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

All right. Perfect. Thank you, everyone, for joining, and I'm excited to welcome the Butterfly Network team. There is a disclaimer on the Morgan Stanley website that I encourage our -- to go check out. We have a lot of questions to get through today, so I think we're going to just get started here.

Joe, maybe I'll start with you and giving a little bit of the strategic direction that Butterfly is headed. What's your vision for what Butterfly can become? And how has that changed over the last few years, particularly as opportunities beyond the traditional point of care ultrasound emerged?

Well, yes, we've -- certainly, first of all, thank you for having us. It's really a pleasure, and I appreciate all the work that you've done. So we've learned that we have built a very strong technology and patent portfolio to be the leader in semiconductor-based imaging. And I think that's a new concept for us. We built our business and our platform around a semiconductor-based ultrasound device that can image the entire body at low cost, that can be used to image anywhere in the body, anywhere in the world. And that is our core mission. But the concept of democratizing imaging through duct that aperture has grown quite greatly recently. We've learned that our core technology can be leveraged for many different clinical use cases. Butterfly still is a company that's developing a large market in point of care. But by licensing out our tech, working with partners on new use cases, it brings shareholders into a much larger TAM and a much larger opportunity. So I think what we've learned is we've solved a major foundational technology problem that serves the point-of-care market and many others. So we're pulling our core technology to the center of our circle, and we're leveraging it from markets, all different types of markets of which 1 of them is point of care ultrasound that we're developing ourselves.

Okay. Great. I think it's important for people to understand your competitive advantage and how parts of that competitive advantage actually might become even stronger as the company scales?

Yes. Well, I really think the big imaging made a mistake. Big imaging looked at semiconductor-based imaging as something that can never really go upstream. That can never get higher image quality that can never challenge a lot of the core tech. And they're wrong. So we are benefiting a lot of the -- and when I talk about the part of imaging that we're focusing on, it's not the back-end image processing and all the work that could be done that could be done by anything. It's about being dynamic on the front end on how to capture the image and how to be dynamic about that image capture. I think they didn't think we can get to the higher levels of imaging. They didn't think we could accomplish [ Harmonix, ] which is a major threshold of moving sound easier to the body to get that higher image. Our fourth generation chip that will be out next year will be harmonic. And so we will have proved their hypothesis wrong. And when you think about the competitive advantage, it cost us $300 million to make our first chip. We'll launch our fourth chip in early '27 and with the best handheld imaging device on the market, not the best device, the best imaging device. So with 600 patents with hundreds of millions of dollars of know-how in supply chain, we're going to partner with the best chip fab in the world, TSMC is our partner. Standing start 5 years for someone else, and they have to figure out how to get around 600 to 700 patents.

What I think has been fascinating is you have a strong core POCUS franchise. But then you also have this very early stage, but extremely promising potentially larger opportunity with the Butterfly Embedded market. How do you think about investment across both parts of the business? And how are you thinking about prioritization in particular?

So Butterfly to the credit of our founder, Dr. Rothberg, Butterfly was architected with a very modern architecture upfront. What do I mean by that? I've been in health care for 35 years, and I've run a lot of businesses in health care. And I've had devices that have software in them. And if I wanted to -- it's actually sadly true today, if I wanted to upgrade the software in my devices in hospitals, I'm sending a rep in with a USB stick.

Right.

Butterfly originally was architected to be completely cloud-based. So we have 150,000 devices around the world. Probably 80,000 of them are active after all the upgrades. And we have -- and I know where or we know where every single user of the device is, we know what type of scan they're doing and their scans come into our cloud. We have 25 million images -- or 25 million [indiscernible], which [indiscernible] a collection of images, probably over 1 billion images in our cloud. And it's growing by 40,000 [indiscernible] a day. So we were architected to be cloud, we are architected to have iOS and Android applications. We have a unique device with a semiconductor. And then we have a SaaS-based middleware that connects all of what we do into pulling that data, the data into the EMR, into the Dicom and into revenue cycle management. So all of those capabilities that Butterfly built for ourselves, as we start getting into conversations with third parties, they want [indiscernible] chip and a development software to modify the chip. But as they start getting more mature and looking at commercial, they want to have the ability to stream all their images into our cloud. They want to all of a sudden now start using our middleware to capture their data. So what we're doing with our architecture is we're taking the point-of-care ultrasound business from the center of the circle and pushing it out to the outside of the circle and saying this is a sales and marketing effort in point of care ultrasound. Then we're taking our cloud capability, our AI Android capability, our data aggregation capability with health systems and our semiconductor capability. and pulling it into the center of the business. And we're modularizing all of those components. So we then developed in a single-minded way of advancing all of that, and then we provide the point-of-care everything it needs. And then each of our partners now, we have brain computer interface partners. We are -- then they will turn around and say, well, we want this version of the chip, and we want this SDK. We want to have this application. We want to have access to this data in your cloud. And it turns into where this technology company that services all these different capabilities. Does that make sense?

Yes. No, it does. And I do want to spend some time unpacking Butterfly Embedded in particular. The mid journey and merge partnerships really validate the technology and applications beyond traditional handheld ultrasound. How do you think about those partnerships? And how have they changed the way you think about the addressable market that Butterfly has a right to win in?

