Doximity Inc

NYSE:DOCS

Earnings Call Analysis

Improving Margins Amidst Growth and Share Buybacks

The company saw significant customer growth, finishing the quarter with 51 key customers, marking a 28% increase from the previous year. Non-GAAP gross margin improved slightly to 91% from 90%, while adjusted EBITDA margins increased from 45% to 48%. However, free cash flow declined by 69% year-over-year to $11.6 million due to increased tax payments. Tax rates are projected between 20-25% for effective tax and 25-30% for cash tax. The balance sheet remains solid with $730 million in cash after completing a share repurchase and authorizing an additional $70 million program; total shares outstanding dropped by roughly 5%. Looking ahead, third-quarter revenue is expected to grow 11% to $127-128 million, with adjusted EBITDA forecasts of $61-62 million at a 48% margin. For the full year, the company anticipates 11% revenue growth to $460-472 million and $207-219 million in adjusted EBITDA, a 46% margin. Despite optimistic moves, the company chose to withdraw their 2028 revenue targets, reflecting a cautious stance on long-term market growth expectations.

Customer Growth and Key Financial Metrics

The company reported substantial growth stemming from its most valuable customers, with a notable 28% year-over-year increase in the number of clients contributing over $1 million each in subscription-based revenue. This escalation from 40 to 51 customers illustrates the company's expanding influence among high-paying users. Moreover, they have seen an improvement in the non-GAAP gross margin, which climbed from 90% in the previous year to 91% in the current second quarter.

Profitability and EBITDA Margin

Adjusted EBITDA rose to $54.2 million, signifying a 48% margin, which is an uptick from the 45% margin recorded in the prior year. This improvement attests to the company's increased operational efficiency and profitability. Furthermore, for the upcoming third fiscal quarter of 2024, the company anticipates revenue to grow by 11% at the midpoint, with expected adjusted EBITDA margins aligning with the 48% achieved this quarter.

Cash Flow and Capital Management

The company experienced a significant decrease in free cash flow year-over-year, reporting $11.6 million in the second quarter compared to the previous year's $37.7 million. This 69% decline was due, in large part, to approximately $29 million paid in estimated taxes for the first six months, of which $10 million related to capitalizing R&D expenses. They have also actively managed their capital through share repurchases, buying back shares worth $169 million at an average price of $22.45, thus reducing the total shares outstanding by roughly 5%.

Future Projections and Market Outlook

Anticipating the macroeconomic environment to largely remain consistent with previous years, the company predicted next year's market growth rate may mirror the current year's. While there's confidence in long-term opportunities and the potential to outperform the market, the company has withdrawn its 2028 revenue and rule of 65 targets due to potential cyclical headwinds. Nonetheless, it maintains its guidance for long-term operating model targets with non-GAAP gross margins of 85% to 90% and adjusted EBITDA margins over 45%.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Doximity's Fiscal Second Quarter 2024 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Perry Gold, Vice President of Investor Relations. Perry, you may begin your conference.

[Perry Gold, executive]

Thank you, operator. Hello and welcome to Doximity's fiscal 2024 Second Quarter Earnings Call. With me on the call today are Jeffrey Tangney, Co-Founder and CEO of Doximity Dr. Nate Gross, Co-Founder and CFO; 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, all of which are 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 our other reports and filings with the SEC that may be filed from time to time, including our upcoming filing on Form 10-Q.

Our forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, November 9, 2023. 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 onetime 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, Jeffrey Tangney. Jeff?

[Jeffrey Tangney, executive]

Thanks, Perry, and thank you, everyone, for joining our second quarter earnings call. We have 3 updates today, our financials, network highlights and new products.

First, our top line. I'm pleased to report that we delivered $114 million in revenue for the second quarter of our fiscal 2024, a 4% beat over the high end of our guidance and 11% growth year-on-year.

Our 20 largest clients who know and measure us best, continue to be our fastest growing with a net revenue retention rate of 119%. Our bottom line was also strong in Q2, with an adjusted EBITDA margin of 48% or $54 million, which was 20% above the high end of our guidance.

Looking ahead, we're raising our annual revenue guidance midpoint by $6 million or 1% to 11% growth year-on-year. We're also raising our EBITDA guidance midpoint by 6% to $213 million or a 46% margin.

We will remain fiscally prudent, and we are reiterating our long-term model guide of 45-plus% EBITDA margins. However, given continued macro uncertainties today, we're withdrawing our 5-year growth target. This said, we still fully expect to be a $1 billion company and 2028 will remain our internal stretch goal to get there.

Our CFO, Anna will provide more color on this in a minute.

Okay. So that's our Q2 financial highlights, a 4% beat, a 1% raise and 48% EBITDA margins.

Okay. Turning now to our physician network. In short, we've never been more used or more useful. Our unique active users on a quarterly, monthly, weekly and daily basis all hit record highs last quarter and all are up double-digit percentages year-on-year. Notably, it's our daily users that grew the most, underscoring the integral role we now play in day-to-day patient care.

