Butterfly Network, Inc. ($BFLY)

Good morning. Thanks for joining us here on the final day of the William Blair Growth Stock Conference. If you don't know me, my name is Andrew Brackmann. I'm the diagnostics analyst here at the firm. Very happy to have the team from Butterfly joining us. We have the CEO, Joe DeVivo; and SVP of Finance, Megan Carlson, joining us here. We'll do about 30 minutes of presentation in this room, and then we'll head to the breakout in Burnham A afterwards. And then lastly, for a full list of research disclosures, please visit williamblair.com. With that, I'll turn it over to Joe.

Awesome. Thank you, Andrew, and thank you to the organizers of the conference. Thank you so much for having us here. So growth conference. So generalist investors in general, we've -- Butterfly is a semiconductor-based ultrasound company. Now, what does that mean? That means that in existing ultrasound. So everyone know what an ultrasound machine looks like. You've seen them before. So you have the overall machine and then you have the different handles and probes. And each of those probes are designed to see different parts of the body. Our founder in 2011 endeavored to build a chip. And that chip instead of having multiple probes that use a crystal lens, that chip would be designed to deliver ultrasound. And it's the first semiconductor ultrasound in the world. Now from 1993 to 2005, this little company called NVIDIA was a video game company, right? You all remember that. They made chips for video games. They didn't make chips for data centers. They didn't have on their plan the desire to create this for that market. But what they did was they solved a foundational problem for themselves. They went out and built a chip that had the processing to do multidimensional calculation to do very sophisticated stuff and then even more chips to allow other gamers to come into this environment. And this happens every once in a while, where a company solves a problem that they have and then realize that everyone else has a similar problem. You all saw that picture of Jeff Bezos sitting at his -- I think it was a folding table desk with his old CRT computer with the handwritten Amazon.com on it. Well, when he was at that table, he didn't have a vision to build cloud compute. They got to a point where their business grew so much that they got to a point where they realized that in order to do online retail, they needed to have a global cloud infrastructure. And so they spent billions of dollars building a cloud infrastructure for themselves. And when that infrastructure was completed, they were only using 1% of it because they had to have all the fixed capabilities of it. And what did they decide to do? They decided to sell capacity. And they became -- that became AWS, which is the most profitable contributor to Amazon today. So my point is that sometimes you solve problems that are bigger than the problem that you were trying to solve. And I'll maintain to you today that Butterfly has done that. And what we've learned over the last several years is that the semiconductor that we've developed for ourselves is very valuable to other people and has many applications. And that semiconductor now, we partner with TSMC. TSMC builds our chips. They help us in development. We have over 600 patents in this space. And we have with MEMS now and with the ability to control all of our sensors have a tremendous ability, and we're learning with the amount of inbounds we're getting that other companies would like to have access to this technology. So we start off in our first application, the reason why we want the chip to do everything is because a lot of times, doctors encounter patients and they want to be able to scan the entire body. Patients come in the emergency room, you don't know what's wrong with them. Is it they have pump fluid in the lungs, do they have a bowel obstruction, do they have an appendicitis? Is it a swollen ovary or endometriosis? Is it whatever? And they -- the only way you make those diagnoses today is if you either order an ultrasound or you have the ability yourself to do an ultrasound and you're present with a machine. So in general, if you can have one device that has the capability of seeing the entire body, you now have a very, very powerful device. And today, when you just look at the medical need, 2/3 of the world doesn't have access to medical imaging. They don't have a nice radiology clinic to go in and sit with an ultrasonographer in rural areas and also in remote areas. So on our primary -- the business that we're developing organically, we're solving a major problem by having the semiconductor because they plug it into their phone and have the ability to select pulmonary, cardiac, MSK. And when they select a setting, the setting is automatically changed to deliver the array and the frequency that, that clinical indication requires. So that initial need, we've now sold over 150,000 devices around the world. And we see that there is going to be a real significant uptake in the future of what's called point-of-care ultrasound. And just to show you how it works, you see on the left that animation that there's -- it's a little vibrating drum. And I like to think of that as a pixel on a TV screen, right? So that one drum can create sound in a certain way. But our chip has the capability to control all 9,000 drums individually, right? So when we talk about us being a health care company today, it's like asking yourself, well, what type of programs do your TV -- are they compatible with? Do you have a country-western TV? Do you have a TV that plays dramas? I say, "Well, what are you talking about?" It plays all shows, right? Because each of those pixels are controlled individually. You change a color, change the color of all your pixels, now you have a picture. Well, with Butterfly, we -- when you can control all 9,000 sensors individually, you can not only meet the 3 clinical use cases that you see up top being curvilinear, phased array and linear. And we can also now do basically anything. Again, ask me what program I can play on a TV. I'll tell you everything. Well, what can we do and what type of an array can we put out? Well, I can control all 9,000 