Butterfly Network, Inc. (NYSE:BFLY) Q2 2023 Earnings Call Transcript

Butterfly Network, Inc. (NYSE:BFLY) Q2 2023 Earnings Call Transcript August 3, 2023

Butterfly Network, Inc. misses on earnings expectations. Reported EPS is $-0.14 EPS, expectations were $0.17.

Operator: Ladies and gentlemen, hello, and welcome to the Butterfly Network Q2 2023 Earnings Call. My name is Maxine, and I’ll be coordinating the call today. [Operator Instructions] I would now hand you over to your host, Heather Getz to begin. Heather, please go ahead when you’re ready.

Heather Getz: Good morning, and thank you for joining us today. Earlier this morning, Butterfly released financial results for the second quarter ended June 30, 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, Chief Financial and Operations Officer at Butterfly; alongside Joseph DeVivo, Butterfly’s Chairman and Chief Executive 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 approval, the size and potential growth of current or future markets for our products and services and the impact of these 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 live and recorded. To access the webcast, please visit the Events section in 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. Joe?

Joseph DeVivo: Thank you, Heather. So I’m pleased to review our results for the second quarter of 2023 and share perspective for my first 100 days on the job. I’ve done a complete review of the business over the quarter and now have a pretty good feel of where we are. Puttifier Network is a great technology platform. We’re leading point of care ultrasound with simply the best solution in the market. Our ultrasound on chip technology allows us to tune a single probe for multiple parts of the body, delivering the cloud, streamline enterprise imaging while documenting an EMRs, billing, managing proficiency for physicians, all at our competitive price point. It has put us in a league of our own. Now, we’ll continue evolving how PointCere ultrasound is used — we will now be pushing the boundaries of our technology to reach new care settings, making it easier to use and empowering more caregivers to understand ultrasound.

I look forward to revealing our complete road map when the time is right. The Butterfly team also quite honestly, has been through a lot. They’ve had 3 CEOs over the past 5 years, hired in Lecco hundreds of people, shifting strategies multiple times and try to do too many things at once in my opinion. After my first 100 days, I’ve grown very fond of the people in this company, and I’m really excited about what the technology can deliver. I believe getting back to basics with smaller teams focusing on our strengths and leveraging only what we can do to add value in health care will bring the bounce back in our step and return the company to organic growth. Stakeholders need a healthy and successful butterfly. Investors deserve better performance employees deserve stability in a place to grow and achieve and that’s exactly what we’ll do.

As I mentioned, we conducted a full strategy re-evaluation this quarter, and we made some tough decisions to create a focus and, in my opinion, more impactful plan. We ensured our new strategy is matched with the right cost structure to deliver on it. And we completed a reorganization to give us time to fund the plan. We implemented growth initiatives for all phases of our business and have a revenue growth plan that will be powered by better execution and near-term product pipeline that will roll out over the next couple of quarters. With the reorganization, we extended our runway and reduced our operating expenses by an average of $2 million a month. On top of that, 2 other cost-cutting efforts over the past 12 months occurred. But getting here was not all cutting.

In fact, we improved investment in our commercial organization, allowing a 50% increase in direct territories. We hired a world-class international sales leader based in Europe, and we funded core technology innovation. We now have a much more commercially driven team with great conviction towards our ability to deliver significant organic top line growth in the future. So from today forward, I’m going to be talking about our revenue in terms of markets and the products sold to them, not the channel in which it’s sold. You will hear me refer to U.S., international and Vet. Within each of these categories, we may sell directly or through distributors in e-commerce. Into these markets, we sell product, software, mobile app subscriptions, other services such as implementation and education.

And at the end of the day, the mechanism for sale is less important than what and to whom it is we’re selling. Our revenue in Q3 was down 3%, while taking out costs. In keeping with the new revenue format, our U.S. team delivered 21% top line growth in the quarter. We closed 2 large 500-plus probe deals into medical schools and launched our distribution relationship with McKesson. As you know, in addition to selling probes, enterprise software sales have been a big focus for this team. In 2022, we added Compass Software to our enterprise offering for sales into hospitals. Sales in this area have since been growing nicely as demonstrated by annual recurring revenue, or ARR, and that growth was 58% for enterprise software sales in the second quarter of 2023 compared to the second quarter of ’22.

The — that’s the result of a lot of enterprise software deals closing each quarter over the past year. We’ve sold it in the health systems who both use and don’t use Butterfly probes. Each relationship is an upsell opportunity. And as I mentioned last quarter, we’re a technology-enabled software company. As is with software, software sales add positively to the company’s gross margins and are increasing in product mix each quarter. Our international business, which going forward will include Global Health did not fare as well this quarter. Sales were down 44% year-on-year. We signed a number of new distributors in new countries in 2022 and placed stocking orders that have yet to be replenished. That said, underlying sell-through is growing, but has not yet outpaced the inventory place last year.

