7.37% beat)
  • Revenue guidance for Q3 2023 is $111.2 million at the midpoint, below analyst estimates of $115.8 million
  • The company reconfirmed revenue guidance for the full year, at $428 million at the midpoint
  • Free cash flow of $37.6 million, down 11.5% from previous quarter
  • Gross Margin (GAAP): 87%, down from 88.7% 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 two years, growing from quarterly revenue of $45.1 million in Q2 FY2021, to $102.1 million.

Doximity Total Revenue

This quarter, Doximity's quarterly revenue was once again up a very solid 28.7% year on year. On top of that, revenue increased $11.5 million quarter on quarter, a strong improvement on the $3.01 million decrease in Q1 2023, and a sign of re-acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Doximity is expecting revenue to grow 13.6% year on year to $111.2 million, slowing down from the 66.7% 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 23.4% 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 87% in Q2.

Doximity Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.87 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is 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 have followed 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 $37.6 million in Q2, up 108% year on year.

Doximity Free Cash Flow

Doximity has generated $150.7 million in free cash flow over the last twelve months, an impressive 39.2% 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 Q2 Results

With a market capitalization of $4.64 billion Doximity is among smaller companies, but its more than $749.9 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.

It was good to see Doximity deliver strong revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Doximity. The company is down 3.22% on the results and currently trades at $25.49 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.

There's no doubt that the market is optimistic about Doximity's growth prospects, as its price to sales ratio based on the next twelve months of 11.9x would suggest. 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 $41.4 per share right before these results, implying that they saw upside in buying Doximity even in the short term.

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