Earnings Call Transcript - DOCS Q4 2024

Operator, Operator

Thank you for standing by. My name is Greg and I will be your conference operator today. At this time, I would like to welcome everyone to Doximity's Fiscal 2024 Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Perry Gold, Vice President, Investor Relations. Perry, please go ahead.

Perry Gold, Vice President, Investor Relations

Thank you, operator. Hello and welcome to Doximity's fiscal 2024 fourth quarter earnings call. With me on the call today are Jeff Tangie, 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, along with a copy of our prepared remarks, all 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, and our other reports and filings at the SEC that may be filed from time-to-time, including our upcoming filing on Form 10-K. Our forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, May 16, 2024. 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 one-time 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, Jeff Tangney. Jeff?

Jeff Tangney, Co-Founder and CEO

Thanks, Perry. And thank you everyone for joining our fourth quarter earnings call. We have three updates today: our financials, network growth, and client summits. First, our topline. We delivered $118 million in revenue for the fourth quarter of our fiscal 2024, beating the high-end of our guidance range. For our full fiscal year ended March 31, we had $475 million in revenue and grew 13% year-on-year. Of note, our top 20 clients once again grew the fastest at 22% in fiscal 2024. These clients include most of the top 20 pharmaceutical companies, who know and measure us best. Our bottom line was strong in Q4 with an adjusted EBITDA margin of 48% or $56 million, which was 10% above the high-end of our guidance. Our free cash flow was a bit higher still at $62 million, which was 37% year-on-year growth. For the full fiscal year, our adjusted EBITDA grew 25% from $184 million to $230 million year-on-year. Our adjusted EBITDA margin was 48% for the year, up from 44% the prior year. To reinvest this growing cash flow, our Board has authorized a new $500 million share buyback program. At the same time, we’ll continue to grow our internal R&D investments in AI and commercialization. Okay, turning now to our network growth and engagement. In fiscal 2024, we added over 400,000 registered health care professionals to our platform. That’s our second biggest growth year ever, rivaled only by our COVID surge in 2021. This recent growth shows how at more and more hospitals nationwide, we’re becoming the standard tool for calling patients, checking calendars, and looking up colleagues. We’ve also extended our reach among Nurse Practitioners, NPs and Physician Assistants, PAs. We’re proud that now over 60% of the roughly 550,000 NPs and PAs in the U.S. have joined our network. This is in addition to the 80%-plus of U.S. physicians on our platform. Our engagement also hit a new high-water mark in Q4. Our unique active users on a quarterly, monthly, weekly, and daily basis were all up double-digit percentages year-over-year. Notably, our daily users grew the most, underscoring how much our personalized newsfeed and EHR-integrated workflow tools continue to gain share and daily use among health care providers. Our newsfeed continues to be our most used feature. Last quarter, over 900,000 unique prescribers scrolled our feed to keep up on the latest developments in their fields. Our workflow tools also saw record engagement in Q4, with over 580,000 unique active prescribers. But don’t take our word for it. Just take a look at our reviews. Our app has over 165,000 reviews on the Apple App Store and is one of the highest rated medical apps at 4.8 stars. Okay, turning now to our recent physician and pharma client summits. In March, we hosted our 12th annual Physician Tech Summit in San Francisco. It was great to roll up our sleeves for two days and test new software alongside 150 of our nation’s top digital doctors. AI took center stage as Doximity GPT, our popular HIPAA-compliant medical writing assistant, won the top marks of the weekend. We are all-in on AI applications for doctors, and we’ll continue to lean into our R&D investment here. To that end, today, we’re delighted to announce a new integration with Perplexity, the AI answer engine that can respond to questions with the latest publicly-available sources and citations. With this integration, physicians on Doximity can ask about a recent guideline change and see the latest answer along with a quick link to the medical society website where the full guideline is posted. Unlike other popular AI models, this gives doctors the latest up-to-the-minute information and its sources. Our physicians tell us that this ability to easily double-check their sources is a key requirement in making clinical decisions. Last week, we hosted our annual Pharma Client Summit in New York. Over 30 marketing leaders from the largest pharmaceutical companies in the world joined us to discuss the latest trends in digital marketing and to take a closer look at our new Client Portal. Our clients have always appreciated our white-glove service and industry-leading ROI. Now they’re also excited about the AI optimizations and time savings our tech can bring them. As one of our clients put it, they want Doximity’s data and AI to tell them how to run their programs, not the other way around. Last quarter, we completed a whopping 124 ROI studies in our Client Portal, leveraging our seamless IQVIA sales data integration. That’s roughly three times as many as we did all last year. Our median ROI continues to be greater than 11 to 1, but the months of back and forth data gathering now take just a few clicks. Our Portal is now available to about 20% of our Pharma brand clients, up from 10% last quarter. We continue to make steady progress in this multi-quarter evolution, following the well-tested ad platform design and playbook of other tech companies. There are three basic functions to our Client Portal: reporting, purchasing, and content creation. The first part, reporting and insights, we rolled out last quarter. This quarter, we’ve introduced purchasing and pricing capabilities. The third phase, content creation and optimization, will begin later this year. It’s been nearly six months since we began beta testing our Portal with clients. We appreciate the advice from many industry experts to stay upmarket and do it right. So far, our existing clients love our tech and transparency. They’re giving us a seat at their strategy table like never before. And over time, we’re excited to unlock and serve a much broader swath of customers with a more automated platform. Okay, I’d like to end by thanking my Doximity teammates, who continue to work incredibly hard to care for those who care for us. With record engagement among health care professionals, the long-term value of what we’re building together has never been greater. I’m proud to be on this journey with you. And with that, I'll hand it over to our CFO, Anna Bryson, to discuss our financials and guidance. Anna?

