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

All right. Good afternoon, everyone. Thanks for joining us. My name is Danielle Antalffy. I am the U.S. medtech analyst here at UBS. Very honored to host to end the day, Butterfly Network. We've got CEO, Joe DeVivo. We've got Interim Chief Financial Officer, Megan Carlson. Guys, thanks so much for joining.

Thank you for having us.

Thanks for having us.

And it's been a few years since we've been following the Butterfly story. And I would love to get just your quick takes. I know we're going to probably get into more detail through the Q&A. But how the story has evolved, Joe? And you're -- what, you've been there for 2.5 years, 2 years.

Yes. 2.5 years.

Yes. Yes.

Well, I -- first of all, thank you for having us. And I'll apologize to anyone who's listening online or here. I have a cough. And if I cough into the microphone, it's going to be horrible. So I'll do the best I can not to. I remember within the first few months of joining the company, and I think I even said this on a conference call or something that I just felt like a kid in the candy store. When I had the opportunity to take the job, meet with R&D, I was just blown away with the depth of the technology that this company created from cloud to enterprise software to AI tools to an incredible semiconductor platform to the hardware. I was just blown away by the employees, the vision and the technical capability of this company. It's insane. And we're doing things today that no other large company is doing. And people, to a certain extent, still don't fully understand how capable this company is. And so we've had this tough experience of having to resize the company in the face of that. We -- when I got there, we're burning -- or a Board member doesn't like that term burning. We were investing $160 million, $170 million a year. And that's rough. Like that's rough. And so we went through some resizing, refocusing. And then fortunately, we created a road map on how we would start deploying all this incredible technology. So what's different from when you were intimate with the story is, a, we've launched a probe that has exceptional image quality. When I got there, it was almost -- oh, Butterfly is so cool this and that, but the image is just not there yet. And it kind of likens to this whole time of digital photography when everyone is so excited about digital photography, but the image resolution wasn't there yet or everyone was so excited about Netflix but it's buffering, right? And it's like, well, I can't watch a movie because it's buffering, right? But -- and so we were kind of at that stage. But now we've gotten to a stage where there is tremendous parity in handhelds now. So we have an all-in probe, lowest cost, does all these different use cases. And the image -- you don't have to sacrifice image anymore for that benefit. What we also did was we built an AI marketplace for -- there's about 50 different to 100 different companies out there developing AI tools to go into ultrasound. We then created a marketplace to allow them to link up to a public SDK and then develop. So we basically have gotten R&D -- so we have signed 27 deals. And each one of these entities now are investing to put AI into our environment. So that is new and exciting. And we haven't stopped our semiconductor development. So it's really, really exciting. We weathered the storm. We did a fundraise. I have to cough.

Go ahead.

Excuse me. We weathered the storm, resized the company, launched new technology, created new business opportunities, and we're in a great spot.

That's good to hear. So let me take some of the burden off your voice for a second here.

Thank you.

Yes. So -- and just so for folks on the line that might not know what Butterfly is, point-of-care ultrasound. Can you talk about where you sell into? Is it the health systems, the hospitals? Maybe talk a little bit about the business model for folks that might not be familiar.

Absolutely. So we make a handheld ultrasound device, and we believe just like we're the stethoscope salespeople 40 years ago. "Hey, doc, I think you might benefit if you can listen to the chest. You can hear the bowel sounds. You can hear fluid in the lungs and whatever." Now it's like, "Hey, doc, you benefit from seeing all those things." Now it's a lot easier to listen and to learn how to listen than to see, but it's the same thing. And we've made a device with a semiconductor that allows for all the different parts of the body to be seen with a single device. So there's a massive market opportunity. And the way we sell, it's something I've really enjoyed. I've been in health care for almost 35 years now and 30 years, 30 -- I don't know, I'll do the math later.

No one's counting.

No. Yes, I'd like to say 20 years or earlier, but I'm old. But what's really fun about this business model is we're digital first. So we have about 1,200 to 1,500 doctors every quarter buying our product online. So we invest a lot in social, a lot in digital, a lot in media. And that then creates the ability to build a brand directly with the doctor and a relationship directly with the nurse and the user. And if you look at how many people come to our website off of that activation, it's substantial. But the amount that actually gets all the way through the funnel to purchase is the number I gave you. So whoever doesn't purchase, all those leads roll down into an inside sales team that tries to activate them. And then we have another inside sales team that just focuses on ambulance companies, out of hospital, urgent care, and they do all that virtually. We just closed a major deal for a cruise line recently. So that was pretty cool to get them all on those boats.

That is cool.

And they did that all virtually. I'm so proud of them. They said, "Hey, do you want to go to the training on the boat?" I'm like, "No, I always told you guys go." So they're taking that trip.

Did they get to go on a cruise?

