Doximity, a digital platform for medical professionals, cut its workforce by 10%, or 100 employee positions, and downgraded its revenue guidance as it faces economic pressures and slowing sales among its pharmaceutical customers.
The company's latest financial results in the quarter ending June 30 beat Wall Street expectations as it continued its streak of strong revenue growth. Doximity also marked a major product milestone as it continues to innovate with generative AI tools for providers. But the good news was overshadowed by a major reduction in guidance as management reduced its fiscal 2024 revenue target by $43 million at the midpoint.
Management said the layoffs were necessary to simplify its operations in light of the current market environment. The company will incur a $8 million to $10 million restructuring charge as a result of the layoffs, the majority of which will be felt next quarter, executives said during the company's fiscal 2024 first-quarter earnings call Tuesday.
Jeff Tangney, co-founder and CEO at Doximity, told investors during the earnings call that the company experienced underperformance in midyear upsells and renewals. "Despite a record upfront this winter, our upsell closed rate fell short in June and July. So after growing steadily for a decade, our upsells have now slowed for two years in a row," he said.
Doximity's clients include all of the top 20 pharmaceutical companies and the top 20 hospitals, he noted.
Tangney said pharmaceutical companies are feeling the pressure from the current macroeconomic headwinds. "Pharma's shift to digital has slowed," he said. "We don't expect our upsell results to improve this year. Due to these recent challenges and the need to streamline client workflows, we've made the difficult decision to let 10% or roughly 100 of our talented employees go."
The workforce reductions mostly hit operations and client service teams, he said.
Founded in 2010 and named for a combination of “docs” and “proximity”, Doximity operates like a LinkedIn for doctors and provides a digital platform for U.S. medical professionals, including telehealth and scheduling tools. The company has more than 2 million medical professional members as of March 31, 2022. Doximity claims to have more than 80% of doctors on its network.
The company's paying customers include pharmaceutical manufacturers, health systems and medical recruiting firms. These organizations purchase subscriptions for Doximity's marketing solutions, hiring solutions and telehealth services.
Clients are opting for more flexible marketing channels, management noted. To keep up with the changing demands, Doximity developed self-service functionality on its marketing platform, Tangney said. "We believe the opportunity to digitize physician marketing is as large as ever and overall, we're excited to see it finally shifting from the traditional magazine and journal purchasing model to a more measurable dynamic online model," he said.
Doximity also cut its revenue guidance for fiscal year 2024, which ends in March, to a range of $452 million and $468 million, down from its prior guidance of $500 million to $506 million. It also revised adjusted EBITDA for the year to between $193 million and $209 million, which was previously $216 million to $222 million.
"As we have emerged from the pandemic, visibility into our business has become more limited than it has been historically," CFO Anna Bryson told investors during the earnings call. "We continue to have strong visibility into the roughly 65% of revenue booked to start the year, but the remaining 35% has become increasingly difficult to predict. Because of this, we are adjusting our guidance philosophy to give wider ranges and bake in more variability for the portion of revenue we do not have contracted upfront. This includes mid-year upsells, new customers and volume expansion in our annual buying cycle."
The company's stock took a hit in after-hours trading Tuesday as its shares dropped 20%.
Doximity's quarterly financial results did, however, beat on the top and bottom lines.
For the quarter, Doximity's revenue grew 20% to reach $108.5 million. The company brought in a profit of $28 million during the quarter, or quarterly earnings of 13 cents per share.
The company reported adjusted EBITDA of $46.6 million in Q2, versus $33.5 million a year ago, an increase of 39% year-over-year. Doximity has an operating cash flow of $57 million, up 28% from a year ago, and free cash flow of $55.6 million, versus $42.6 million, an increase of 31% year-over-year.
Tangney said he is bullish on Doximity's long-term growth potential. "We continue to see long-term growth rates north of 20% on our path to greater than $1 billion in revenue in fiscal 2028," he said.
In a note, Ryan Daniels, an analyst with William Blair, said Doximity’s model is "undergoing growing pains as it adjusts to current market dynamics in the post-COVID world."
"While this clearly comes at the expense of near-term visibility, again, pointing back to the wider range in guidance, we ultimately believe this will better position the company to deliver its solutions to clients and return to better growth in the coming years," he wrote in an analyst note. He noted the company’s "market leadership position, long runway for organic growth, deep and experienced management team and the model’s combined growth and margin profile."
For its fiscal second quarter ending September 30, Doximity is projecting revenue between $108.5 million and $109.5 million and adjusted EBITDA between $44 million and $45 million.
Expanding ChatGPT tools in healthcare
Back in February, Doximity rolled out a beta version of a ChatGPT tool for doctors that helps streamline some of their time-consuming administrative tasks, such as drafting and faxing preauthorization and appeal letters to insurers.
The open beta site, called DocsGPT.com, is an integration with ChatGPT that works with Doximity’s free fax service.
The company has now signed enterprise deals with three health systems for its DocsGPT AI writing assistant, Tangney said during the Q2 earnings call.
"With our enterprise version, we've now added HIPAA security and administrative guardrails that will let doctors do even more. We believe the time savings could be significant. Our recent survey of 322 AI-using doctors predicted that in a few years, AI will save them each 13 hours per week; six in their EHRs, and seven in their other office work," he said. "We're excited to deepen our health system partnerships as we expand our AI and enterprise-level offerings."
Offering a HIPAA-compliant ChatGPT tool for health systems and doctors gives Doximiy a competitive advantage, Tangney noted.
"In terms of pricing, we're in a land grab mode right now. I don't think we expect more than a few million dollars in revenue from it this year. But once we get out there and have more doctors using us, we think that there's a long-term opportunity here to add more value and ultimately to have it grow to be a much bigger business," he said.