As mentioned, we’ve hired a new sales leader base in Europe, and I’m committed to getting our business organized correctly. We are direct into the U.K. and Germany, and those teams have developed a really nice pipeline, and I’m pleased with their progress. Fixing international distribution is something that I’ve done before. It takes continued focused execution and a commitment from our internal team to serve the needs of the international business one market at a time. This should just be a temporary setback. And our global health work, we’re proving that we can indeed make an impact by putting ultrasound in the hands of more mid-level providers, changing the way health systems deliver medicine and to ultimately improve outcomes for patients.

This becomes clear when you look at usage data from our large deployment and training programs in Kenya, it’s incredible to see how many mothers are receiving better gestational care because Butterfly is in their community. Data shows that about 10,000 butterfly scans are now happening per month across 224 Canaan public facilities. In a 1-month post-deployment study that was sent to program participants, 88% of the 377 respondents reported finding a high-risk condition such as brief presentation, low fluid or fetal distress, 95% are using Butterfly to decide on a treatment plan and for their patients and 81% used brutally to determine if high-level care is needed. Our global health program can drive real change across the globe, and I’m thrilled to share that soon, we plan to announce yet another big win for our Global Health team.

We’re looking forward to sharing the details when they are allowed. So that was slightly down in the quarter. Unfortunately, we were down resources in the first half that have now been restored. We expect that revenue to return to growth in the second half of the year. To that end, I’d like to discuss some recent activity. So we launched our Autoline counter last quarter for Human Care, our vet business saw an opportunity to use it in production cattle. There are 1 million cattle producers in the U.S. alone. And that’s pretty much just about as many U.S. physicians there are. They often leave prophylactically give their cattle expensive antibiotics to control disease spread and protect their herds where respiratory disease could be detected earlier to reduce antibiotic use, saving time, money in cattle.

Our auto D-line tool can now help with that. And the Butterfly team made it happen. We tuned our beam to see 30 centimeters into the chest wall of cattle to reach and scan their lungs. It’s so cool. That’s how versatile Butterfly is. We can just adjust for human and animal anatomy of all sizes. We’re not an analog set of crystals like a fixed lens on a camera. We have tremendous power and capability to use software to drive the right frequency through our MEMS technology to get the desired result without having to change the hardware. As an outcome, a prominent U.S. university of now researching the effectiveness of the Robin counter for the early disease detection and production cattle. So that’s where we are from a business perspective, and I’d like to turn the call over to Heather in a moment, but now I want to walk you through 3 near-term opportunities for growth.

Our next-generation probe, IQ3, Butterfly Garden and Butterfly Cassidy. In the first half of next year pending regulatory approval, we will launch the third-generation probe called IQ3. IQ3 is state-of-the-art technology that improves performance at every phase of ultrasound deployment powered by our new P4.3-chip, we have more than doubled our processor speed, increased frequency, which allows for even more applications, increased scan time, battery life and many meaningful performance enhancing capabilities. IQ3 closes the perceived imaging gap between us and our competitors, building on top of our market-leading value and superior technology. There will be no need to have multiple handheld probes in the hospital, only one focus handheld device will be needed.

This creates standardization, ease of education, fleet management and service for our customers. IQ3 will start opening doors to phasing out the need for heavy poor battery poor connectivity peso-based handheld. Our IQ3 software platform has also some very nice upgrades coming. As we get closer to launch and receive our regulatory approval, I look forward to showing you what it can do and why it will be a game changer for the market. Q3 is next-generation technology that will allow for images to be captured in an automatic way. I won’t go into how it works now, but it will be the easiest image capture device for ultrasound in the world. Instead of searching for anatomy like a flashlight in the case, you’ll progress a button and it will scan automatically.

This is a new feature that will be added to the current standard ultrasound imaging that butterfly performs. We know as word gets out, as it already has, customers may want to wait for the new technology. We’re planning for this in our forecasting and also in making it easier for our customers to upgrade to IQ3. They should continue to purchase IQs now so they can get in and get going with ultrasound and we’ll make it easy and cost-effective for them to get into Q3, so there’s no incentive to way. We will continue to sell our IQ Plus alongside IQ3 for those customers who want a lower cost alternative or who don’t need the benefits of the next-generation device. I came to Butterfly not to turn around another company, but to have the pleasure to bring this kind of technology into health care.

This is what it’s about. This is the next step in making ultrasound easier for inexperienced health care providers to be comfortable with ultrasound, all made possible by our ultrasound on-chip technology. Second, Butterfly Garden. Our technology has caught the attention of third-party AI developers who want to build novel applications that work with our imaging platform. We’ve already enabled a few of those partnerships. And as a result of this interest, I’m pleased to announce the launch of Butterfly Garden. Our Garden will be the place where ultrasound AI and software developers can access our proprietary software development kits or SDKs and APIs that will allow them to build their applications and use our imaging platform to work in conjunction with tariffs.