Anna Bryson, CFO

Thanks, Jeff, and thanks to everyone on the call today. Fourth quarter revenue grew to $118.1 million, up 6% year-over-year and exceeding the high-end of our guidance range. Full-year revenue grew to $475.4 million, up 13% year-over-year. Similar to prior quarters, our existing customers continued to lead our growth. We finished the quarter with a net revenue retention rate of 114% on a trailing twelve-month basis. For our top 20 customers, net revenue retention was higher at 122%, so our biggest, most sophisticated customers remain our fastest growing. We ended the quarter with 296 customers contributing at least $100,000 each in subscription-based revenue on a trailing 12-month basis. This is a roughly 1% increase from the 294 customers that we had in this cohort a year ago, and these customers accounted for 90% of our total revenue. Moving forward, we will be increasing the revenue threshold for our customer count metric. We believe a metric that better represents the health of our business at this scale is the number of customers contributing at least $500,000 each in subscription-based revenue on a trailing 12-month basis. We ended the quarter with 98 $500,000 plus customers. This is a 23% increase from the 80 customers that we had in this cohort a year ago, and these customers accounted for 81% of our total revenue. Turning to our profitability, non-GAAP gross margin in the fourth quarter was 91% versus 90% in the prior year period. For the full fiscal year, non-GAAP gross margin was also 91% versus 90% in fiscal 2023. Adjusted EBITDA for the fourth quarter was $56.4 million and adjusted EBITDA margin was 48%, compared to $48.9 million and a 44% margin in the prior year period. For the full fiscal year, adjusted EBITDA was $230.5 million and adjusted EBITDA margin was 48%, compared to $184 million and a 44% margin in fiscal 2023. We are proud to continue to run a very profitable business with 25% year-over-year growth in our bottom line. Now turning to our balance sheet, cash flow, and an update on our share repurchase program. We generated free cash flow in the fourth quarter of $62.3 million, compared to $45.6 million in the prior year period, an increase of 37% year-over-year. For the full-year, we generated free cash flow of $178.3 million, compared to $173.4 million in fiscal 2023, an increase of 3% year-over-year. As a reminder, we have utilized our NOLs and are now paying cash taxes at a rate of roughly 25%. We ended the year with $763 million of cash, cash equivalents, and marketable securities. During the fourth quarter, we repurchased $21.7 million worth of shares. For the full fiscal year we repurchased $284 million worth of shares at an average price of $23.19. These share repurchase efforts have decreased our fully diluted shares outstanding by 5.5% since Q4 of last year. We completed all remaining authorized share buybacks in April, and today are announcing a new $500 million share repurchase program that will be open-ended. We believe repurchasing our shares is a valuable use of the incremental cash we generate above what’s needed to reinvest in the business. Now moving on to our outlook. For the first fiscal quarter of 2025, we expect revenue in the range of $119.5 million to $120.5 million, representing an 11% growth at the midpoint, and we expect adjusted EBITDA in the range of $55 million to $56 million, representing a 46% adjusted EBITDA margin. For the full fiscal year, we expect revenue in the range of $506 million to $518 million, representing 8% growth at the midpoint, and we expect adjusted EBITDA in the range of $238 million to $250 million, representing a 48% adjusted EBITDA margin. Finally, one housekeeping item. In fiscal 2025, we expect stock-based compensation to increase from roughly 10% of revenue to roughly 12% to 13% of revenue, as we continue to invest in and grow our team. That said, we expect the dilution impact to be low, at less than 1% of shares outstanding, prior to any buybacks. Now I’ll provide more color on our outlook. Our annual guidance assumes growth of at least 10% amongst our Pharma customers and flattish growth amongst our health system customers. Our Pharma business, which represents over three quarters of our revenue, continues to outperform the roughly 5% to 7% growth rate of the overall HCP digital market. We believe this outperformance is due to our record engagement, industry-leading ROI, and continued innovation. Speaking of innovation, we are excited by the long-term potential to unlock even more growth for our Pharma business with our new Client Portal. However, given this will be our first upsell season with it, we are assuming no material revenue impact in our fiscal 2025 guidance. With regard to our health system customers, renewal rates remain strong, but we are seeing less expansion and new business. Hospitals today are focused on a post-COVID return to profitability, which we believe is more of a near-term headwind caused by the pandemic, inflation, and labor shortages. We are, however, encouraged by a recent McKinsey study which estimates that health systems’ profits will rebound and grow by an 11% CAGR over the next four years, after less than 5% growth this past year. As far as visibility into our fiscal 2025 guidance, we continue to see a trend toward more upfront buying on Doximity. This has led to us beginning each year with a higher percentage of revenue under contract, or booked, than the prior year. As of today, we have over 70% of our subscription-based revenue guidance for fiscal 2025 under contract. This compares to over 65% at this point last year, and over 60% at this point two years ago. To-date, we have focused our commercial efforts on the universe of Pharma brands with over $100 million in U.S. sales, a strategy aligned with the white-glove nature of our business model. Looking ahead, we’re excited by the opportunity our Portal will bring to further expand our offerings to the long tail of Pharma brands. There are roughly 470 brands with less than $100 million in U.S. sales, and today, they represent only about 8% of our total Pharma revenue. We think this could be substantially higher in the long-term. The Portal also brings an ability to expand our reach to other small and medium-sized businesses in health care, such as medical devices, diagnostics, and digital health. We look forward to partnering with more brands and companies, as we continue our evolution towards being both high tech and high touch.

