Healthcare professional network Doximity (NYSE:DOCS) reported Q1 FY2024 results beating Wall Street analysts' expectations, with revenue up 19.7% year on year to $108.5 million. However, next quarter's revenue guidance of $109 million was less impressive, coming in 10.2% below analysts' estimates. Doximity made a GAAP profit of $28.4 million, improving from its profit of $22.4 million in the same quarter last year.
Doximity (DOCS) Q1 FY2024 Highlights:
- Revenue: $108.5 million vs analyst estimates of $107 million (1.35% beat)
- EPS (non-GAAP): $0.19 vs analyst estimates of $0.15 (30.2% beat)
- Revenue Guidance for Q2 2024 is $109 million at the midpoint, below analyst estimates of $121.3 million
- The company dropped revenue guidance for the full year from $503 million to $460 million at the midpoint, a 8.55% decrease
- Free Cash Flow of $55.6 million, up 22% from the previous quarter
- Gross Margin (GAAP): 87.9%, up from 85.6% in the same quarter last year
Founded in 2010 and named for a combination of “docs” and “proximity”, Doximity (NYSE: DOCS) is the leading social 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).
As you can see below, Doximity's revenue growth has been very strong over the last two years, growing from $72.7 million in Q1 FY2022 to $108.5 million this quarter.
This quarter, Doximity's quarterly revenue was once again up 19.7% year on year. However, its revenue actually decreased again in Q1 by $2.5 million, following the same trend as its $4.3 million decrease in Q4 2023. While one-off fluctuations aren't always concerning, we have no doubt that shareholders would like to see its revenue rebound soon.
Next quarter's guidance suggests that Doximity is expecting revenue to grow 6.67% year on year to $109 million, slowing down from the 28.8% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 20.1% over the next 12 months.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 87.9% in Q1.
That means that for every $1 in revenue the company had $0.88 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Doximity's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Doximity's free cash flow came in at $55.6 million in Q1, up 30.5% year on year.
Doximity has generated $186.4 million in free cash flow over the last 12 months, an eye-popping 42.6% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from Doximity's Q1 Results
Sporting a market capitalization of $6.71 billion, Doximity is among smaller companies, but its more than $873.2 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was comforting to see that Doximity topped analysts' revenue expectations this quarter, even if just narrowly. That really stood out as a positive in these results, together with strong free cash flow. On the other hand, its revenue guidance missed analysts' expectations significantly and is indicating a pretty significant slowdown in growth. Overall, this was a mediocre quarter for Doximity. The company is down 16.9% on the results and currently trades at $27.25 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. We think Doximity is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been strong over the last two years. And while its customer acquisition is less efficient than many comparable companies, the good news is 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.
Doximity's price to sales ratio based on the next 12 months of 13.3x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about Doximity and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.Wall Street analysts covering the company had a one year price target of $36.6 per share right before these results, implying that they saw upside in buying Doximity even in the short term.
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