Our first SDK, which is available today, will enable developers to place their app in Apple’s App Store and link that app to work with the Butterfly IQs Pro. When they open their app in plug and Butterfly, the image captured through the butterfly probe appears in their application and their software can do the rest. We believe developers will like the easy to use kit and appreciate access into the largest installed base of point-of-care ultrasound devices in the world. For Butterfly, it allows us to continue to broaden our base. As each of these companies who develop on our platform, we will have more of their customers buying Butterfly, while existing Butterfly customers will have access to even more capabilities. It’s a win, win, win. As mentioned, we currently have several partners that we’re working with to this end, charitable foundation, pharmaceutical companies, surgical robotics companies, a cardiac AI company, and we are in discussions with several more.

Responding to the unsolicited demand we’ve received to date, Butterfly Garden standardizes this activity and welcomes more partners. Our next SDK plans to give developers access into our cloud and make it possible for third-party apps to use the EHR integration and workflow, further monetizing our investment in enterprise software. We’re also in discussions to monetize our ultrasound on chip platform. Votify investors have funded an incredible semiconductor chip technology, which warrants use even outside of Focus, for example, implantables, medical devices and other diagnostic tools. And we intend to monetize it for them. Like Intel Inside, these applications that use our ultrasound on chip technology will be “powered by Butterfly and will be rigorously protected by our 1,000 patents worldwide.

Third, I’m pleased to announce that we’re adding a full range of courses as well as Butterfly certification to Butterfly Academy. As you may recall, Votify Academy has a compendium of virtual training courses, training so important in point-of-care ultrasound because ultrasound is hard to learn, making it more accessible to health care professionals increases the importance of training. Currently, nearly 15,000 users have accessed our Butterfly Academy courses. We’re now adding in-person modules, which can augment self-training with virtual scan review and didactic training. We’ll also start offering in-person certification courses designed to increase proficiency and quality. We’re even planning to launch an instructor or treat the trainer course which helps institutions in-source training by developing proficiency of a few staff to educate the others on their team.

All Butterfly subscribers will get access to our catalog and pricing. So with that, I’ll turn it over to Heather. Heather?

Heather Getz: Thank you, Joe. Revenue for the second quarter of 2023 was $18.5 million, down slightly compared to the prior year revenue of $19.2 million. As Joe mentioned, we will start talking about sales in terms of the U.S. international net. Underlying all of these are both products and software, which are sold directly as well as through distributors and e-commerce. Starting with the U.S., we realized $14.4 million in total sales, up 21% from prior year, driven by higher subscription revenue, higher average selling prices, and partially offset by lower perm sales. Total international declined 44% to $3.3 million. In international, we are still working down initial stocking orders with distributors that occurred in prior year as we entered new markets.

We also had the initial deployment of the Gates grant in Africa in the prior year quarter. But in other revenue declined by $500,000 due to 2 large sales in that occurred in prior year. Breaking our revenue down between products and software, product revenue was $12.3 million, a decrease of 9% versus Q2 2022. This decrease was driven by lower volumes spread across all segments, except for the U.S., where we had 2 large medical school deployments. Software and services revenue was $6.2 million in the second quarter, growing by 7% over the prior year period. Software and services mix was 34% of revenue and increased by approximately 3.5 percentage points versus Q2 ’22. This increase was due to a higher installed base of products with the accompanying subscription software, renewals on the existing base of software users and software implementations completed during the quarter.

As Joe mentioned, we will start talking about our annual recurring revenue, which is reported as part of software and other services. Total ARR grew by 23%. This was led by an impressive increase of 58% in our enterprise software, which increased from 29% to 35% of our total ARR. Individual mobile software also grew by a respectable 7%. Turning now to gross profit. Gross profit was $10.9 million in Q2 2023 compared to $10.6 million in the prior year period. Gross profit margin was 59% for the second quarter, which compares to 55% in Q2 ’22. This increase was primarily due to a higher average selling price in addition to the product mix, reflecting a higher proportion of software and other services revenue. Also contributing to the increased margin was higher manufacturing productivity and other efficiencies.

Offsetting these benefits was higher amortization, which reduced margins by 400 basis points. For the second quarter of 2023, adjusted EBITDA loss was $17 million compared with a loss of $37.1 million for the same period in ’22. 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, consoling and other outside services. Moving to our capital resources. As of June 30, cash and cash equivalents, including restricted cash, were $171 million. Our total use of cash in the second quarter was $27 million. If I exclude $3 million of expenses not expected to reoccur, our monthly use of cash was down to $8 million in the second quarter. Before turning to 2023 guidance, I wanted to provide a heads up that shortly after filing our 10-Q, we will be filing an S-3 with a $300 million shelf.