Our news feed did particularly well in Q2 and hit both record reach and usage. Our AI algorithms are playing an increasing role in our success as they read over 0.5 million articles each month to personalize news briefs for each doctor based on their subspecialties procedures and interests. We're also now using AI to rewrite medical journal headlines, making them more succinct and readable, leading to higher engagement. With each tap on our news feed, our algorithms learn and improve and our decade-long data mode widens. We're proud to help doctors stay up-to-date on the research that matters most to them.

Our workflow products, scheduling, AI writing tools and Telehealth also hit fresh highs in Q2, with over 550,000 unique active prescribers. And we continue to gain share here post COVID, signing more top hospitals to our EHR integrated tools. We now count 16 of the top 22 U.S. hospitals as workflow clients and over 44% of all U.S. physicians on our enterprise platform.

Now for our product spotlight. We have 2 new products in Q2, DocDefender and our pharmaceutical client portal. DocDefender.com is our new free privacy service for doctors. Just as our popular Doc dialer product protects doctor cell phone numbers from off-hour callbacks, DocDefender protects their family's home address or phone numbers from being easily found online. Sadly, Ocean reports that half of U.S. health care workers will experience violence in their careers. And a full 35% of physicians we served had already had a patient find their home address. Or personal information online.

DocDefender works by requesting takedowns or removals from the many people Finder websites out there. Similar delete Me services exist, but they're expensive. We believe doctors who increasingly serve on the front lines of society's toughest problems, deserve this basic protection for free. Like many of our best products, the idea for DocDefender came out of our annual 200 Physician Summit, This year, the recent spike in physician shootings weighed heavily on the group, and so we brainstorm a technological way to help.

DocDefender was the top to [indiscernible] getter of the weekend. Thousands of doctors have already beta tested DocDefender and the reviews so far have been great. We're excited to roll it out to all of our physician members this quarter.

Okay. Now for an update on our new self-serve pharma client portal, where we made incredible progress this last quarter and now have a strong Phase I beta product out and ready for our clients. As we did with our hospital client portal, we began by rolling out to a dozen or so pharma test clients. So far, the feedback has been very positive. Clients like the ability to monitor their programs in real time, to see their IQVIA ROI reports integrated seamlessly and leverage our AI brainstorm bot to write better headlines.

Our plan is to open up this client portal to all of our pharma clients early next year. Then by next summer's upsell season, we'll layer in the ability to relaunch, add targets and expand existing programs directly from the site.

We expect this client portal will not replace but instead strengthen our white glove service for our top clients. It will allow our service teams to spend less time e-mailing about reports and more time on our newer point-of-care peer-to-peer and rep enablement products. It will also make it easier for us to reach and serve the longer-tail smaller clients.

By virtue of our unique reach and usage, we believe we're well positioned to become Pharma's premier digital HCP partner. And we're proud to now offer client service that's both high touch and high tech.

In closing, our Q2 saw record physician engagement, better-than-expected sales and profit and continued innovation with a new privacy product and our client portal. We believe health care is still in the early innings of its shift to digital. And with the advent of generative AI, we think tech will transform health care more this decade than ever before.

We're honored to continue to put physicians first and to be the leading digital platform for doctors. I've personally never been more bullish about our long-term opportunity.

And with that, I'll hand it over to our CFO, Anna Bryson, to discuss our financials and guidance. Anna?

[Anna Bryson, executive]

Thanks, Jeff, and thanks to everyone on the call today. .

Second quarter revenue grew to $113.6 million, up 11% year-over-year and exceeding the high end of our guidance range. Similar to prior quarters, our existing customers continued to lead our growth. We finished the quarter with a net revenue retention rate of 114%.

For our top 20 customers, net revenue retention was higher at 119%, so our biggest, most sophisticated customers are still our fastest growing.

We ended the quarter with 290 customers contributing at least $100,000 each in subscription-based revenue on a trailing 12-month basis. This is a 3% increase from the 281 customers that we had in this cohort a year ago, and these customers accounted for 88% of our total revenue. As mentioned, we are seeing the strongest growth come from our largest customers. To give some more color around this, we ended the quarter with 51 customers contributing at least $1 million each in subscription-based revenue on a trailing 12-month basis. This is a 28% increase from the 40 customers we had in this cohort a year ago.

Turning to our profitability. Non-GAAP gross margin in the second quarter was 91% versus 90% in the prior year period. Adjusted EBITDA for the second quarter was $54.2 million and adjusted EBITDA margin was 48% compared to $46 million and a 45% margin in the prior year period.

Now turning to our cash flow, balance sheet and an update on our share repurchase program. We generated free cash flow in the second quarter of $11.6 million compared to $37.7 million in the prior year period. A decrease of 69% year-over-year. The cash outflow in Q2 included roughly $29 million in payments for estimated taxes for the first 6 months of the year, with roughly $10 million of that related to the capitalization of R&D expenses.

Given we have utilized nearly all our NOLs, as you consider modeling the impact of taxes in the future, we estimate that our effective tax rate will be between 20% to 25% and our cash tax rate will be between 25% to 30%. These rates may vary depending upon deductions from stock-based compensation and the capitalization of R&D.

During the second quarter, we repurchased 7.5 million shares at an average price of $22.45 representing $169 million. We ended the second quarter with $730 million of cash, cash equivalents and marketable securities.