Operator, Operator

Thank you. It appears our first question comes from Brian Peterson with Raymond James. Brian, please go ahead.

Brian Peterson, Analyst

Thank you and congratulations on a great quarter. I wanted to ask about the customer cohorts. I agree that the 500,000 number is a better metric since it represents 81% of the revenue. However, considering the approximately 200 customers that are currently paying between 100,000 and 500,000, how many of them do you think might eventually be a good fit to spend over 500,000? Any thoughts on that?

Anna Bryson, CFO

Sure, thanks for the question, Brian. And yes, I think to the point you just made, listen, we're in a phase of growth today that's mostly led by scaling our larger existing customers. I think one of the trends that we've seen over time is that cohort of customers, the cohort of customers that are spending more than $500,000 with us, continues to represent a growing percentage of our overall business, so today it's at about 81%. And if we look back last year and the year prior, it was only about 76%. So a big part of our growth has been doing exactly what you just referenced and getting those customers from that, say, 100,000 to 500,000 threshold up to the 500,000 plus threshold. We've done a ton of analysis on this. We believe that there are a long tail of pharma companies and health systems that we could help continue to graduate into that bucket. Without giving further specifics around the exact number, I think that there is plenty of room for us to grow in this 500,000 plus cohort.

Brian Peterson, Analyst

Good to hear. And Anna, just on the guidance in terms of seasonality, looking at the June quarter, it's guided to up a few percent sequentially. Any delta on what's driving that versus what we saw in June, maybe the past few years. Thanks, guys.

Anna Bryson, CFO

Yes, sure, Brian. So as I mentioned last quarter, we did see a higher mix of new products and new brands during our annual buying cycle. That included a $10 million plus brand that was actually a new brand for us and 100% growth year-over-year in our newer modules. So these programs had contractual launch timing that was more weighted towards spring, which did lead to a softer than typical Q4, but a nice step up into Q1 as those programs are now live and it's contributing to the strong 11% growth guide that we're seeing in Q1.

Operator, Operator

Thank you, Brian. And our next question comes from the line of Scott Berg with Needham & Company. Scott, please go ahead.

Scott Berg, Analyst

Hi, everyone. Nice quarter here. Thanks for taking my questions. Jeff, you had given a number of adoption metrics from non-physicians on the platform in the quarter and the progress that you're making there. I guess the question there's kind of a two-part is, one, do you think you can get those usage and adoption rates over time to be similar to what you see with physicians today? And then two, how do you think about your ability to monetize these additional people that are on the platform? Is that opportunity, I guess, does it differ at all from the historical viewpoint of the platform? Thank you.

