Doximity, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2021 (Doximity fiscal 2022 third quarter). Unaudited results are compared with the periods ended December 31, 2020. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context
Doximity operates a digital platform for U.S. medical professionals, offering professional networking and clinical workflow tools. Its principal revenue sources are subscription-based Marketing Solutions and Hiring Solutions sold primarily to pharmaceutical companies and health systems; it also earns recruiting-services revenue. The company completed its IPO in June 2021.
Financial performance and liquidity
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue, 2021 / 2020 | $97.9m / $58.7m; up 67% | $249.9m / $140.2m; up 78% |
| Gross profit, 2021 / 2020 | $86.8m / $50.8m | $221.9m / $117.0m |
| Gross margin, 2021 / 2020 | 89% / 87% | 89% / 83% |
| Operating income, 2021 / 2020 | $35.8m / $17.9m | $85.6m / $30.5m |
| Net income, 2021 / 2020 | $55.6m / $17.2m | $118.1m / $28.7m |
| Adjusted EBITDA, 2021 / 2020 | $47.0m / $21.5m | $110.9m / $38.0m |
| Adjusted EBITDA margin, 2021 / 2020 | 48% / 37% | 44% / 27% |
Adjusted EBITDA is a non-GAAP measure; it excludes, among other items, stock-based compensation, taxes, depreciation and amortization, and other income. For the quarter, net income margin was 57% versus 29% a year earlier; for the nine-month period it was 47% versus 20%.
Cash flow: For the nine months, operating cash flow was $79.6m, versus $45.4m in 2020. Free cash flow, as defined by the company (operating cash flow less property and equipment purchases and capitalized internal-use software), was $76.0m versus $41.7m. Investing cash flow was negative $616.9m, chiefly reflecting purchases of marketable securities; financing cash flow was positive $556.0m, primarily from the IPO.
Liquidity and debt: At December 31, 2021, cash and cash equivalents were $85.1m and marketable securities were $680.5m, totaling $765.6m. Current assets were $858.4m and current liabilities $91.7m. The balance sheet reports no borrowings or other debt. Management stated available cash and marketable securities should fund working capital and capital expenditures for at least 12 months.
Changes versus prior comparable periods
- Quarterly revenue rose 67%, driven mainly by subscription revenue, which increased $35.9m. Management attributed most of that increase to expansion of existing customers, including additional brands, service lines and modules; subscription customers generated about 93% of quarterly revenue.
- For the quarter, existing Marketing Solutions customers’ average revenue per customer increased 60%. The nine-month increase was 74%.
- Gross margin improved as revenue growth outpaced cost-of-revenue growth. Operating expenses increased, including research and development, sales and marketing, and general and administrative expenses; the latter also reflected public-company costs and higher stock compensation.
- Net income benefited significantly from income tax benefits of $19.8m for the quarter and $32.0m for the nine months, primarily related to tax deductions from stock-option activity after the IPO. This is an important distinction when assessing underlying earnings.
- Customer metrics improved: customers with at least $100,000 of trailing-12-month subscription revenue increased to 258 from 172; net revenue retention rose to 171% from 145%.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects operating expenses to increase in absolute dollars as the company invests in product development, sales and marketing, infrastructure and public-company compliance. It expects gross margin to remain relatively steady in the near term, with quarterly fluctuations possible.
- Management said COVID-19 had not materially adversely affected results to date, while warning that pandemic-related demand shifts may not persist. It also noted uncertainty around the Omicron variant and possible changes in customer spending, hiring and telehealth use.
- The company recorded $1.2m of quarterly stock-based compensation expense related to a U.S. News warrant. The warrant’s grant-date fair value was $34.7m and is to be expensed over its vesting term of approximately 6.5 years. The amended partnership carries minimum guarantees totaling $9.1m over its initial noncancelable three-year period.
- Other commitments include an eight-year Texas office lease with $17.9m of undiscounted payments beginning around June 2022, and a three-year web-hosting commitment of $5.2m annually beginning January 2022.
- On February 4, 2022, Doximity agreed to acquire the Amion scheduling and messaging application assets for $53.5m cash at closing, up to $24.0m in performance-based earnouts over four years, and approximately $5.0m in restricted stock awards to joining employees. Closing was expected in fiscal 2023’s first quarter, subject to customary conditions.
- Key risks include retaining and expanding customers and physician engagement, customer and pharmaceutical-brand concentration, competition, privacy and cybersecurity obligations, healthcare regulation, and uncertainty over pandemic-related demand. The dual-class structure gives Class B shares ten votes per share; holders of Class B held approximately 89.3% of voting power at December 31, 2021.
- A hypothetical 100-basis-point rise in interest rates would have reduced the market value of cash equivalents and marketable securities by an estimated $12.6m at period-end. The company reported $5.4m in unrealized losses on available-for-sale debt securities and no recognized credit losses.
Important facts for investors to verify
- Whether subscription growth, customer expansion and the 171% net revenue retention rate remain sustainable, particularly as pandemic-related trends change.
- How much reported profit growth reflects operating performance versus tax benefits from stock-option activity; also monitor stock-based compensation and dilution.
- Whether operating cash conversion remains strong given the nine-month decreases in deferred revenue and increases in accounts receivable and deferred contract costs.
- The effect of interest-rate movements on the large marketable-securities portfolio and the timing or cost of the Amion acquisition and related earnouts.
- Developments in the U.S. News partnership, minimum guarantees, and the warrant’s expense and vesting schedule; and the company’s ability to meet its stated spending and margin expectations.