Butterfly Network, Inc. (BFLY) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Butterfly Network, Inc. Q1 2023 Earnings Call. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to Heather Getz, Executive Vice President, Chief Financial Officer, to begin. Heather, please go ahead when you're ready.

Good morning, and thank you for joining us today. Earlier this morning, Butterfly released financial results for the first quarter ended March 31, 2023, and provided a business update. The release and earnings presentation, which include a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures, are currently available on the Investors section of the company's website at ir.butterflynetwork.com. I, Heather Getz, Executive Vice President and Chief Financial Officer of Butterfly, alongside Joe DeVivo, Butterfly's Chairman and CEO; and Darius Shahida, Butterfly's Chief Strategy Officer, will host this morning's call. During today's call, we will be making certain forward-looking statements. These statements may include, among other things, expectations with respect to financial results, future performance, development and commercialization of products and services, potential regulatory approvals, the size and potential growth of current or future markets for our products and services and the impact of macroeconomic factors on our business. These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contained in the forward-looking statements. These and other risks are described in our filings made with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, and the company disclaims any obligation to update such statements. As a reminder, this call is being webcast and recorded, and we will be referencing a slide presentation in conjunction with our remarks. There may be a short delay between the live telephone audio and the presentation being shown. To access the webcast, please visit the Events section of the Investors section of our website, and a replay of the event will be available following the call. I would now like to turn the call over to Joe DeVivo. Joe?

Thank you, Heather. Good morning. I feel quite fortunate to join the family at Butterfly Network during such a critical time in its history. I first want to thank Dr. Jonathan Rothberg and the Board for the opportunity and also the warm welcome I've received from the whole Butterfly team. I've only been here a few weeks and have enjoyed meeting the incredible people who brought so much success to the company, and I'm really excited about Butterfly's potential. During my career, I've seen the early days of minimally invasive surgery, surgical robotics, interventional oncology, and most recently, digital health. Each with the undisputed disruptors in their respective fields. It's an exciting ride, and I'm thrilled to be a part of the disruption that will be caused by the democratization of medical imaging through Butterfly's one-of-a-kind hardware enabled by AI tools. This technology will empower providers to help treat and diagnose patients where they are. In a moment, Darius will provide a business update on the quarter, and Heather will communicate the financial results. But first, I'd like to share my initial perspective on the opportunities that I see. Over the past couple of years, I served in the AI ultrasound field, actually partnering with Butterfly and have seen firsthand how impactful enabling clinicians to capture images at the point-of-care can be. Since the inception of Butterfly, we've spoken about the importance of ease of use in empowering practitioners worldwide with ultrasound because nearly 2/3 of the world's population lacks access to medical imaging and the vast majority of health care practitioners are not ultrasound trained. Ease of use and training are the most critical limiting factors to broaden adoption and true democratization of medical imaging. With our Ultrasound-on-Chip technology, Butterfly has made imaging more accessible to medical professionals worldwide, and frankly, easier to use. This is why we've invested so heavily in the development of novel AI applications to empower practitioners wherever they may be. From our Auto Bladder Volume tool to our cardiac guidance and interpretation partnership to our auto gestational age application with the Gates Foundation, and now most recently, our Auto B-line tool. This newly approved tool makes it easier for medical professionals to capture key pulmonary scans to detect fluid in the lungs at the point-of-care, giving them a timely diagnosis when they need it. This B-line application is essential for diagnosis confirmation in pneumonia and many other cardiovascular diseases. In fact, there are more than 1 million diagnoses per year for pneumonia alone in this country, and our B-line application will make it easier. Butterfly is clearly at the forefront of AI development as we seek to make our solution as easy as possible. And while this approach and the importance of AI has garnered a lot of attention, investment and M&A recently, it's been at the core of our DNA and the company strategy since the very beginning of Butterfly. Our secure cloud empowers our AI developers to build applications for our customers by tapping into our database, which represents the largest ultrasound image repository in the world. Importantly, this focus on novel AI tools development and our image repository is not only bearing fruit in the form of FDA approvals, but in driving the commercial adoption of our technology in ways that traditional POCUS is unable to do. Going forward, it's our intention to start monetizing our AI algorithms across our large installed base. Over the past 3 years, Butterfly has deployed more devices in the market than any other company with nearly 100,000 ultrasound probes shipped to date. Butterfly has an amazing ability to reach, deploy and empower users virtually. I view Butterfly as a technology empowered software company. Our chip-based hardware provides us an accessible and growing user base that our software can be sold to, providing incremental software opportunities. Our recent FDA clearance has paved the way for other developed tools that are in queue for regulatory submission, reaching more people, empowering them with intelligent diagnostic tools and helping them with the business of medicine through enterprise software is the winning formula for our future. Now, being a disruptor is never easy. I've been there many times before. It's always hard to predict the timing of customer and market adoption in the face of the massive opportunity it presents. I fully intend to lead Butterfly through this journey and capture the market for our employees and our investors. So with that, I'll turn it over to Darius to comment on our commercial and business progress in the quarter. Darius?