As of today, we have completed all outstanding share repurchase programs, and our Board has authorized an additional $70 million share repurchase plan. Following the share repurchase efforts, our total shares outstanding have decreased by roughly 5% or 8.8 million shares since our August earnings release. We are pleased by the positive impact these efforts have had on shareholder value.

Share repurchases have been funded by our free cash flow. And as a reminder, our IPO proceeds remain untouched and available to invest in the business and M&A.

Now moving on to our outlook. For the third fiscal quarter of 2024, we expect revenue in the range of $127 million to $128 million, representing 11% growth at the midpoint. And we expect adjusted EBITDA in the range of $61 million to $62 million, representing a 48% adjusted EBITDA margin.

For the full fiscal year, we now expect revenue in the range of $460 million to $472 million, representing 11% growth at the midpoint. We now expect adjusted EBITDA in the range of $207 million to $219 million, representing a 46% adjusted EBITDA margin.

The increased outlook reflects an improvement in our close rates over the past 90 days. Incremental budgets have been unlocking, but this has occurred later than typical due to the macro environment. As our customers deploy these dollars, we're encouraged that Doximity remains a top choice. With engagement levels at all-time highs across our platform, we continue to deliver strong returns for our customers and their desire to increase their program reach is evident in our Q3 revenue step-up.

As you consider our implied Q4 guidance, please remember we are providing wider ranges and making it more variability for the portion of revenue not yet contracted.

Now I'll give an update on our long-term financial targets. Given the broader macro backdrop remains relatively unchanged over the last year, we believe next year's market growth rate may look similar to this past year. With this in mind, we believe it prudent to withdraw our 2028 revenue and rule of 65 targets.

We still have strong conviction in our long-term opportunity and ability to outperform the market. but we are aware that we may face cyclical headwinds in end market budget growth for longer than initially expected.

As it pertains to our long-term profitability, we expect our highly efficient vertical sales model to continue to deliver a best-in-class margin profile. Due to this, we are reiterating our long-term operating model guidance. of 85% to 90% non-GAAP gross margins and 45% plus adjusted EBITDA margins.

As we look ahead, we are excited by the innovation we are bringing to the industry and the value we will continue to deliver for our customers. Our new pharma client portal has the potential to power a new level of personalization and efficiency on our platform, a win-win for our clients and for our members. We believe this is an exciting and natural evolution of our business. and will position us for market leadership for years to come.

With that, I will turn it over to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Brian Peterson from Raymond James.

[Brian Peterson, analyst]

So I'd love to get any color that you guys have heard from customers about calendar year '24 budgets, and I appreciate the comment that you just gave. But what have you heard in terms of any feedback or how they're thinking about budgets for next year?

[Anna Bryson, executive]

Sure. Happy to take that one, Brian. So listen, it's still a little bit too soon for us know exactly what budgets will look like next year. Our best guess is that the calendar year budget growth rate will look roughly similar to what we saw this past year. So mid- to high single-digit growth. .

And now we do remain confident in our ability, regardless of what the growth rate is to outperform the market. And as we're in the midst of our annual buying cycle right now, there are many things that both we and our customers are excited about around our new reporting tools, the potential to bring AI to their programs. And the returns demonstrated by our new products.

So there's a lot of really positive momentum happening in the business right now, but it's just too soon for us to give more color on the market growth rates.

[Brian Peterson, analyst]

Understood. And maybe just [indiscernible] moving to the product a little bit with DocDefender, and I know with Amion, I just hoping to understand how you guys are thinking about potentially adding monetization to that? Or how we're thinking about these new products in terms of when that will start to impact the growth rate?

[Jeffrey Tangney, executive]

Yes. Thanks, Brian. This is Jeff. I'll take that one. So first, we're so thrilled to have double-digit percent growth across all of our active user categories. And the highest growth with daily users really is, I think, a true North signal for us that we're becoming part of the doctors, daily workflow, treating patients, checking their schedules, using our AI tools to help. So we're really proud of that, and that, to me, is really the best out of the quarter. I think if you look at others in our space, our competition, they're not seeing that, if anything, I think they're seeing year-on-year declines as we move out of the sort of COVID, stay at home, heavy digital use.

With regard to DocDefender specifically, we have no monetization in that product today. But similar to our dialer product, we see a lot of opportunities for that, and that's something we'll will phase in over time. The good news is it's the sort of product that doctors once they start monitoring their privacy, they come back and check frequently as there are additional websites and other changes. And it's the kind of thing that's sort of whack a mole privacy wise, it drives a lot of ongoing engagement.

Our AMM product, which you mentioned, continues to grow and do great probably less new news on that front, except to cite as we did in our prepared remarks, we're at 16 of the top 22 health systems now who have an enterprise BAA or business associate agreement with us inside their EHRs, inside their privacy agreements and powering their workflows.

[Operator]

Your next question comes from the line of Richard Close from Canaccord Genuity.

[Richard Close, analyst]

Yes. question. As we're preparing for the next budget year, and I'm curious if you could update us on demand for point of care. Maybe versus the traditional news feed? Are you seeing any major differences there, maybe point of care growing at the expense of the latter, the news feed?