sensors. So we can do biplane, we can do 3D. We can actually -- because it's a semiconductor, we can literally move the beam on the device without moving the device itself, where a normal ultrasound device is like a flashlight, you have to contort it. So that is a very, very powerful set of circumstances. And historically, supercomputers used to be huge. Now every one of you have is one in your pocket. Ultrasound machines used to be huge and then the power of processing, every doctor and every nurse in the world will have one. And so we're very excited about what we have done in our core business and where our core business will grow. And we're just as excited about a lot of new opportunities that are coming our way because we are now starting to license our chip. In 2006, NVIDIA created a developer software called CUDA. And that developer software was the first time that a third party can get inside the GPU of an NVIDIA chip, change the settings for its application. Well, we've replicated that. We now have software that allows third parties to come in and modify our chips. And I'll talk to you near the end of the talk about the types of companies that we've already partnered with and that we're going to partner with. But Butterfly, we sell directly to the doctors. We sell to ambulance companies, clinics, cruise lines and of course, hospitals. And as we built a brand, we've become pretty popular in the medical community. And just recently, over the last 9 months, there are 3 different TV shows that have featured Butterfly, and we didn't place this product. Organically, there was an adviser on The Pitt who is a big Butterfly point-of-care supporter, and they had about 6 different scenes where they showed using the Butterfly. Season 50 of Survivor just started and the inaugural episode, one of the kids -- one of the contestants, some old. One of the contestants hurt their Achilles and they right on live TV -- not live TV, but right there on the show, did pull the Butterfly out. And then on Virgin River, which is my wife's favorite show, I've never seen an episode, but they have a scene where the patient's [ wife ] has lower right quadrant pain and she's diagnosing an appendectomy. But Butterfly is now, especially in the medical community, becoming a verb. Did you Butterfly that patient? And it's really cool to have a brand that is popular amongst the doctors and nurses that is understood. And there's -- we have example after example of that type of overall acceptance. So we're the only -- I think there's one software company. But aside from that one software company, we're the only medical company in the world to actually receive an Apple design award. I have a big like titanium cube on my desk. Very proud of this award because we're architected in a very modern way. Our design is very simple, artistically done and very powerful and fungible, which is very consistent with the Apple brand. When I used to run other medical companies in the past, and I had a piece of hardware in the hospital, if I wanted to update that hardware, I'd have to send a rep in the hospital with a USB stick, right? Well, actually, today, we -- all 150,000 of our devices that we've sold have the ability to connect into our cloud. And just like your iPhone, every picture you take gets replicated in the cloud, right? And if you want that picture, then you have to sync up with the cloud. Well, every image that every doctor takes in the world comes in our cloud. We have over 25 million images today, and that is growing at just about 30,000 to 40,000 new images per day. So with 25 million images, growing 30,000 to 40,000 a day. That becomes a very potent AI warehouse to be able to develop new AI applications because you can imagine a developer of AI ultrasound coming up with a model. And now all of a sudden, they need 5,000 kidneys to train their model. Well, where do you think they get those 5,000 kidney scans? They're not open sourced. And we don't sell that data. But I'm saying they'd have to go do a clinical trial. They'd have to go to some university and do all these scans at very, very high cost, very complex. We -- if we're developing a new renal model, we can just simply pull in the anonymized image and build the model right then and there. So we have -- the value of this is powerful. But we also -- what's happened is we've now -- as our popularity has increased on the medical ultrasound side, we're getting -- it's creating a little bit of an issue for hospitals because now everyone is walking in the hospital with a Butterfly and it's not linked into their EMR. It's not linked into their system, and I get a phone call from the administrator yelling at me for selling all these doctors. But we had one major hospital that you all know was upset, and we went back and realized that in their town, 140 of their doctors had bought a Butterfly. So we built an enterprise software system called Compass. And that enterprise software system takes all the data from all of those devices and pushes it into their EMR of choice, pushes the image into their DICOM and pushes a file into their revenue cycle management system so that when they're acquiring an image, today, hospitals that are using point-of-care ultrasound only capture 35% -- 30% to 35% of the images. So it's just so easy to pick the device up, record an image and then put it down to pause and do all the documentation takes time. And so it's a revenue loser. And also, it's not compliant. You're required as a hospital to have all the data for that patient put into a record. So when someone uses our enterprise software system, they're able to acquire. And we've now seen with our installations of probably about a couple of hundred sites across the U.S. health systems across the U.S. have it. And when they put the system in, they get to about 70% to 80% compliant. So it allows them to double their ultrasound scanning revenue the moment they put our software in place. And then lastly, we've built out just like thinking in the ecosystem and platform side, we've compartmentalized all of our capabilities to be able to link into not only the hospital's network, but to allow ourselves to link into third parties. So if any of you have seen ultrasound, ultrasound