Both companies, mid journey and merge are very sophisticated and have -- I won't say unlimited funding, but access to they're not capital constrained. And they have very big dreams. If they could reach their dreams without Butterfly, they would. And so we've gone through very significant negotiations. We've gone through IP. We've gone through everything. And we're delighted to have them as partners because they are literally pushing the boundaries of what can happen in the future. So what we've learned is we have a business like this is real. Forget about oh, I'm going to let someone use my whatever and charge them whatever for it. I mean what's valuable to them is over a decade of evolution of technology development. What's valuable to them is the -- they can stand on top of our intellectual property platform and start filing IP on top of ours. So they get all the dates from the original Butterfly what we've innovated and it creates a foundation for their business to solely stand on our shoulders and innovate past where we are in their certain use cases. And so those deals -- we have other deals with very sophisticated partners that we are not at liberty to talk about. But those deals helped us validate that we have a really serious foundational technology. We have a significant lead. We have intellectual property that protects us and is extremely valuable. And we have a partner that can scale to the type of volumes that these type of companies would want to scale. I can't talk at all about what mergers is doing other than what's in their press releases. But they're going very big TAMs. And so for us to be a part of that for us to be an enabler for them, it's going to constantly keep or need to be at the cutting edge of what we do. So we're not like we have this 5-year lead on everyone else, and we're just going to sit back and enjoy that lead. They are pushing us to the boundaries of data acquisition of processor capability and speed. It's an extraordinary experience for us.

Yes. And I mean, the way you've described it is it feels like the long-term ambition of Butterfly Embedded is to become an ecosystem, right, where other companies are taking your technology, building products on top of that, more of a platform model. versus you all needing to develop every single end market application that's possible.

Correct. I mean we -- our P&L is full of market development activity for clinical [indiscernible] sales forces, conferences, clinical work, like all the money we spend in our digital activation to get to market is a lot. But we are now bringing to shareholders so many -- so much more TAM. I think we took a stab at it and it went from like a $20 billion to $250 billion TAM, which is nuts, just by just -- again, sometimes companies solve problems that other people have. And there's many examples in history of companies doing that and then monetizing that foundationally across the industry, and we're just the next one to do it.

Yes. And I mean it does beg the question, though, as you're evaluating partners. Which ones are better to enter through partnerships, meaning which some applications are better to work with the partner on versus some where you have the capability set and you want to own the end market and the end product and the economics itself. How do you think about that decision?

So we've kind of ring-fenced what we believe the Butterfly opportunity is. And the Butterfly opportunity, it basically has to do with general medical imaging, where on one side, like we are, like, say, in the middle where we have a probe for every doctor and they can bring it in and out of the hospital. We are going to go upstream into the hospital over the next several years. Our fourth generation chip that comes out in the beginning of '27, we'll have image quality better than any other [indiscernible] handheld in the world. So we're going to start asking the question, why would you have an analog and [indiscernible] handheld if the semiconductor. It's like why would you walk in to Blockbuster when you can just sort of just download the film on Netflix. Why? And it's the same experience that digital photography had. Kodak came out with the first digital camera. 2 years later, they shut it down because it's 1 megapixel image. So it didn't matter if it was cloud. It doesn't matter if you can store and forward, it didn't matter that you didn't need film, the image quality wasn't good enough. So all those digital benefits weren't worth the fact the primary outcome was substandard. But the moment you got to equivalents and even better, all the digital capabilities now come into the purchases. And that's where we're at now. We're going to turn medical imaging, core medical imaging on its head, and we're going to capture more and more. We're going to be launching our own part in the next year, which is going to bring us into about an existing $3 billion market opportunity of existing revenue upstream. And we're also going into the home to be able to help nurses diagnose or capture images in where they are to keep them there and keep them out of the hospital. So those are our core markets. Now there are companies that have very specific use cases in women's health and others, and it would cost us so much money to go and develop that individual use case. It's almost like building another point of care business. But we get to participate in that business now because they're going to do that market development. So wherever there's very specific niches or very specific of clinical applications that we're not going to develop ourselves and someone is there, we're going to choose to partner.

Okay. That makes sense. I mean the way you talked about the TAM opportunity growing so substantially. Do you feel like what mid journey and merged partnerships are representative of the total opportunity set? Or do you think we're still really early on in just discovering what is the power of this technology.

Well, I think it's still very early. I think Merge is our fourth or fifth DCI company today and there'll be more. So we've learned that in communicating with the brain, you can put a wire in the brain. There's an amazing company called Science who's actually growing brain neurons into the chip into the brain or you can use sound waves to communicate with the brain. And there's a lot of vision there from dealing with chronic conditions or dealing with trying to restore function to ways of enhancing the brain and ultrasound is the least invasive way to be able to understand neural activity, and we've even had partners start imaging through the skull, which people thought was not possible with ultrasound. And if you're interested, a left neuro, ALE PH neuro, have some images online that are some of the most extraordinary images of a living brain ever taken through the skull. But there are so many applications in intravascular, cardiac ablation. They're in [indiscernible] on a micro scale. There are so many different applications of the technology that we haven't fully discovered yet. And then we are actually talking quite actively to our first Embedded partner that's not health care. It has to do with a company that does material stress. So if like an airplane wing, if it's under a significant amount of stress, you can see the material start changing form prior to a crack, and so if you're pushing an envelope of something, and there are all kinds of construction and military applications, where you can sense the changes in these materials. And so I think we actually today don't fully understand the full opportunity. We've done the best we can. And we've now, in the beginning of the year, have started to staff up the part of the business to be able to be much more proactive. Most of the relationships we have today were all inbound to Butterfly.

Yes. I mean as you explore other industries, within health care beyond health care. How does that change the business model fundamentally, the org structure, your capital allocation priorities? I assume it's kind of an evolving decision process.