[Anna Bryson, executive]

Sure, Richard. The first thing I'll say is that we're excited to penetrate deeper into point of care and peer-to-peer budgets. And as we've had the conversations with our customers during this annual buying cycle, our customers are really excited about how these products can increase the value they're receiving from our platform when coupled with our other product suites. So the programs we've run peer-to-peer point of care over the past year have demonstrated very strong returns. We've been able to prove to our customers that the more modules you buy, the higher your returns. So we're looking forward to expanding our customer reach and deepening our penetration here over time.

[Richard Close, analyst]

Okay. And then with respect to the EBITDA margins, I guess, the long-term 45% plus. But is there any reason why you can't keep up the current level that you just reported and what's implied for the -- yes, for the third quarter?

[Anna Bryson, executive]

Sure. I'm happy to take that one. We plan to continue to invest in growth and invest in the business. We're doing that today with new products, we have a new client portal that we'll be investing in more and more. We have new business lines we're investing in, and we're continuing to hire. So from our perspective, we're certainly continuing to invest in growth. And so we think 45% plus margin as a long-term target is appropriate given those investments. .

[Operator]

Your next question comes from the line of Ryan Daniels from William Blair.

[Ryan Daniels, analyst]

I'm hoping you could dive a little bit deeper into the beta users on the new pharma client portal. Meaning, are you seeing quicker conversion on sales or better pricing? I know you've talked about some auction-based pricing based on ROI. So curious what you're seeing initially with those users.

[Jeffrey Tangney, executive]

Yes, Ryan, Jeff Tangney here. Yes, I'll take that. So I've been joining quite a few of these calls with our clients. It's fun, we just had a director to top 5 pharma company this week tell us it was his favorite meeting of the week to go through our client portal together. And that's because it's just a lot of insights that we can provide. It's real-time data, which she's excited about. And the integration of the IQVIA results allows him a, again, real-time look at the incremental sales and ROI that we're delivering, which at the end of the day, it's the bottom line for senior marketers inside pharma.

So all that's gone super well. I do want to be a front that are Phase I the product that we have out for [Audio Gap] for clients to purchase additional waves or programs. But they've already asked about that. And so I think it will be a natural extension of that in our Phase II, which in our prepared remarks, we said we will have fully out for our next summer upsell season to make it really easy for them to take this video that so many docs like and deploy that to a broader audience or to a different audience or to take actually one of the more fun pieces of the demo has been our GPT brainstorm bot, where we can show physicians who've already seen all of your articles and messages are really engaged in your product, in your market. But then Brainstorm additional things that may relate to their practice, given that they see a lot of patients with co-morbidities or whatnot and how they put that together.

And of course, the brainstorm bot just comes up with ideas. But it's been fun. I say my favorite is it's very good at creating raps. So rhyming answers to insurance companies on why they won't do an insurance approval for that drug reimbursement.

So anyway, we've had some fun with it. But I would say today, we're not doing purchasing on the portal. That's something that we will roll out with caution in a way that, again, stays with our high-touch model, but also bringing high-tech to it.

[Ryan Daniels, analyst]

Sure, sure. That's great. And then -- I appreciate all the color. And then as my follow-up, interesting comments in the prepared comments from you, Jeff, around daily users, I think you said that grew the most. And your news feed is reaching record usage. I'm curious if you've made changes to the platform that's driving that or if it's just the kind of halo effect of all the solutions you now have for these providers kind of driving them to the platform more frequently. A good data point, so I just want a little more color there.

[Jeffrey Tangney, executive]

Yes. Great question, Ryan. I think the short answer is AI. We really are able to use AI more in our news feed. Yes, we have seen record growth in our daily active users, and our overall news has led the way there. So I think we are the news feed of medicines for all intents and purposes. We're the place that when doctors have a few minutes, they'll open us up and go get up to date on what's new for their practice and not just at a cardiology level, but at a at a procedure level, given their type of practice and the 10 years of data that we have on the things that they are most interested in.

So I do think AI really has been helping our teams there a lot, and we continue to lean in there.

[Operator]

Your next question comes from the line of Scott Berg from Needham & Company. .

[Scott Berg, analyst]

Jeff, I want to just kind of follow up on the new speed item. Given your kind of record usage levels and assume they remain at the kind of level point forth. How should we think about the impact on the kind of the return on announcement? I know you haven't talked about any of those numbers, I think the last couple of quarters with some of the results your customers have had. But I would imagine that there's probably some natural correlation that major customers you can have for this. [indiscernible]

[Jeffrey Tangney, executive]

Yes, Scott, I'm not certain I heard all of what you had to say there, but the short answer is you're right, with increased engagement on our news products we are seeing terrific returns on our ROI and ROAs, return on ad spend studies. And in fact, this past quarter, we had a higher than our median, which we had announced it being 10 to 1. So we're seeing continued increases in our return on investment for our customers. .

[Scott Berg, analyst]

Great. And then for a follow-up on your self-service portal, does that reduce your sales and marketing spend over the long term as customers use that more? I didn't know if correlations with sales commissions, et cetera, maybe impacted there? And I guess where I'm kind of going with it. I didn't know if with that change in the business here going forward, if that actually could drive some upside to your long-term adjusted EBITDA margin if that does kind of drive down sales and marketing, which wasn't probably in the [indiscernible].