Thank you for that introduction, Joe. We are excited to have you on board. In the last quarterly update, we shared a recap of all the progress that was made in 2022 across each of our 4 pillars: health systems, international expansion, path to home and adjacent value stream on our path to democratize medical imaging. 2023 has kicked off in earnest with progress across each of these 4 pillars and with our team driving outcomes against our principles of easy, everywhere and economical. So with that said, let's dive into the progress we made this past quarter in more detail. Starting with our progress in health systems. This quarter kicked off with more large institutions embracing Butterfly and deploying our Blueprint solution at scale. In fact, we are excited to share that this morning, we have signed another significant deal, this time with the largest medical school in the country to deploy our Butterfly solution to help facilitate point-of-care ultrasound across the continuum of education. The institution expects to use our QA in credentialing, utilization tracking and Butterfly Academy, didactic courses as a complement to its existing point-of-care ultrasound curriculum. This opportunity represents an important partnership to empower and deploy an exemplary medical education program across multiple specialties and to train hundreds of students, residents and physicians. While we are introducing this meaningful partnership today, the deployment was signed in April. We look forward to sharing more details in the coming months. Another notable partnership was our multiyear rollout with High Quality Medical Education, an internationally recognized Emergency Airway Management and point-of-care ultrasound organization based in Minnesota. This deployment will put Butterfly iQ probes and Compass software in over 100 rural and critical access hospitals throughout the state of Minnesota. The deployment will be paired with extensive POCUS training as part of the grants awarded to HQ Med Ed by the Helmsley Foundation aiming to boost sonography and POCUS training, and ultimately, improve access to exceptional medical treatment for all Minnesotans. Internationally, as you'll recall, last quarter, we announced the deployment with the University Hospital of Bonn in Germany, in which they are deploying Butterfly in a one-to-one model across their entire medical school and Butterfly Blueprint across their health system. Great progress has been made in this area with the implementation now underway. The connectivity is in place and first students arrive later this month. Moving to our clinical progress and our path to home. Beyond the aforementioned FDA approval we received in Q1, our clinical team continues to make progress with a number of key studies that demonstrate the value of Butterfly in a multitude of use cases and clinical settings. Our team is actively working with several institutions that have deployed Butterfly at scale and are compiling and quantifying the meaningful return on investment that Butterfly is driving through encounter-based workflow. Expect more updates on this front in the coming months. Another exciting clinical advancement in the first quarter is the release of the ACC cardiovascular point-of-care Ultrasound Workbook. Inspired by an innovation partnership with Butterfly, the ACC put together a team of experts and developed this guidance tool for cardiologists to enhance the adoption and utilization of POCUS by cardiologists. Three key areas are addressed, including cardiac, lung and vascular bedside ultrasound as well as the value POCUS can provide in enhancing routine bedside physical exam. Now, the ACC joins a growing list of professional societies acknowledging and supporting the evolution of bedside assessment to include POCUS, and we are thrilled to have been the inspiration for this publication. Last, but not least, we have signed contracts with large U.S. academic medical centers in the Northeast to initiate clinical projects that are evaluating wide-scale deployment for clinical care and training initiatives that explore the use of Butterfly as a new standard of care in hospital patient management. We anticipate initiating this in Q3 and look forward to updating you on our progress on this front later this year as well. Moving to our adjacent markets. Our veterinary team is excited to announce that a seminal paper was published in the Journal of Veterinary Medical Education, which demonstrates the feasibility and benefits of implementing a self-driven point-of-care ultrasound program in large animal teaching hospitals, using Butterfly iQ+ Vet. This randomized controlled trial found that by equipping students with Butterfly iQ+ Vet and providing simple, self-guided digital materials for device use and key clinical applications, it is feasible to implement self-motivated POCUS training even in large animal teaching hospitals amid heavy caseloads and time constraints. Moreover, the self-driven program increased POCUS knowledge in students that have lower test scores, plus 94% of students found the Butterfly useful in their education and 95% reported they would like a device during all their clinical rotations. This Penn research corroborates our belief that by empowering students with Butterfly's easy-to-use portable POCUS system, academic institutions will greatly enhance training efficiencies and knowledge outcomes in their programs. Importing ultrasound education and training is core to our veterinary team strategy as it is with our broader company strategy. The vet team continued to expand existing relationships with academic institutions and strategic partners this past quarter. As you'll recall, in Q3 2022, Butterfly announced and entered into a collaboration with a third-party training platform that connects veterinary hospitals with professional sonographers in real-time using the Butterfly iQ+ Vet device. In Q1 of this year, we expanded this relationship and they now offer a more comprehensive package that includes Butterfly program tablets with educational offerings for all their customers. With all this progress in mind, I will now turn the call over to Heather for the financial results. Heather?