Jeff Tangney, Co-Founder and CEO

Thanks, Scott. Yes, this is Jeff, I'll reply. Yes, we're probably over 60% of NPs and PAs in the U.S. In terms of our ability to monetize NPs and PAs, frankly, they're substantially similar to physicians. They have prescription rights in nearly every state. And in terms of our biggest clients, they're actually in many ways topping their target list. So we're excited to be over 60% of NPs and PAs. Historically, we haven't done as well with them, and I will tell you what it boils down to, they're a little less proud of their resumes, right? We began being this great service to showcase your curriculum vitae and all of your publications and all of your clinical trials. NPs and PAs tend to have less of that, having had fewer years of education. But they are heavy users of our Doximity Dialer, Telehealth Service, of our Calendaring Service, of our Messaging Service. And so as our workflow tools continue to gain adoption, have new hospitals roll us out, we're now in 17 of the top 20 hospitals that have our enterprise IT platforms in place. We see greater and greater adoption amongst them. And this year we're going to be focusing more on NPs and PAs specifically. So we haven't announced it in the comments, but we have been putting together a what we call NP Navigator to help NPs choose the right schools and training programs for them to go to. This is something that's been a real hit with our physician audience. We get over 90% of graduating physicians to come use our what we call residency navigator. So we have over a 1,000 NPs who've provided feedback on their schools and programs. I think it'll be a real service to the NP and PA community to be able to make better choices as they decide where they're going to move to in the country to do their training. So we'll continue to lean into, I think, other non-physician audiences, and frankly, we are increasingly a network for all of healthcare, all healthcare professionals, not just physicians.

Scott Berg, Analyst

Thank you, Jeff. Anna, you mentioned that revenue from pharmaceutical customers is expected to grow by more than 10% year-over-year. For our non-pharmaceutical, more hospital-based revenues, we anticipate they will remain flat year-over-year in 2025 compared to 2024. Considering these revenue streams, how can we stimulate modest growth from that segment? Are there limitations in the end market across the various products you have that could influence this growth rate for some time?

Anna Bryson, CFO

Yes, sure, Scott. So I'll start by saying hospitals have had a tough few years. I mean, it's no secret, right, with the pandemic and inflation. And I think we have to remember that the public health emergency only ended in May of 2023. So, hospitals today really are focused on this return to profitability. And we believe this is much more of a near-term headwind. We have seen less new business expansion, because of that, but the good news is our renewal rates remain really strong and our enterprise telehealth business continues to perform very well and drive strong engagement. And then as we kind of think about that market over time, we are really encouraged by the recent trends and forecasts by McKinsey for a rebound in health system profitability. So we do believe that this is much more of a near-term headwind that is caused just by a post-COVID return to profitability for health systems. And we strongly believe that this end market can be a good grower for us over the long-term.

Operator, Operator

Thanks, Scott. And our next question comes from the line of Jared Hass with William Blair. Jared, please go ahead.

Jared Hass, Analyst

Yes, thanks for taking the questions. This is Jared Haas for Ryan Daniels. Maybe I'll just ask a follow-up to kind of put a finer point on that health system commentary. I'd be curious how you're thinking about any opportunities from a product development perspective, given the sort of margin challenges that, that industry is facing, thinking about solutions to actually help address those issues, right, whether it's through better revenue capture, helping those health systems, lower costs or drive operating efficiencies, anything like that, that's sort of informing your product development initiatives to kind of be a solution to their problems?

Jeff Tangney, Co-Founder and CEO

Thanks, Jared. This is Jeff. I'll take that. Yes, we remain very vested long-term in serving hospitals and the hospital market. And listen, as Anna just said, we think their return to profitability will be swift. And, you know, they're the great clients, loyal clients long-term for us. So we want to continue to help them. I don't want to get too much away in terms of our product pipeline and roadmap. We do spend a lot of time with our hospital clients developing new ideas, new products, and suffice it to say, I think we have some good things cooking there. We just did our hospital advisory board a month ago, which brought I think the top hospitals from around the country together with us to brainstorm on these things. The one thing I will highlight is in regards to recruiting, which remains a big challenge for hospitals keeping talent, labor shortages, we have been using GPT to help us personalize their job listings and posts for the individual end physician or nurse or NP or PA. And we're seeing that GPT does do better; it gets better click rates than just the general posting. So wouldn't it be nice if every time you got presented with a job opportunity, that it was personalized for you in a way that you can quickly flip through and adjust? So we're excited about what we call it recruit GPT here internally. We're really excited that the click-through rates you've seen here do significantly better. And our clients, of course, are excited about this as well because they get more applications, more candidates, and more help filling a lot of those positions that they have over them.