[Anna Bryson, executive]

Sure, Scott. So for our new pharma client portal, we aim to be high touch and high tech. We absolutely will continue having our white glove service and also continue to meet our customers where they are and allow them to have real-time reporting and more real-time access to buying on our platform.

Theoretically, over time, we will continue to focus on efficiency as a business. And yes, that could make our sales and marketing as a percent of revenue decrease, but we're also going to continue to invest in the platform. So we could see some increase net there from an R&D perspective.

So I want to get ahead of our excuse there as far as increased margin. I think 45% plus margin is something that we are very proud to be guiding to, but we are going to be remaining this high-touch and high-tech business as we launch this client portal.

[Operator]

Your next question comes from the line of Elizabeth Anderson from Evercore ISI.

[Unknown Analyst]

This is Samir Patel on for Elizabeth Anderson. Anna, you mentioned that you left the 4Q guide a bit wider for business that wasn't yet contracted. Could you give us some color on how much of the full year guide is booked to date?

[Anna Bryson, executive]

Sure, happy to talk about that. So as we sit here today, we'll really just have renewals left to book. So we've kind of gotten through that mid-year and year-end upsell cycle for the most part. You can see in our results and our step-up in Q3, that actually ended very positively for us. So we did see some strong growth over the past 90 days here.

As we look ahead to Q4, most of that is stemming from renewals. As I mentioned in my prepared remarks, we are taking a more prudent approach here to how we guide on that portion of our revenue not yet booked, just given the continued macro uncertainty, but we feel really good about where that number is for now.

[Unknown Analyst]

Got it. Appreciate that. And then one quick question. Just looking at your 3Q guide, it looks like you're kind of -- you kind of mentioned that you're guiding to EBITDA margin of around 48%. I guess my question first is, should we see another step down in OpEx on a dollar basis in 3Q? And then related to that, I guess, what is keeping the year-over-year margin relatively flat given the recent restructuring?

[Anna Bryson, executive]

Sure. So Q3 is the largest sales quarter. Clients are deploying about 65% to 70% of their annual budgets in Q3. So it in the end becomes our largest bonus and commissions quarter as well. So you typically will see a step-up in OpEx between Q2 and Q3, and we expect that to be similar this year.

As I mentioned before, we're also continuing to invest in our business and our new client portal. And even with this investment that we're seeing, we're guiding to record margins in Q3. So this over 48% margin is a record margin for us in Q3, and we feel really good about where EBITDA is.

[Operator]

Your next question comes from the line of Jessica Tassan from Piper Sandler.

[Jessica Tassan, analyst]

Congrats on the really exceptional results. I wanted to ask just about the robust growth in productivity suite users. Can you help us understand if outside of point of care, are you guys monetizing those users with things like education embedded and scheduling or the point-of-care tools just driving more utilization of the news feed?

[Jeffrey Tangney, executive]

Yes, Jess, this is Jeff. So I'll speak to that. The short answer is, yes, within our workflow suite, we do have links into our news feed. And as we've discussed with our point-of-care products, we also have moments where people are having to wait for a reply for someone paging another doctor, and that's a perfect moment to have an educational piece about a product or about a market.

So I'd say we are monetizing across our full suite. So hopefully, that answers your question. I'll just share that we did just do our annual pharma client event in New York, had a record turnout. 130 clients came and I'd say it was great because they got to hear from some of our physicians at this event and really just hearing how doctors are using us in their workflow every day has been a real differentiator for us in the market.

[Jessica Tassan, analyst]

My follow-up is just of the subscription growth that came from existing customers year-to-date, I think it was about $19 million based on the Q. Can you just break this down a little bit. So is Doximity playing a bigger role in content creation or targeting? Or is this primarily just kind of more campaigns, more modules, more impressions?

[Anna Bryson, executive]

Sure, happy to take that one, Jess. So as I mentioned before, we had a strong end to our kind of midyear year-end upsell cycle. And so we've seen some strong growth here over the past 90 days. A lot of that comes from increases that we've seen from our largest customers.

So as you heard me mention on the call and one stat we think is really indicative of the health of our business, is the increase we've seen in the number of million dollar customers, which is up 28% year-over-year. So now we have $51 million plus customers. These are customers that are adding brands, they're adding modules, they're adding audience members. And we believe that growth that we're seeing amongst our largest customer cohort is indicative of the value of our platform, irrespective of the near-term macro headwinds.

[Operator]

Your next question comes from the line of Eric Percher from Nephron Research. .

[Unknown Analyst]

Question on the long-term guidance, and I think I understand that it's primarily the duration of cyclical headwind, not a change to the total opportunity. Does that change your perspective on how you allocate R&D or R&D priorities over the next 12 to 24 months. And obviously, this plays into the change in R&D focus from physician to clients, how does all of that layer in?

[Jeffrey Tangney, executive]

Richard, this is Jeff. I'll take that. I think you're right. I mean at a macro level, this is really just a more caution longer viewpoint on our end. And as I mentioned in our prepared remarks, we fully expect to be a $1 billion company. And getting there by 2028, will remain an internal stretch goal for us. Sorry, Eric. And I just want to repeat that we'll continue to aggressively invest in the business. I think there's a lot of new TAM to go after in peer-to-peer rep enablement point of care. We'll continue to take share in our core markets with hospitals and with pharmaceutical companies. So we think we're in a great position, and we're still leaning in and investing in R&D.

