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

Okay. We're going to continue down the morning track, Day 2 of the 46th Annual TD Cowen Healthcare Conference. I'm Josh Jennings from the TD Cowen Medical Devices Research team. And we are excited to have executives from Butterfly Network. Local trip for you guys, but still much appreciated. Thanks for participating in our conference this year and letting us host this fireside chat. We have CEO, Joe DeVivo; and CFO, John Doherty. Gentlemen, thank you, and good to see you.

Good to see you. Thank you so much for the invitation. We're -- not only the conference is a fantastic opportunity for us, we're very appreciative for all your support of Butterfly. And so we wouldn't miss something like this for the world.

Well, we've been intrigued by Butterfly technology initially, the point of care.

Yes. You came on early. You came on early. You paid your dues.

We have paid our dues. The handheld ultrasound market and your technology. But as you've laid out recently, you're not just a point-of-care ultrasound company, and there's been some evolution that we'll dig into. But maybe to start, I've just seen you come into this conference room, I had a little flash back to 2024, that Investor Day event you held and where you and your team laid out kind of the vision and the path. And over the last 2 years, you guys have delivered and executed on multiple fronts, pipeline innovation, this Octave Now Butterfly Embedded initiative. And there's a lot to talk about today, a lot of progress in 2025, and 2026 seems to be shaping up to be an even bigger year. So congrats on all that progress. And maybe we can start on just Butterfly Embedded because that's a hot topic. You guys announced a deal with -- a partnership with Midjourney last year, big revenue stream. You guys already talked about some of the contributions in 4Q and on a go-forward basis. But maybe any updates? And I know that it may be a little bit limited in terms of what you can share, but any updates on that Midjourney collaboration, maybe to start just on the technology front and the product that's being developed through this collaboration?

Well, thank you for that, and thank you for showing up to the Investor Day meeting, and thank you for listening. Because actually, if anyone is listening, they'll realize we're making amazing progress. And we're very appreciative for the type of support that you've been giving us and other partners. We're on to something really special, guys. And again, for anyone listening, you should just be aware of what's happening. We -- our founder set out to create a technology that had flexibility, that had ubiquity, that had a concept where all the different imaging and ultrasound use cases could be generated within a single device, with a semiconductor that was infinitely programmable, that was low cost, that was durable, that was mobile. And again, we -- a lot of us put our context into big metal med tech and especially the investor base is used to big metal med tech. And we are not big metal med tech. We are a technology company that is solving a health care problem. But we've learned that we've solved the problem in a way that is probably more foundational than we thought. And the manner in which sound has been delivered over the last 40 years has been through delivering energy through a crystal. And then that crystal would vibrate based upon how it's cut into a certain wavelength based upon the frequency and the energy that's been put through it. And that's kind of like -- it's like saying I've been taking a photograph with this glass lens for the last 40 years. Our lens now is made out of 9,000 MEMS elements that can be controlled individually. And it was specifically designed to be in a handheld device that allowed for a clinician to say, I want to scan the carotid, I want to scan the heart, I want to scan the MSK. And it would just simply change the settings to allow a clinician to be able to make a clinical determination right then and there. And so that part of the business is growing and the whole mission is strong and what we are accomplishing is impressive. We were on Survivor the other night. I don't know if anyone watches Survivor, but literally 3 nights ago. So for those of you who have...

Not as contestants.

