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Doximity's (NYSE:DOCS) Q4 Sales Top Estimates But Stock Drops 24.9%


Full Report / June 23, 2022
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Healthcare professional network Doximity (NYSE:DOCS) reported Q4 FY2022 results that beat analyst expectations, with revenue up 40.4% year on year to $93.6 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $89.1 million, 8.06% below analyst estimates. Doximity made a GAAP profit of $36.7 million, improving on its profit of $21.4 million, in the same quarter last year.

Doximity (DOCS) Q4 FY2022 Highlights:

  • Revenue: $93.6 million vs analyst estimates of $90.1 million (3.86% beat)
  • EPS (non-GAAP): $0.21 vs analyst estimates of $0.15 (41% beat)
  • Revenue guidance for Q1 2023 is $89.1 million at the midpoint, below analyst estimates of $96.9 million
  • Management's revenue guidance for upcoming financial year 2023 is $456 million at the midpoint, in line with analyst expectations and predicting 32.7% growth (vs 70.6% in FY2022)
  • Free cash flow of $44.8 million, up 75.1% from previous quarter
  • Gross Margin (GAAP): 87.4%, in line with 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 incredible over the last year, growing from quarterly revenue of $66.6 million, to $93.6 million.

Doximity Total Revenue

And unsurprisingly, this was another great quarter for Doximity with revenue up 40.4% year on year. But the revenue actually decreased by $4.22 million in Q4, compared to $18.5 million increase in Q3 2022. Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter

Guidance for the next quarter indicates Doximity is expecting revenue to grow 22.6% year on year to $89.1 million, slowing down from the 99.7% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $456 million at the midpoint, growing 32.7% compared to 70.6% increase in FY2022.

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 87.4% in Q4.

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. Despite the recent drop that 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.

Key Takeaways from Doximity's Q4 Results

With a market capitalization of $6.31 billion Doximity is among smaller companies, but its more than $798.1 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.

We enjoyed seeing Doximity’s impressive revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, the revenue guidance for next year indicates a significant slowdown and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company currently trades at $36 per share.

Is Now The Time?

When considering Doximity, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 16.1x. But looking at the tech landscape today, Doximity's qualities as one of the best businesses really stand out and we still like it at this price, despite the higher multiple.

The Wall St analysts covering the company had a one year price target of $65.9 per share right before these results, implying that they saw upside in buying Doximity even in the short term.

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