So these macro -- more caution longer amongst our clients, we view as an opportunity for us to I think, to continue to step up in the market relative to others.

[Unknown Analyst]

And then a follow-up just on -- given the strong EBITDA result on the cash flow, I heard the commentary on tax, but I want to make sure I understand relative to the increase in prepaid expenses and accounts payable. Has there been a change in your outlook for cash flow conversion over the course of the year?

[Anna Bryson, executive]

So historically, we've seen free cash flow roughly near EBITDA on a trailing 4- to 6-quarter basis. And so that has not changed. But what has changed is that we are through our NOLs, and we are impacted by the newer tax rules around R&D capitalization. So what has changed is what our cash tax rate is now we're expecting free cash flow to be below EBITDA by the magnitude of whatever that cash tax rate may be. .

[Operator]

Your next question comes from the line of Scott Schoenhaus from KeyBanc.

[Scott Schoenhaus, analyst]

Anna, you mentioned you're having a lot of success with $1 million customers, and we clearly see revenue per $100,000 customers see nice sequential growth. Can you just provide any color into next year and what's built into these sort of initial assumptions on that cohort? And if the programmatic or self-service that you kind of weak and invested in -- we should built into those assumptions next year as a higher midyear upsell?

[Anna Bryson, executive]

Sure. Like we've said before, especially in this environment, we believe that our top customers will continue to lead our growth. So that cohort of $1 million-plus customers. It's been evident as you look at our NRR of our top 20 of 119% plus. So we have had strong success there. .

As we go forward, look, it's just too soon for us to comment on what we think fiscal '25 or beyond will look like. We are really encouraged by the recent momentum we've seen in the business. But at the end of the day, we are still facing cyclical headwinds and market budget growth. So while we remain committed to outperforming the market, we just aren't yet sure exactly what that growth rate is going to look like.

[Operator]

Your next question comes from the line of Stan Bernstein from Wells Fargo Securities.

[Stanislav Berenshteyn, analyst]

Maybe first, can you give us an update on the ROI for [indiscernible] for both pharma and health systems?

[Jeffrey Tangney, executive]

Yes, it was higher this last quarter than it had been previously. And we've said previously, our median was a 10:1 return, Stan.

[Stanislav Berenshteyn, analyst]

Got it. And maybe one quick one here. Just in terms of preliminary guidance, I know you just mentioned macro headwinds are pressuring budgets. Is that showing up as impact on volumes? Or is there a price component that's showing up as well?

[Anna Bryson, executive]

Sure. Once again, too soon for us to comment on next year and what that's looking like. We're in the middle of our annual buying cycle with our customers. From a pricing perspective, in this environment, we are baking in lower assumptions than typical for price increases. .

One thing we are excited about, especially with the client portal is we believe the real-time ROI reporting and analytics are provided in that portal will ultimately allow us to continue to raise prices nicely. But in this environment with the macro headwinds, we're just not leaning too aggressively into pricing right now.

[Operator]

Your next question comes from the line of Craig Hettenbach from Morgan Stanley.

[Craig Hettenbach, analyst]

And nice to see the really strong EBITDA performance. Jeff, if we think about the prior target of 20% CAGR in the intermediate term, is there a range that you think is kind of appropriate to where you see the market over a more intermediate-term basis?

[Jeffrey Tangney, executive]

Craig, good to hear from you. Yes, really just too soon. Again, this is more caution longer, I think, is what we're seeing in the end marketplace from our clients. And Again, our ROI remains strong. Our engagement remains very strong. One thing I haven't mentioned that we mentioned in the last call was about 90% of our R&D was physician-focused and I think we've had a lot of success in this last quarter. We've got a lot of our R&D team and are very excited now to work on client problems. And so we're seeing that mix shift.

And I think our clients are really pleased with the high-tech motion we're offering. But again, I think too soon to comment on that midterm growth rate.

[Craig Hettenbach, analyst]

And then just a quick follow-up on the video products. How do you think about that into next year as it layers into the business? And any kind of signpost to watch for in terms of adoption in the marketplace?

[Jeffrey Tangney, executive]

Well, I'll tell you, Craig, one of the cool things about bringing in all the IQVIA data and now being able to run these more real-time ROI analysis is we are able to start to look at what content types really generate incremental NRx lift, they call it sales for our clients. And that's a window we've never had before because before, we've always done these year-long look backs and haven't had the kind of real-time data to look at it all. .

And the short answer is, is video is hot. Video does very well at communicating messages, engaging doctors and ultimately changing behavior. And that's great news for us because with our point-of-care Telehealth product, we have a lot of video inventory. So we're excited to lean more into that go-to-market motion this year.

[Operator]

Your next question comes from the line of Jailendra Singh from Truist Securities.

[Jailendra Singh, analyst]

Congrats on a strong quarter. My first question, I mean, last quarter, you guys called out some market share losses to cheaper banner as kind of platform. Just wondering if any of those trends moderate or reverse this quarter and what have been the drivers. I believe you have talked about that some of that could have been because of lack of an automated online purchase platform, but just curious that how trends were 3 months later?