Thank you, Joe and Darius. Revenue for the first quarter of 2023 was $15.5 million, essentially flat compared to the prior year period and within our guidance communicated on the year-end earnings call. Looking at our sales channel, we saw a 15% increase in our U.S. direct business, driven by higher subscription revenue and increases in our global health business, which includes our deployment in Africa with the Gates Foundation. This growth was offset by softness across our other channels, including e-commerce, international distribution and Vet. Breaking our revenue down between product and software, product revenue was $8.8 million, a decrease of 20% versus Q1 2022. This decrease was driven by lower volume across all segments with the exception of global health. Software and services revenue was $6.6 million in the first quarter, growing by 45% over the prior year period. Software and services mix was 43% of revenue and increased by approximately 15 percentage points versus Q1 2022. This increase was due to a higher installed base of product with the accompanying subscription software renewals on the existing base of software users and software implementations completed during the quarter. Turning now to gross profit. Gross profit was $9.1 million in Q1 2023 compared to $8.3 million in the prior year period. Gross profit margin was 59% for the first quarter, which compares to 54% in Q1 2022. This increase was primarily due to a higher average selling price in addition to product mix, reflecting a higher proportion of subscription revenues. Also contributing to the increased margin was improved manufacturing productivity and other efficiencies. Offsetting these benefits was higher amortization of internal use software, which reduced margin by 560 basis points. For the first quarter of 2023, adjusted EBITDA loss was $22.3 million compared to a loss of $39.7 million for the same period in 2022. The improvement in adjusted EBITDA loss was driven by the increased gross margin dollars as well as the implemented cost reductions, which led to lower payroll, consulting and other outside services. Moving to our capital resources. As of March 31, 2023, cash and cash equivalents, including restricted cash, were $198 million. Our monthly use of cash, excluding bonus and severance, was $11 million in the first quarter of 2023 compared to $18 million per month in the first half of 2022. Before I turn the call back to Joe, I would like to touch on 2023 guidance. It has been less than a month since Joe joined the Butterfly team, and we need to give him an opportunity to evaluate the company's strategy. As such, we cannot affirm full year guidance at this time. We will revisit our guidance on our second quarter earnings call. That being said, we are committed to providing as much near-term direction as possible. Considering the greater-than-expected disruption we experienced in the first quarter resulting from the change in leadership and reduction in force as well as the longer-than-expected launch time with our distribution partners, we are expecting Q2 revenue to increase sequentially, but still be flattish to last year. Breaking it down, we believe our U.S. direct channel will continue to show strength. And as we recently signed a deal with one of the largest medical schools in the country and have visibility to another in the near future. We also expect our distribution partners to gain traction as we progress through the quarter. Our vet channel will see expansion, albeit at a slower pace than expected. We are, however, expecting continued softness in our international distribution as well as lower global health revenue as we anniversary the Gates Foundation deployment. As for EBITDA, we are expecting some improvement versus the first quarter of this year with higher sequential revenue and the full realization of our reduction in force. To close, while we saw strength in our U.S. direct and global health channels, we experienced higher-than-expected disruption and softness in our other channels. We believe we can navigate this disruption we are seeing while still realizing the vision and mission of Butterfly. Under all scenarios, we have a solid cash position. We continue to evaluate and find opportunities for efficiencies, and we will continue to invest in our current and future growth while closely scrutinizing our investments to ensure that we pick the maximum ROI projects and carefully evaluate the trade-offs. Meanwhile, we will give Joe the opportunity to assess our strategy. And with that, I will turn the call back over to Joe for closing remarks.