Jared Hass, Analyst

Okay. Yes, that's great. Appreciate the color there. And then maybe I'll ask a follow-up on the pharma side and specifically the comments around your optimism of getting into the smaller biopharma segment of the market. Could you just kind of walk through how you would think about sort of the commercial efforts in the SMB segment of that market? You know, any differences or nuances as to how you would go after that customer segment versus your traditionally larger pharma manufacturer client base?

Jeff Tangney, Co-Founder and CEO

Sure, thanks, Jared. So, let me just start by saying I'm incredibly enthusiastic about our portal, especially having just spent time with 30 of our biggest clients last week. And you know, just after they see all the different ways we can optimize and measure and provide them these 124 ROI studies, you know, with just a few clicks instead of just once a year and a torturous three months data merging process. They come to us and say, what can you just tell me what to do? Because we really are in a position to help them figure out the right voice, the right channel, the right way to optimize, getting words out about their new clinical studies and other things. I think that's even more true with the smaller mid-tier pharma companies, because they don't have the legions of consultants and agencies and others to really help them optimize and do all that. And our portal can do a lot of that for them. Now, the thing that we're still missing and building today is the ability for them to actually upload their content, which I think will be an important piece. And it is something that, as I said, will be later this year. So I think we have small forecasts for what this will do this year. But as I look to future years, I mean, today, as Anna said in her preliminary remarks, only 8% of our revenue, subscription revenue, comes from these smaller firms. And when you look at other companies, it's usually a much higher percent. So we're very excited about what we can do there. I would say that the most exciting clients we have, have been the mid-tier companies because they don't already have all the consultants and others producing these analytics for them and now with a click of a button they can see it, they can take it to their CFO, it's somewhat magical for them. And I think we've seen technology do similar things in other tech companies.

Operator, Operator

Great, thank you Jared. And our next question comes from the line of Richard Close with Canaccord Genuity. Richard, please go ahead.

Richard Close, Analyst

Yes, thanks for the questions and congratulations on the report. Anna, I was wondering on the first quarter in the year revenue growth guidance, I know you addressed the first quarter in terms of timings of launches, but curious why doesn't the 11% growth carry over into the remaining quarters for the year? If you could just you know provide some details on what went into the I guess the rest of the year?

Anna Bryson, CFO

Yes, hey Richard, thanks for the question. So, you know, as I said in my prepared remarks, we're entering the year with the strongest backlog we've ever had, with over 70% of our subscription-based revenue already under contract. And we're really happy, as we said before, with how the upfront was with our pharma business and the fact that we're guiding to this 11% growth in Q1, where we have strong visibility in Q2. But as we think about like the back half of the year, it is more dependent on our upsell season and the next up front season. And as we've said before, we're just going to be more prudent as we think about guiding to the dollars we don't yet have booked, given we are still in an environment where we're facing macro uncertainty.

Operator, Operator

Thank you, Richard. And our final question today comes from the line of Craig Hettenbach with Morgan Stanley. Craig, please go ahead.

Craig Hettenbach, Analyst

Great, thanks. Jeff, you mentioned the Pharma Summit last week. Can you just touch on any customer feedback on the recent hire of Lisa Greenbaum as Chief Commercial Officer? And any initiatives she's maybe looking to drive with customers?

Jeff Tangney, Co-Founder and CEO

Yes. Thanks, Craig. I'm glad you asked. Lisa has been great. So she's been here since January, so about five months, but I'll say it feels like five years already because she just knows our industry so well. She worked for five years most recently at Google and before that, spent 15 years at Medscape. So she not only understands our market and industry dynamics, but also knows a lot of our clients personally and a lot of our team personally, which is terrific. She's really leading the charge in having a more tech-enabled go-to-market for us. And she's, I think also really leaned in. She thinks we have a whole exciting new company, if you will, in our telehealth platform and our point-of-care products. So some of the new modules. I know she's have been really leaning into. So excited to have Lisa on the team, and my hope is we'll have her on our next quarter call to tell you a bit more in person.

Operator, Operator

Thank you, Craig and thanks to all with your questions today. At this point, I would like to turn the call back over to Jeff Tangney for closing remarks. Jeff?

Jeff Tangney, Co-Founder and CEO

Thank you. I'd like to thank the entire Doximity team for their hard work in serving more doctors every day than ever before, and I'd like to thank everyone for joining. Thanks so much.

Operator, Operator

And ladies and gentlemen, that does conclude today's call. Again, thank you all for joining, and you may now disconnect.