I'm hoping. They're supposed to. They're supposed to. So I'm very proud of them. They did a great job. And then we have a direct sales force that walks in the front door of the hospital.

Hospital. Yes. Okay.

And then internationally, we have distributors, and then we're direct in the U.K. and Germany.

Okay. And then it is the device itself, but isn't there a -- there's a software component as well. And if I recall correctly, you talked a lot about enterprise deployments, enterprise-wide. So maybe talk a little bit about that.

100%. So the way that works is there's a growing trend over the last 15 years of doctors being able to do ultrasound at the patient bed. So instead of ordering -- instead of sending the patient to radiology or waiting to have someone come to the patient bedside, who's an ultrasonographer, individual doctors have learned 1 or 2 scans and then built up their capabilities. And so it's called point-of-care ultrasound or POCUS. Now they do it a lot in the emergency room, they do it in intensive care units. They'll do it in anesthesia to place lines. But a lot of these scans you can get reimbursed for. But only on average, 30% of those scans actually make it into the EMR, make it into DICOM. So there's 70% leakage, revenue leakage for hospitals.

Yes.

So we built an enterprise software called Compass that connects to our device as well as our competitor devices and allows for them to program it where, first of all, they can collect all the image data from the devices. Second, they can actually document the encounter and that will then go into the EMR. The images go to DICOM and then when they're finished with the record, it pushes into the revenue cycle management software so they can get reimbursement. And so we've deployed these at scale. We have one health system with 65 different departments all on the software, and they've increased their capture rate to 77%.

Wow.

And that more than doubled their revenue, and it's huge. So we have this individual relationship with the doctors, but then we have this relationship with hospitals to help them operationalize point-of-care ultrasound, not just have the device, but then also the genesis of Compass was actually education because normally, when you have a new doctor, they're credentialing themselves on ultrasound, they need to be -- someone's got to look over their shoulder. So you can have a single administrator who's an ultrasound expert go into our software, go into that particular doctor's images, you can actually score and rate each image. And as they're going up their learning curve, you can graduate them up to certain places. And so that's what the software does also.

Okay. Got you. Yes. And so you had a win, I think, earlier this year. Is that right?

It is.

You closed a full enterprise deployment at a top 5 global health system. And you do talk about several large active opportunities. I imagine you can't give a ton of color on those until they actually close. But what differentiates the Butterfly product offering most often with RFPs today? So we touched on image quality. You feel like now the Butterfly focus is at parity with the other devices out there, TCO, Compass workflow, AI outcomes and evidence, like where does Butterfly win?

So we win anywhere someone is serious about deploying a program. And what's fascinating about this space is most administrators, even like we went to a conference in February, kind of like a boondoggle conference where all of these administrators go and then you can pay to go and meet with them. And so we met with 14 different Chief Medical Officers from health systems. They had no idea who Butterfly was.

Really?

They had no idea at what point-of-care -- one of them did actually, just one. Had no idea what point-of-care ultrasound was.

Interesting.

Because it's like a departmental thing where ER is like -- the ED is like, well, we need ultrasound, get us a machine, but it's not like they don't understand institutionally. So then one of the beautiful things about Butterfly is we are cloud-based, right? So we have 150,000 devices out there. I have 25 million images in my cloud. I have more images than any other nongovernmental entity in the world, and it's growing over 30,000 a day.

Yes.

And I can see every device. I know if they're taking an image. I know if it's not on or I know if it's -- if a scan is coming in, I know what type of preset. We have all this data. So when we sat with those 14 CMOs who didn't know who Butterfly was, we'd say to them, and like this one big customer that now has over 700 devices after they put the software in, we said to them, did you know 140 of your doctors have Butterflys? No. What? 140 of their doctors had -- they had purchased them on their own.

The doctors did.

The doctors did. It's like -- so...

But then you don't get the enterprise solution part -- component of it.

They're not getting any of the data, so they're not compliant.

Right.

And they're not getting any of the reimbursement.

Right.

And so when we sat with those 14 -- we knew who the CMOs were because they had to kind of select us to take the meeting. And when we sat with them, after they told us they didn't know who Butterfly was and they didn't understand what POCUS was, we would then pull up a document and say, 88 of your doctors have Butterflys. You've done 7,000 scans. It's mostly in this specialty, this, this and this. They were just like, are you kidding me? So we fight this major awareness. The big imaging companies focus on MRI, CT and then they'll bundle in the point-of-care. And point-of care ultrasound to a big imaging company is a kind of single type of use case cart. So like they sell these $15,000, $20,000, $30,000 carts that are more compact and that go to the ED or whatnot. And that's the lion's share of their focus revenue, not necessarily handheld. They'll give away the handhelds. And then they'll bundle it and try to with noncompetitive ways, keep us out of the hospital. But like that's how people process. We're a one-to-one company that has individual probe and the software. And when we show people how many doctors care about this, the awareness is actually increasing now. The conversations we're having are less who are you type of thing. And that's why like we had some headwinds this year because we had some very big deals lined up, but then it was just so easy to push us aside because we're not in the budget, we're not the top priority in the hospital and -- but that's going to change.