Thank you, Heather. My last prepared remark will be on the incredible opportunity Ultrasound-on-Chip technology provides. As I mentioned earlier, I believe we are a technology-enabled software company. We have many opportunities to monetize our broad and growing base of hardware with new software applications, but I don't believe it ends there. I believe the proprietary Butterfly chip can be leveraged in more form factors to empower even more patients to be treated in more automated and intelligent ways. I'm excited to share with you our vision before the end of this year. Thank you. And I'll now turn it over to the operator for questions.

[Operator Instructions] Our first question today comes from Joshua Jennings from Cowen.

Congratulations, Joe, on joining the Butterfly team.

Thank you. Happy to be here.

I was hoping to have -- great. Heather and Darius, wanted to just maybe -- just review, I guess, the details on the U.S. commercial team. And maybe just to remind us of the U.S. sales infrastructure, it sounds like, Joe, you may be reevaluating the commercial strategy in the U.S. and globally. But just have a better handle on kind of the combination of direct sales reps and distributors, anything incremental -- or sorry, to get detailed you can share, would just be helpful to understand where that commercial team sits and how that could evolve over the course of 2023.

Yes. Josh. So if you look at our direct sales force, as we mentioned on the year-end call, when we restructured it, we did reduce some of our direct sales force and so get them specifically on the hospital systems, which has been successful in Q1. As I mentioned, we were up 15% year-over-year, which is a great result with that reduction. On the distribution side, we had expected to onboard third-party distributors at a faster rate and that did not occur. And you will start to see that benefit in Q2. And as we mentioned, Joe will be evaluating that go-to-the-market strategy and we will revisit it on the Q2 call.

Understood. And was hoping to also just get an understanding of the hardware and software pipeline initiatives, anything you can share to what investors should be expecting in 2023 in terms of new capabilities, features of the software or of the next-gen Butterfly iQ system.

Well, so this is Joe, Josh. So first of all, historically, when we would sell software, we would sell it in a bundle in a subscription package. So what we are doing is we're in the process of coming up with different levels of bundles and being able -- as new capabilities come out, to be able to monetize them with a different pricing strategy. So we are working on that today, and I'd expect in the year, near the end of the year to start going with new capabilities to customers and be able to monetize them. So when we do that, we'll let you know. I think we are going to be releasing the B-line algorithm sometime in the second quarter. And that will be an ability to kind of reinvigorate our subscriber base and find ways, ultimately, to upsell. I think 2024 is the year where you're going to see a lot of incremental software and also some hardware come out. And we'll certainly update that more specifically a little bit later. But I have to say, coming in as a new CEO and learning what's in the pipeline, I feel like a kid in a candy store. There is so much this team has done, and I'm actually stunned, it hasn't come to market yet. And so there are AI applications or software improvements, hardware. So it's going to be a lot of fun.

That's great to hear. Wanted to ask about the home opportunity. And I know the team has been working on regulatory pathways with the FDA to open up that home indication for their patient self-scanning or even provider of scanning in the home. Any progress there? And then anything you can share just on the time line front. When do you think that work with the FDA will be done and you kind of have a defined pathway forward in terms of what's going to be required?

Well, that's a part of things that we are revisiting. I think there may be opportunities to get there sooner and it may not be as complicated as we thought about in the past. Just give me a little time, so I can piece it together for you. The home and off-site is going to be a massive, massive opportunity for us. And I'm just thrilled to update you. I wish I could tell you what I know right now, what I want right now is dates and deliverables. So when I tell you, I can tell you with certainty on timing. But our -- I have a very strong desire. When I looked at this business from the outside in, the hospital business is very important and very strong. It's also filled with some incredible incumbents who are going to fight us tooth and nail to seed market share, although they have been fortunately for Butterfly. There's an even larger opportunity outside the hospital. As hospitals -- in my time in digital health and virtual, we've all seen how payers, providers, employers are all trying to find ways to reduce the cost of care and help treat or manage and maintain patients in their home. And given the lens that I'm bringing from my time, InTouch and Teladoc, I think there's going to be an enormous opportunity. And I don't see it as a science project. I see it as connecting some dots internally and packaging things in a way that can create value for this company. So it's a little too soon for me to connect those dots for you. And I can't wait until I can.