[Jeffrey Tangney, executive]

Yes. Thanks, Jailendra. Yes. So per our 1% guidance raise, we're obviously pleased with the sales momentum we've seen since then. Our close rates were up in Q2, as Anna has already mentioned. I'll go back to that 130 client day long event we had in New York recently, we did get a lot of good feedback from there. And with regard to some of these new competitors, I will say, the third-party reports they're running are finding issues with their quality and their ROI. And I think that, that has moderated, I think, some of that competitive threat. .

The joke is that IP address targeting often reaches the doctor's daughter, not the doctor, and that is raising a lot of questions about whether there's real ROI here.

[Jailendra Singh, analyst]

And then my follow-up, what of the insurance company, Aetna, they recently announced, I know making some changes around reimbursement for some of the virtual care and audio coverage reimbursement. And as always is the case that generally other insurance also follow the trend. I was curious what feedback have you got from your providers since that announcement? And how should we think about the provider usage of Doximity platform? Clearly, you have a lot of tools of providers, but dialer app is one of the critical tools you guys have for your provider clients. Just curious like what's the feedback from them?

[Nate Gross, executive]

Jailendra, this is Nate. That's a great question. I think if you are looking at some of the recent moves in the payer space, that's dictated more by the business realities of those payers. And is less so at this point, a broader trend in medicine. I think we're seeing there's still a lot of legislative patient and doctor support for Telehealth as a sort of a new normal for certain types of care delivery. I think all parties who use it like it in the right circumstance.

And so we believe Telehealth is here to stay, and I think our numbers on the engagement side of our platform reflects that. That said, every year, not just in Telehealth, physicians face decreases and cuts to their compensation and to what they can build for and how much they can build for and they are increasingly asked to see more patients and see more patients efficiently. And so while not every patient and not every type of care is going to be a perfect fit for Telehealth, it's going to be up to the technology community and those working with doctors to come up with solutions that can make it as seamless and easy and lightweight as possible because when the economy and when physicians are just strapped, that's the only way we're going to be able to deliver a product that works for everyone.

So we're thrilled that our engagement is at an all-time high. And if you look at what Jeff said, DAU, daily active use, which is really those workflow tools of which Telehealth is our crown jewel led the charge and grew the most in the last quarter.

[Operator]

Your next question comes from the line of Jack Wallace from Guggenheim Partners.

[Unknown Analyst]

Anna, in your comments, you mentioned that there's a little extra budget unlock as part of the reason for the guide. I realize it's a small cohort, but is there any part of that, that's related to the self-service portal and it sounds like the hope might be that, that would be the case going forward, but is there any extra unlock tied to the self-service portal in the guide?

[Anna Bryson, executive]

Sure, Jack. Happy to take that question. The short answer is not yet. I think we're really excited about the unlock that, that could bring for next year potentially. But really, what we've seen over the past 90 days is like many other industries, we've just seen elongated sales cycles in this environment. So those incremental dollars that we typically start seeing being added to our platform in June didn't really start coming in until August of this year. But since August, I think that's where we're really encouraged by the strong growth we've seen here over the past 90 days as our customers are adding on to their high ROI programs. .

So a lot of this has really been budget driven. But for next year, we're very excited by what self-serve can bring, but it's just too soon to put numbers behind us.

[Unknown Analyst]

And then for the recently launched products or maybe some of those in the planning? Are you noticing any changes in your customers' appetite for supporting those launches, any slower or faster just given the current environment?

[Jeffrey Tangney, executive]

Yes, this is Jeff. I'll take that. The short answer is there's a lot of interest in innovation in what we're doing. But I'd say also in this more cautionary macro environment, there's a flight to quality around high ROR programs that have had proven results.

And again, from our end, that's great because this is the time of the year when our clients sit down, they look back on the year, they look at all the numbers, they do the math. They do the ROI and we're one of their key, if not, they're absolute key digital HCP partner.

So I wouldn't say that there's this strong drive towards experimentation in this market, like maybe there was in 2021. And I would argue that's actually good news for us because in 2021, that meant there was a lot of digital dollars thrown at new websites and other things that, frankly, just didn't work that well.

[Operator]

Your next question comes from the line of Allen Lutz from Bank of America.

[Allen Lutz, analyst]

I guess this one for Jeff or Anna. The point-of-care offering was sort of introduced intra-year this year. So I'm curious, as you think about [indiscernible] Because most of your business is on this annual part of the annual budget cycle. Do you expect to see a step-up in point of care revenue in your fiscal 4Q calendar or 1Q? And then related to that, is there any way to frame how much point of care revenue is embedded in that 4Q guide?

[Jeffrey Tangney, executive]

Sure. This is Jeff. I'll take that, Alan, and Anna may add some color. The short answer is our point of care is doing really well fundamentally because it's a video product. So as I mentioned earlier, that ability to have engaging video that's 20, 30 seconds long, our watch rates when doctors are just sitting there waiting for the patient to join a call, which is a lot of minutes every month, is a really great time to reach doctors and to get that engagement.