Not as contestants, no. But we -- for -- about 3 nights ago, the opening -- the series premiere for Season 50, one of the contestants had an Achilles injury. And you got to remember that while this is a TV show, this is filmed out on an island in Fiji, right? And so you have this kid trying to wonder if he has a torn Achilles and they pull out a Butterfly right on the show. And they walk through, hey, this is a really potential serious injury, we need to scan this injury, et cetera. And many of you have already seen that we were on the pit on both the Season 12 and Season 13, where they use it in a mass casualty event. It was used in the space station recently. You've seen some news. Inspiration 4 when the SpaceX astronauts were -- it was a full civilian crew with the same -- they used to be on the Board of St. Jude with the St. Jude patient, they had it on board there. And so we've created this amazing technology that can be anywhere a patient is and can help them substantially. But we've learned that, that architecture or that chip can help other companies to -- and reach their goals, too. We've learned that, that chip being infinitely programmable. So we have the ability -- in a medical environment, but we have the ability to create an unlimited, based upon our parameters, type of sound from a semiconductor. And there are a lot of other companies who would like to use that concept. And so we're very excited for what that means. Midjourney has come up with a use case that they're very excited with that we cannot unveil until they're ready to unveil. But we're talking to a lot of people on how the interface between technology, AI and the human body can be bridged through the portal of sound. And we're becoming a pretty important part of that. And it's very exciting. And I think it's core to our founder's mission, which was the democratization of imaging, to be able to bring imaging easier, lower cost to where everyone is. I think making sound in that and the interface with the body is going to be an amazing use case as we see cloud AI morphing into physical AI.

And maybe -- you just peaked my interest of cloud AI translating into physical AI. Can you help a lay person like myself, and I'm not a tech guru, but just better understand that dynamic or that -- any more details you can share there on that transformation?

Well, so you have OpenAI, you have Gemini, you have Grok, Claude. In many senses, going to a website and searching for an answer in the cloud is very quickly becoming generic. But now you see what's happened with OpenClaw, where you can create this agent and this agent has all of this incredible capability. Well, what's the first thing everyone wants to do with this agent. They don't want to set it loose on all of our data. They want to buy a separate, I would call it a PC. They're actually buying these Air -- what are they, those little Mac -- iMacs, I think, or iMac minis, I believe they are. And they're creating this whole kind of closed environment and then creating accounts on that piece of hardware for the AI to live. You're going to -- I would say most AI players today are looking for, down the road, a way for a unique device to interface with a human. And that is kind of the next phase. I mean you've heard of Jony Ive over at Apple has come into OpenAI about a year or 2 ago to create this new device. And you're going to see more and more AI empowered devices interface with a human in order to do a very specific use case. I was listening to that All-in Podcast with Chamath Palihapitiya, and he was specifically talking about the reversal of cloud because now you -- because we put all of our data into the cloud, well, now everyone is going to want to start pulling their data off the cloud and then compartmentalizing it and then running it with these agents that would interface with devices. So it's really, really fascinating what's happening right now. And to the extent that communicating through sound is an important portal, it leaves a massive opportunity for Butterfly to leverage its core technology for these use cases.

I appreciate that. That's helpful. And we are anticipating, I guess, Midjourney's unveiling of the use case and the integration of Butterfly's Ultrasound-on-Chip semiconductor technology. And any time lines you can share just in terms of when that announcement could be made?

Whenever they're ready. We are their partners. It is their business. We are only here to empower them. And when they're at the time that they want to talk about this, man, I can't wait to talk to you, Josh. I can't wait to unpack it for you because it's just so cool, it's so impactful to humanity, and it's this marvelous kind of [ compilation ] of what our capabilities are and what their extraordinary capabilities are and how they kind of amplify each other.

All right. A lot of anticipation building. So we're looking forward to learning more. It's my understanding, and you've shared this publicly, just about you working with Midjourney over the course of 2025, maybe even late 2024 in front of finalizing this collaboration. But in that period, there are other potential partners around the hoop for what was once branded Octave now Butterfly Embedded and just this finalization of the Midjourney partnership may have catalyzed even stronger interest. And maybe just talk about the pipeline. You referenced this on the recent earnings call last week, but within Butterfly Embedded, could we see more partnership announcements in 2026?