is hard. It's easy -- if you look at an MRI technician, their biggest worry actually is that patients got metal in them because they're concerned about that metal being pulled up by the magnets. But then once they take care of the patient, they initiate a standard protocol for image acquisition. So it's not -- they're not -- it's very difficult in ultrasound because if this room was perfectly dark and I was trying to look for a button on your shirt, I'd have to sit there and look and scan and I'd have to know in what direction I was looking at. But then I'd have to understand and interpret. Well, there are now -- we were developing -- we are developing AI models and have received a major FDA approval recently. But we've opened up our ecosystem, and we now have 30 development partners who are building AI ultrasound into an SDK of ours. And so when they launch it into the App Store, the customer can buy the keys from that company. They plug it into a Butterfly. Now the AI can tell them how to diagnose a DVT, how to look at a cardiac echo, how to be able to do a pulmonary scan, how to do an aortic scan or a fetal monitoring scan. So the power of this ecosystem is insane. And as these apps come out in more and more applications, what's going to happen to legacy ultrasound, especially on the lower end, is similar to what Apple did to BlackBerry. BlackBerry didn't have an ecosystem, didn't have apps. You were all forced to have a BlackBerry because your enterprise managers at the time told you that this was the safe and lockdown system. But then over time, when Google came out with Google Maps and you can now navigate on your phone, you're like, "Wow, I got to have one of these iPhones." It does all these things and all these cool apps. Well, we're architected that way. And there's going to be all of these AI apps that come into our ecosystem. And it's very, very, very powerful. And one of the first ones, HeartFocus, a cardiac echo app came out about 6 months. And at some point, as these apps come out, this whole thing is just going to explode. And then also, it takes -- it's -- now that this market has been around for point-of-care for about 15 years, and it takes a village. You have to make the device, you have to train on the device. You have to have these applications. And then you also have to have services. So we do implementation services for our software. We do services for training. And then now we're building a home business to work with at-risk providers to keep their patients in the nursing homes and not in a revolving door to the hospital. And we'll have a lot more to talk about that on our next earnings call. But ultrasound is having a moment. If you just look at all the different papers, there are -- and this is normalized because we have, from a growth perspective, normal ultrasound has a consistent amount of papers. Point-of-care ultrasound from a relative percentage standpoint is doubling the amount of papers. But there are now a lot of things in transcranial ultrasound, neuromodulation, brain-computer interface, sonoporation, blood-brain barrier opening. These are all things now that are being studied for the first time. And there's a lot of new applications. And that's why we are starting to open up our platform. And what that does for us is we have just about a $20 billion TAM for core Butterfly. But the moment we start licensing our chip to other markets, it expands our TAM from about $20 billion to about $350 billion. And we think this is just the beginning. And I'll show you in a moment a list of companies or a list of areas that are starting to work on our chip. So we've created a program called Butterfly Embedded, looks a lot similar to an Intel Inside logo. And we are creating this concept that now we have a cloud compute, now we have apps. Now we have a lot of APIs and SDKs to each of our individual systems, and we're making it very easy now to start partnering with third-party companies that not only dramatically increase our TAM, but also increases our own intelligence that as we help solve their problems, we're learning more about our capabilities and where that market needs to go. So when we look at that overall TAM and that overall opportunity, Point-of-care ultrasound itself was our entire world. That's what we have spent the last 15 years focusing on. And it is an exciting time because in that world of point-of-care ultrasound, our fourth-generation semiconductor will be out next year. And that fourth-generation semiconductor is a profound technological shift in the ability to acquire images. And that will, in my view, if -- probably one of the biggest analogies for our business is digital photography. So if you know the story of Kodak, back in '95, they launched the first digital camera. And every business school studied the fact that in 1997, they shut that program down. And they shut the program down because it was a 1-megapixel image. So whenever digital equals ultrasound or digital equals ultrasound -- whenever digital equals analog, digital wins. In the beginning when Netflix launched, what was the biggest problem? You had buffering. Your home network wasn't as powerful to run the bandwidth or it was too big a file to push across your home network. And so regardless of it being a cool idea, you still went to Blockbuster because you want to see the thing whatever. But the moment Netflix performed as well as Blockbuster and they were able to compress it and multidimension it, then now it became a benefit. Well, in 2003, all the other great imaging companies said, "Now, this digital photography is a great idea." And when it got to about 5 to 7 megapixels, digital photography took over film. Well, we are the digital photography part, and we now have seen our processing power double and our ability to do harmonics is now significant through our MEMS capability. So the next version of our probe will be better than any other probe that's out there. And there won't be a need for the other companies to even sell their product because our -- right now, you look at your phones, Apple just launched a phone with a 42-megapixel image. So that's not going to stop. The capabilities of semiconductors aren't going to stop in its development. And