Yes. Yes. Okay. Where are the bottlenecks in enterprise approvals? So like thinking the cybersecurity, integration, training, budget, you just touched on budget. And how do recent security accreditations shorten that cycle?

Well, so the biggest bottleneck is because like every hospital has a massive EMR implementation. They're doing something. And so to get a priority up on that list and get them to carve out the resources at times because we have to integrate into some of their systems. And we've done everything to make it as easy as possible. That's the biggest bottleneck. But there's also this, look, beautiful hypocrisy. And I don't blame them because I did this when I was working for a big company. But most of the other devices that the big companies have aren't connect -- really cloud connected. They'll connect into a DICOM and push an image, but they're not really connected. And so what they do is that they sell to their disadvantage. And they say, "Okay, well, we're this closed system and this other company has a cloud and oh my gosh, that's not going to be secure." Well, every health system has a cloud instance. Every -- there's AWS special cloud, Salesforce and Cerner and whatnot. So they're all in the cloud. And so we've -- but the hypocrisy is if you listen to the CEOs of those companies, we'll have a cloud instance in the next 3 to 5 years. We're building AI and cloud. They're just saying, we want to be Butterfly, we want to do a Butterfly, though. S while their sales force is selling against it, they're actively developing it. And all of a sudden, it will be the best thing since sliced read and the most secure thing. So it's just a bunch of sales and marketing garbage. But it's effective when it's coming from those companies. So we've had to make sure -- so we just said, you know what, we're going all the way. And we are going to be FedRAMP certified in the next like 3 to 4 months. And that's the highest, highest security. So we'll be high trust FedRAMP, and we've gotten all these other clearances. So we know that we have very sensitive data, and we do everything possible to secure it.

Okay. Got you. You've completed development of the P5.1 chip. Am I saying that correctly, P5.1? What step change in image performance and power thermal efficiency should users expect? And how does it expand clinical use cases beyond the rent iQ3?

Great question. So it's -- we're on this journey, right? We're on this journey of more processing power, more capability, better image quality. When the first phone came -- the first camera came out, it was 1 megapixel. Apple just launched a 48-megapixel camera. So it's just like -- and we're the only company that's now doing this with a semiconductor, and we're on this like every couple of years, 2 to 3 years, we're making these generational type chases. The next version of the chip does something that no one in the industry thought can be done. What's kind of fascinating is in Europe, there's a law called RoHS, restrictions on hazardous substances. And so every electronic device, not just health care, is subject to this law. And the law, what it does is it takes toxic materials out of electronics to improve the environment. So for the last 17 years, they've -- the ultrasound industry has had to go through a trade organization called Corsair and every 3 to 4 years, file for an exemption to this law because they have lead crystals in the ultrasound devices. And so I didn't even know this law existed and one of our partners is like, well, you guys aren't you compliant to this law? The whole industry needs an exemption, but because we don't have lead in our devices, we're compliant. So we went back and we read every one of the public applications that they made to the regulators saying that, oh, we can't do it, and the other companies that are using semiconductors are never going to get there because they can't accomplish the type of mechanical impedance. And there's a pressure that require -- that gets to a better image. It's almost like you've ever been on a boat and you just hit the gas and you start going. And then after a while, the boat kind of planes and then goes fast.

Yes. Yes.

It's kind of the same thing where when you get to a certain amount of mechanical pressure, the waveform that goes to the body, all of a sudden kind of glides through the body, and it's called harmonics. And they literally in their application said they will never be able to accomplish harmonics. And so by reading these exemption packages, we're reading what they're telling regulators can't be done. Well, we just did it.

Yes.

So we've doubled our mechanical impedance and our P5.1 chip will now get to harmonics. And so that has taken image quality, especially in cardiac. So like we proved that we can build this all-in-one ultrasound device, but we are almost sought -- looked at as a wellness device. We then just launched the most recent version, and now we're kind of equivalent to the whole industry. Next one is going to be better. And that better is the miracle, why would you buy? It's like if I have a digital camera that's better, why would you buy film.

Right.

Because you want to have to develop every picture you don't want or do you want to now move into the next generation. So that's what's happening to us with this next chip. And now we've just started development of the following generation chip that will have 20x the processing power of our current product.

Okay. And so it sounds like one of the big -- so you've gotten there on the image quality. That was something that with prior generations was not quite at parity. So we're there from an image quality perspective. It sounds like right now, it's just literally awareness.

Well, yes. Well, the biggest barrier for our growth is education.

Yes. Okay.