What we're learning is the evolution of our partnerships usually start off as an R&D effort, a development effort to see whether our technology can interface with theirs. And so while we did have 2 early partners that were very far along with their technology that just looked for us as a bolt-on to amplify what they've done, one being Mendaera, which is a vascular robotics company, wicked cool, if you see how that works, and the other is Sonic Incytes, that has a fatty liver technology, and they wanted us to help them with one of their use cases. But those were amplifications of their thought, whereas some of these others are earlier where they're really building them into the core architecture. So Midjourney had been a partner of ours since November of '24, December of '24, but we never talked about them because they purchased our technology, they bought a bunch of chips. They purchased the licenses to our software, which will let them tune the chips, and then they went on to go do their work. And then just about a year later, they made a decision that they are on to something, and they wanted to license it exclusively. And it's that exclusive license that turned into the commercial opportunity. Now we do have other partnerships that are occurring, and we are onboarding more that we are working on. But I don't think, given the early nature of all of this, that we'll be press releasing the individuals unless they decide they want to. But I just think it's important during that development cycle for us to maintain their confidentiality.

Can you share just -- to help understanding just with the pace of these R&D initiatives with partners, where you stand just in terms of potential -- I don't know if you can quantify it or give some qualitative details, but just where you stood in early '25 versus where you stand today?

So I think the cool part about it is we're not making, at this stage, hardware changes. We're not modifying our chip. So the benefit of that is they're taking our existing chip and then they're taking our software, which allows them to modify the settings and program the chip. So they very quickly -- even before we sign a partnership, we may do a lab with them and show them what we can do, that we can meet -- we can be within the boundaries of their use case before they onboard. So a lot of this is software development and software moves quickly. If we had to then create this whole -- if we had to create a new chip, then that's -- you know how long that would take, and we haven't had to get there yet. But that's the other part of this that's so beneficial to Butterfly is all of this development is making Butterfly better and smarter. And even if we license a certain -- say, we give exclusive license to a certain subsegment of the market, we have access to that technology for all the other segments. So it allows us to be more and more capable. And I think Embedded becomes a significant amplifier of value for the Butterfly shareholder.

Right. And we've gotten a couple of questions just around IP access to patents, the moat that Butterfly has created. My understanding is that there is a moat, and we also have this partnership with the Taiwanese semiconductor manufacturing company that is unique and also create the moat in its own right. But maybe help us think about that competitive moat, both on the manufacturing side and on the IP channel.

You really know until you're tested, and I don't want to tempt anybody to test us. But I mean we do have 600 patents. And there's a lot of know-how in the development of the chip. I don't -- we clearly couldn't have gotten this far without TSMC and they're extraordinary valuable partner. And whenever we move the next chip to get taped out at the fab, they take a whole process of -- and depending upon some of the things we're working on, they may get in with us a little bit earlier, but they don't bring a chip into the fab until they absolutely believe in it and know that it's going to work. So it cost us $300 million to make our first chip. And then it's been -- we've had the leverage from that. And we just pushed our 4th generation to the fab and all of our engineers are actively working on the 5th generation that has a whole new AI capability to it. So I think that's -- there's a lot of people who will make certain subcomponents. People make CMOS wafers, people make MEMS wafers. But we've been able to marry the -- with a CMOS in a whole tech stack with our software that I'm sure some people can try to replicate, but they have to do it in a different way than we've done it.

We've got a question from the audience, Michael.

There are a handful of other producers of handheld ultrasound. There's 2 names that come to mind EchoNous and a company Exo, I think they call themselves Echo. Two questions, one, have you assessed whether they [ infringe their ] IP; and then two, they didn't enter your mind in marketing and development products?

Sure. So you're talking about both EchoNous and Exo. EchoNous is a company that the founder of SonoSite founded. So it's a very nice technology. It's based upon legacy piezoelectric. And so it's very much a classic legacy ultrasound company. Great company. I think they're probably competing more with the bigs than we are since they're really focused a lot. They have handhelds, but they're focusing on carts right now a lot. So that's not -- we don't really encounter them on a day-to-day basis. Exo makes a piezo-based chip. And so they're the only other company that's -- at least they've tried to commercialize a chip. They're on their 1st generation for everything that we know. They commercialized a product called Iris, unfortunately, for them, right at the time we launched iQ3. And our iQ3 was just next level to where that performed. And it hasn't had the type of traction in the marketplace. But we think about them a lot because we are a CMOT-based chip and they're a PMOT-based chip. And there are different physics between the different MEMS of those chips. And so we have to be very respectful of what they could potentially create in the future. So yes, we do think about them. We don't see them in the marketplace, but we know they're there. They just received $100 million cash infusion from Samsung almost a year now, maybe less than 9 months ago. So you have to give tremendous respect to Samsung. You have to give tremendous respect to them. So I'm sure they'll do something at some point, and we do think about them.