we have been rapidly developing, which now allows us to participate in a lot of new markets. And so we're talking to companies today in patient monitoring. We're talking to pharmaceutical companies today about how ultrasound can do drug activation. There are some bone healing opportunities, endoluminal HIFU, which is high-frequency ultrasound that will allow you to focus a beam to do some type of something interventional or clinical, catheter-based. We have a deal with a robotics company now, neuromodulation and BCI, and that's probably one of the biggest, most explosive ideas that are coming out that they're looking to put our chips in the brain. And because our chip can move and the beam can move, you can put one chip in a lobe and see that entire lobe of the brain. So -- and by doing so, you can see blood flow, you can see electrical activity. And if you wish, you can actually push thermal to an area of blood ischemia to try to stimulate it. So it's -- what people are now trying to do is, look, we've solved the problem for ourselves. We're building a point-of-care ultrasound business, but we now have a lot of very big shots on goal, and we probably have now 40 to 50 different companies we are in active discussions with to license our chip. And because our moat is so big, a lot of this has all been inbounds. And because of our IP and because of people's desire to do this, most of this has been inbounds. But we've now, in the first quarter, started to build a team that is now proactively marketing to certain industries because this is not just health care applications as you see around the circle. If you look in that box, there's actually ways to keep batteries fresh by delivering pulsed ultrasound energies. I even had -- on the material stress side, I just met with a company that's putting -- trying to build sensors for drone wings to ensure that with the amount of pressure they're under, they don't snap in air. And you can see with ultrasound material stress changes before it gets -- and it breaks or even cracks. So there's -- and there's even an application that someone is working on that allows for -- if you have this massive window, you can put our chip on the window and you can touch the window. And when you touch the window, the chip knows exactly where your finger is. So think about that. You can have a spot on your window that's a light switch or a keyboard or you can have a refrigerator with a keyboard and things that you just dynamically touch. Just like those movies where you see what was that thing? I can see it in my mind. Anyways, whatever, but the computers that you can see in there. So anyways, a lot of really cool things that are happening for the company. And so today, this is kind of our pipeline. So what's active are the ones that we are now signed. So we have a robotic surgery product. We have BCI neuromodule -- 3 BCI companies, diagnostic imaging, a tomography company, which is fascinating. We have an interventional company, a wearable company, augmented reality. And in the pipeline, you can see all the different businesses that we're speaking to. Our chip licensing business, well, first of all, you can see I'm very excited about our point-of-care ultrasound business, and that's going to be a wonderful growth and very exciting for us into the future. The chip part of the business is going to be a much bigger part of our business. It's going to -- it's today maybe 20% of our revenue after 1 year or after 2 years. And it will very quickly not only grow past that business, but be a major profit driver for us and a major annuity for us because all of these partnerships that we are doing are all incremental. It doesn't require any capital CapEx investment from our side. We just continue to develop our chips, and then we now can license them out. We can sell -- get the revenue for selling them. And also, there's revenue associated to them if they want us to do any individual work. And so our revenue now is coming from point-of-care ultrasound and what we call embedded. We have our core business. We will now in -- the end of '26, start seeing revenue from this services business in home. I'll talk about that more on our conference call. And then Butterfly Embedded, the way we make money is through a licensing fee, chip purchasing and revenue share or a royalty. And so Butterfly started off as a SPAC, went out really hot and heavy and realized that in health care, my view has always been in health care, it takes 10 years to become an overnight success. But as you look at any of these companies, any of these large tech companies, first 10 years are hard. You're really having to create a lot of foundational work, but then the marketplace gets it and it completely explodes. Look at any of the bigs right now. I think even SpaceX was private for 20 years before now they're going public. So it takes a long, long time. But we've gotten this thing turned around. We came -- I came here in '23. We reduced the size of the business. We focused on launching our next probe and consuming a lot less cash. And now we should do between $117 million and $121 million this year, dramatically reduce our cash consumption and set ourselves up for real serious growth in the future. And so last quarter, we grew 25% and you can see our gross margins improving. You can see our consumption of cash reducing. And this is just the beginning. I think we are near that 10-year overnight success mark. I think a lot of people are waking up now to see who Butterfly is in the context of the tech world. A lot of the tech community we're talking to now at the highest levels, guys, we're having conversations with. And I think this company is poised over the next 3 years to do some crazy fun things. Also, we did a deal with a company called Midjourney. It was a $74 million licensing deal. And that's one of the reasons why we're seeing this type of revenue growth this year. Just stay tuned because a lot of people want to know what they're using our chip for. It's a Gen AI text-to-image company. That's an extraordinarily creative company. And I'm very excited about what they're going to unveil when they're ready. But hopefully, it will be soon. All right, guys. I appreciate your time. Thank you.