Understandable. And then last question, just on -- I wanted to just ask about the Blueprint software package, enterprise software in the software revenue line is performing very nicely since I was introduced, I think, last year. Can you just help us understand? I know part of the strategy is in the facility and deployment, but also Blueprint could act as a Trojan horse and there's some hospital systems that are adopting Blueprint in front of the Butterfly iQ handheld devices and all the capabilities there. But maybe just help us better understand that opportunity in the United States, just Blueprint as a stand-alone software solution for hospital systems exclusive of the devices and how it's been contributing to the software and other services revenue growth over the last couple of quarters.

Sure, Josh. I'll do my best and if I have any holes, I'll let the team help me. So our enterprise software is called Compass. And Compass plus iQ+, meaning our enterprise software plus our hardware in a wrapped bundle is called Blueprint. And the Compass software has been a pleasant surprise to the team. I think there -- we do a lot in software. We are using software to tune our chip to get the appropriate images. We're using software to create AI algorithms to make image capture more successful. And then we're using software with Compass to make the business of medicine and the business of ultrasound more efficient. A lot of people take scans, but they're not documenting those scans, and then they're not billing for those scans. And when they don't build for those scans, that's revenue for health systems that they're foregoing. And there really isn't -- and I guess, to the team's surprise, there really isn't an enterprise management software that ties the scan, the ID and the record of the scan to the EMR and then to the billing process to ensure that these scans are paid for it. And so as our team approaches hospitals, regardless of who the incumbent imaging company is, they pretty much all are excited about the fact that Butterfly is solving a pretty major problem for them. And so the early signs are we're seeing, in a few of our early sites, then capture simply more reimbursement. And so the ROI is very immediate. Literally being able to see what the baseline in reimbursement for imaging was the prior month and then after Compass seeing that go up and go up materially. So it's a big positive for us. And we're going to continue, as we market Compass, to make Blueprint in the bundling of the entire solution a priority. But I think our team has been -- I think the prior management team, prior leadership were very visionary and did a great job in this area. And I think I feel blessed to have a product like that with everything else that's in the pipeline.

Fantastic. Thanks a lot, Joe.

The next question comes from Suraj Kalia from Oppenheimer & Company.

Morning, everyone. Can you hear me all right?

Yes.

Yes.

Perfect. Joe, Darius, Heather. Joe, welcome aboard, pleasure to connect with you over the phone today. Joe, a lot of commentary you have provided. And I appreciate the fact that you're just getting your feet wet and there are a lot of unknowns out there. I totally understand. Joe, one of the things you mentioned is you're repositioning the company, I think, so I'm paraphrasing here, as a technology-enabled software company or AI-enabled something you had said. Moving forward, Joe, would you advise us to start looking at the software component of the business, that line item? Specifically, in terms of the ROI on these strategic initiatives rather than the handhelds being placed per se as an ultimate driver of software. How would you advise we start looking whether Q2, Q3 onwards in terms of these 2 line items?

Well, so thank you for the question, it's an incredibly lucid question. And I look forward to when I feel comfortable providing guidance. And I feel we have initiatives in place that are driving revenue to help at that time, a healthy forecast to see it and peel it out in the right manner. The reason while I have not been inside the operation long, it's only been a couple of weeks of meeting people, but I have been studying the business from afar, and I have been thinking about the business. And I have a thesis on the business before I took the job. And in thinking about the business, what I'm seeing is that we are having an ever-increasing installed base and our capabilities and our software are becoming more sophisticated. And so the way to look at it simply is, every quarter, we're going to increase our installed base. We are not, in any way, shape or form deemphasizing hardware. With that, I see an opportunity that as new capabilities come out and those capabilities are creating value for customers, instead of just adding them into a package for free for those customers who will see value in that additional software they could pay for it. And so that means that we have to create an enterprise system that allows a customer to go to a site and actually increase their package and their capability and buy more software from us. And so, A, we want to increase the breadth of our business by placing as much software as possible -- or I'm sorry, placing as much hardware as possible. But then second, as our R&D continues to be productive in creating new solutions, that's just -- that's not just increasing the ASP on the new sales. It's going back to the base business, reinvigorating them and selling them software. So it's not really a pivot, but it's a different way to monetize the business. And I think what that will do, you've seen in the quarter, I think we were 54% gross margin going to 59% or I don't know if that's exactly right. But we've seen an increase in gross margin. And I'd like to see this business with much higher gross margins than we're at. And if we can do -- if we can keep our hardware at an appropriate price to create market access, but we can monetize our software at very high gross margin, I think you'll see the profitability or at least the contribution profile of the company increasing over time as we execute on that strategy. So I'm very happy to unpack it for you when we get closer to guidance. But at least that's how I'm thinking.