We did spend a big clip of this discussion on Butterfly Embedded, but it's appropriate considering everything that's going on in the last couple of months. But thanks to Mike, we'll pivot over to point-of-care ultrasound segment in iQ3, Butterfly iQ3 and the pipeline. But maybe just to talk about the market and your handheld focused business. It sounds like that there's sustainable double-digit growth in play currently, but there are some building blocks that are creating a foundation for potentially an inflection in the market. So maybe talk about kind of market growth assumption rates, how Butterfly is positioned there, which is very well positioned is our view? And then are there -- can this market inflect in -- over the next 3 to 5 years?

Well, I've joked many times like Butterfly kind of had a fast start and then had to go through some kind of resetting of expectations. But I've always felt our founder and I felt the prior CEOs before me have always had the right strategy and always had the right vision that empowering every doctor, every nurse in the world with a device is an absolute possibility. But I think that probably the biggest difference I've had is simply in the thought that it takes 10 years to become an overnight success. And in health care, you just have to be mindful of changes in practice and workflow and having to get into how you change everyday clinical practice of medicine. Well, that 10 years is coming up. And I think it's happening, to be quite honest with you. Right now, about 80% of medical students to -- one way or another are getting trained on Butterfly. So we've already won the game. The die is cast. It's a fait accompli. Ultrasound will be a part of clinical practice. I just don't want to wait 20 years for it to all of a sudden fully inflect. So now all of our marketing practices are on how and what do we do to compress that back. So we're not just waiting for the next generation, but we're helping this current generation evolve. So we've done everything from education tools. We have our own University of Phoenix type training with Butterfly University. And then we have our AI tools with ScanLab. So we've done everything. Now we've launched Garden that we're going to have 20, 30, 40, 50 new apps over the next 5 years that come out that make it easier to do ultrasound. And we're starting -- and we've now invested in our next generation of our Compass, which is our enterprise SaaS-based software that allows us to help manage our data and manage quality and get patient records, images and reimbursement files into their system. I'm feeling that hospitals are starting to wake up. I remember a year ago, we went to a conference and sat with 14 CMOs and asked them about their point-of-care ultrasound program or their POCUS program. And they said, what's POCUS? Chief Medical Officers. What's POCUS? But we're actually starting to see hospitals starting to coalesce around creating infrastructure, creating guidance, creating standards because about 70% of the scans that are being done are uncaptured, are not reimbursed, are not compliant because it's not completing the patient record. So this is happening. People are waking up. And I think the business is probably going to be pretty lumpy because we're going to see a health system all of a sudden go and it will be a big order. And will that happen next? I don't know. Let's see. But I'm starting to feel that point-of-care ultrasound is going from being nascent to now starting to get into the 4 walls of the hospital. They're starting to think about it more. And all the big companies want to portray point-of care ultrasound as a cart. But over the next 18 months, we're going to come out with a new technology that we've talked about that's going to change the concept of every doctor and every nurse having their own device and change the concept of putting one-to-one in a hospital. So I'm really bullish. I think our core business is going to -- we will see basically a double-digit growth, I think we believe. And we think that the investments -- we just had our POCUS Innovators Forum, which is 60 of the top POCUS leaders that came in, and we had a conference. And literally, what they're talking about that they need for the future is all of our road map that we are working on. So the convergence of the thought and where we are for the future, we think, is right online.

Great. And can you just build out on that product you're referencing that within the next 18 months that you're going to introduce that's going to potentially be transformational in terms of...