That said, it's typically -- it's playing out that it's selling together with our broader programs. And our client portal will actually reinforce this and again, bring all of this data and all the results back together into one place.

So candidly, it's a little difficult to point to our success in point of care discretely from our news feed because they're both doing super well. And they're typically, again, being sold as a bundle.

So with regard to our guidance, I guess, I defer to Anna, but I'd just say, overall, video engagement, which is what our point-of-care product is, has been a real hit.

[Anna Bryson, executive]

Yes. And as far as what we have embedded in our Q4 guidance, I would say not much from that perspective because we're thinking about launch time lines, we're sensitive to the time it takes to get these products created and live. And so from our perspective, we're not counting on a big ramp there at all.

[Operator]

Your next question comes from the line of Glen Santangelo from Jefferies.

[Glen Santangelo, analyst]

Jeff, I just wanted to follow up on some of the comments that you made regarding the macroeconomic climate. You said that your clients seemingly less willing to drive towards experimentation. I'm trying to get a sense for maybe -- I mean it seems like it's benefiting you in this environment. And so I'm trying to get a sense for maybe overall market growth. I think Anna following up on your remarks, you said that you all feel comfortable that you'll be able to grow faster than the market. And I'm trying to get a sense for -- in this year, how fast is the market growing? Clearly, we're not seeing digital outperform the overall marketing budgets by as much as they were during the pandemic, but I'm sure it's still growing faster. And I'm just trying to get a sense in the current environment. with the competitive landscape of programmatic DTC, DTP? Like where is the market growth today, you think, in your mind? Sorry, there's a lot to that question. So however you want to handle it.

[Jeffrey Tangney, executive]

Great, Glen. This is Jeff. I'll take the first crack. So first, I'll say, pre-COVID pharma health care spend by our estimates and IDC and others about 17% of their marketing budgets digitally on digital programs, which is way under the Fortune 500 or general industry norm at that time. I think during COVID, there was some catch-up. It grew faster our current guesstimate is that it's probably half of the 75% that the Fortune 500 does. So in the mid-30s in terms of what percent is spent digitally. But there is a bit of a reversion to the mean as we come out of post COVID here.

And again, I'd say, overall, the general approach to all things these days is just more caution at the macro level, given that our clients could invest that money at low risk at high rates these days as well instead of investing in our marketing.

Again, over time, that will shake out, and when we're delivering a 10:1 return for our clients, we'll see more come our way. But you'll see probably less of that experimentation and those new websites that were tried out during COVID that didn't have any return. So I don't know, Anna?

[Anna Bryson, executive]

Yes. So specifically to your question, Glen, around market growth. What we said on our August call is that we believe the market this year grew maybe mid- to high single digits. And as far as our expectations for next year, just given the continued macro headwinds, we think next year, we'll look roughly similar to this past year. We do think this is more of a near-term phenomenon. To Jeff's point, we are contending with a post-COVID reset and then a macro downturn. I do think over time, there will be a reversion to the mean upwards just for where we are right now in this macro climate, we're assuming the growth rate remains similar to what we saw this last year. .

[Operator]

Your next question comes from the line of David Larson from BTIG.

[David Larsen, analyst]

I've been hearing the 10:1 return for a long time. But I think what I've heard that's new this quarter is a tighter integration with IQVIA, the ability for the clients to actually run the data themselves and look at that think through their client portal, is that correct? And can you maybe just provide a little more color around it?

Did I hear that correctly that you can see the real-time ROI in a self-service way. Is that new?

[Jeffrey Tangney, executive]

David, that's right, that is new. And again, this is out in beta right now. It's something that we expect to make available to all of our pharma clients early next year. But I think it's a big unlock. You're absolutely right. It's something that we've seen in our hospital business has been a big difference maker. So in our hospital business, we've been doing this now for a year or 2 where we've been able to provide our clients these quarterly refreshes of their referral data and show them what their ROI was. And it's interesting. The first time you do it, it's a 45-minute call with a lot of statistical questions. The second time you do it, it's a half hour call. And then the third time, it's just an e-mail. And it's a reminder to our clients that -- of the value we provide them.

Right now, historically, what we've done for our clients is more of a once-a-year look back, which obviously isn't as frequent and isn't as top of mind. So I do think it will be a big unlock for us to make this data just more available and more transparent to our clients.

[David Larsen, analyst]

Yes, I think there's enormous value in that they can see the ROI right away. So why not invest more, especially in a tough economy. And then did I also hear you say something about insurance approvals for certain drugs, are -- do you have a solution in that area or not?

[Jeffrey Tangney, executive]

We're working on it, David. So we did announce that we have our Doc's GPT product that was launched back in February of this year. We announced last quarter that we had our first health system clients for it. So these are top hospital systems paying to get their doctors and their back-office staff access to tools that help them write ensure appeal letters. .

And of course, pharma would love to make that better and easier as well, and they have whole content libraries that we can feed in that provide better insurance appeal letters to make sure that patients get the medications they need.

[Operator]

We have no further questions in our queue at this time. I will turn the call back to Jeff for closing remarks.

[Jeffrey Tangney, executive]

Great. I'd like to end by just thanking the entire Doximity team for their hard work this quarter and serving more doctors every day than ever before. Thank you, everyone, for joining.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.