The product is called iQ Station. And basically, what we see in the hospital are carts and there's carts everywhere, and there's carts for this use case, that use case. You show it to the cart and you kind of have to deal with the experience that, that cart gives you. But everyone today has their own phone. And -- but let me just ask, if you were using your phone, would you do -- would you create a PowerPoint presentation on your phone? Would you create an Excel on your phone? No, you don't do that. You go back home, you sit at your docking station, you got your 2 screens and your laptop and then you have this environment where you're going to sit there for a long time and do that kind of detailed work. Well, on the one-to-one side, everyone is going to have their own device, but it's going to be amazingly powerful, and it's going to have the image quality that you need to be able to do the types of scans that you need. But when you go inpatient to the hospital, you can actually dock the device. And then your whole experience, all your presets, all your patients, all your workflow now gets expressed on this device. And the device may even know who you are before you walk in the room and when you walk in the room and ask you, do you want to pair. And so it takes your Butterfly experience, but gives you -- takes your Butterfly data and know-how and gives you an inpatient experience. And so this will be less expensive than the carts out there, and it will be -- it will allow us to tap into the capital equipment budgets of all the hospitals to completely, summarily take out all the low-end carts and turn them into one-on-one model.

Appreciate that. That deepens our understanding of that initiative. And John, sorry, I've been leaving you on the edge there, but I'd love to just touch on 2026 guidance, and just some of the different drivers that get you to the revenue growth and anything you want to share just on the gross margin levels expected in 2026?

Yes, sure. So the guidance we put out, just in case folks aren't paying attention, for the full year is $117 million to $121 million. That's up 20% to 24% year-over-year. We do believe the core business should grow at high single digit to low double digits, and the rest of that will come through embedded. We got gross margin to north of 67%. We're comfortable there. The embedded business is throwing off a really solid margin level overall. That said, we also gave Q1 guidance. Q1, we do tend to trade down a little bit. Certainly, we'll be up year-over-year, but from a sequential perspective, we expect to be down. It's typically a weaker quarter. Also, we have 401(k) resets. We have other tax -- income tax based things that reset as well. So from that perspective, we guided to a negative 8% to 10% -- negative 8% to negative 10% net loss and will likely be the worst quarter that we have from that perspective. But what we're -- just more generally, what we're trying to do within the business is really build operating leverage. We're in a really strong cash position. We have over $150 million in cash. We can fund the business going forward. In addition, we're working ourselves to be a cash flow positive company over the period of time, we've been out there talking about by the end of 2027. I think we're certainly on track for that. If you look at the guidance overall, just to fine-tune it a bit, give or take, revenue up $20 million in absolute dollars. Our net loss improving by about $5 million. So we are continuing to also invest in the business. And with our cash position, if we see opportunities to accelerate the top line growth, we're going to be in a position to do that.

And just thinking about the core handheld business and that enterprise channel that you guys have been attacking, pipeline seems to be flourishing. There's been some puts and takes on the capital equipment spending environment in 2025. It's hard to forecast how that's all going to pan out in 2026. But is that a fair assumption that just the enterprise pipeline in terms of potential customers that are moving forward potentially with contracts and either on the Compass software side or the handheld hardware side or a combination of both is in a better place than it was at the beginning of 2025?

Yes, it is. Yes. We feel -- let's just say it's back to normal plus another year of market awareness and involving. So we're pretty excited about where our core business is, and we're pretty pumped about '26.

Excellent. Well, I think it's a good place to stop. There's a lot more to address, and we're going to do that down the line as looking forward to tracking continued progress throughout this year, and maybe we'll hear from Midjourney and get some more learnings on this Butterfly Embedded partnership...

You we'll be the first phone call. I'll call you once it's up [indiscernible]. You deserve that.

Thank you, guys, for participating again this year. Have a great rest of the day. Good luck with your meetings this afternoon.

Appreciate you, my friend. Thank you for having us.

Thanks, Josh.