We are now eligible to register a shelf and believe that it is simply good housekeeping to give us optionality and the ability to raise capital quickly should the need arise. Moving now to guidance. On the last call, we committed to providing an update, and I would like to touch on that now. As Joe discussed, he spent his first 100 days learning the business and evaluating our strategy. The result of this process is not a drastic change in what we need to do, but more on how we get there. This process culminated in a more specific tactical road map and plan for reorganization that will allow us to further extend our cash and reinvest in our direct sales team. This exercise is expected to reduce our ongoing operating expense by an average of $2 million per month or about $60 million through the end of 2025.

While a significant amount of work has been accomplished and we are excited about our ability to expand revenue with our new focused offerings, we are cognizant that our strategy and additional direct sales resources will take time to ramp. As such, I’m going to conservatively guide to revenue numbers that are based on our existing run rate, resources and product offerings, assuming no large onetime deals occur for the remainder of the year. Based on these assumptions, we are expecting full year 2023 revenue of at least $64 million, which is greater than the prior year revenue of $73 million by about 10%. To put this in perspective, large initial orders, primarily into international markets as well as some other one-offs that occurred in 2022 are expected to decline by about $10 million in ’23 when compared to the prior year.

In addition, the market is expecting us to deliver a next-generation prove at some point in 2024. We believe this is contributing to a sort of onborne effect where purchases may be delayed pending the launch of a new product. These factors, coupled with the disruption caused by the reorganization and reduction in resources is leading to this estimated decline. That being said, over the past year, we have taken $170 million of annualized expenses out of the business. And as a result, we are able to provide an adjusted EBITDA guide for the full year of a loss of $80 million to $75 million, which is an improvement of approximately $10 million to $15 million versus our previous number. To summarize, while our overall revenue is facing some headwinds, we are seeing strong underlying growth in the U.S. and in enterprise software.

There is upside to this plan. We are receiving no large deals in the second half, no impact from our investments in the direct sales force, Butterfly Garden or Butterfly Academy. Even with these headwinds and conservative assumptions, we have maintained a solid cash position and have further extended our cash runway, allowing us to guide to an improved EBITDA loss. While going through this process has been very difficult, the outcome is that we have a company rightsized to accomplish its goal with a strong base of technological and organizational assets to build on and the people who are reenergized and excited about the future of Butterfly. With that, I will now turn the call back to Joe for closing remarks. Joe?

Joseph DeVivo: Thank you, Heather. We feel it’s important to create a revenue baseline for the business without all the noise of large initial deals then manage the expenses accordingly for sustainable top line growth. As I mentioned earlier, we’ve learned the business out while maintaining a robust R&D pipeline and increased sales and marketing focus and investment. We’re mindful of our hardware sales in the face of a new platform launch, and we’re being cautious. Some cuts in the business through the year have hurt our top line momentum, and I commit to you, we’ll get it back. Butterfly has many levers for growth. Over the next several quarters, we will continue announcing initiatives that take advantage of Butterfly’s unique capabilities and our desire to build new markets that only we can serve.

You’ll hear more about Q3, AI applications and other capabilities that are novel. I’m intent on completely leveraging the technology investments that we have made and flexing the muscles of what ultrasound on ship can bring. Frankly, peso crystal-based imaging will become increasingly irrelevant in handheld ultrasound in the future, or at a minimum, relegated to niche use cases. The physics of energy, imaging and heat have been maximized in these analog handhelds. Over the past several years, Butterfly has built the largest installed base in the world for handheld point-of-care ultrasound, selling more than any of the biggest companies. But ultrasound on the chip is still in its infancy. Moore’s law is on our side, and that will be evident when you see what our next pro can do.

Butterfly started by disrupting handheld Ultrasound. It introduced unprecedented capabilities to clinicians throughout the world. We made handheld ultrasound affordable, easy to use and that helps patients everywhere receive care at the point of care. And I’ll close by reminding you that Focus is here to stay. 2/3 of medical schools and growing have focused on their curriculum. 42% of first year residency positions across all specialties in the United States have a requirement to learn focus. Meeting these program requirements is logistically impossible without handheld ultrasound and the software and services to get faculty up to speed. Our education offering is not only timely for the next generation of doctors, but critical for the older generation that must keep up with new standards of care that result from this change in training.

Butterfly is proving time and again that we have the product, software and services to not only make the transformation feasible, but practical at an accelerated rate of adoption. As I mentioned earlier, the next 3 quarters will be quite busy as we launch many new products and initiatives. We are reorganizing our sales and marketing strategy, shifting more of our spend towards commercial efforts and will return to double-digit organic growth into 2024. It’s a very exciting time for the company. So, thank you so much for the time today. And operator, please open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Suraj Kalia from Oppenheimer & Co.

Suraj Kalia: Heather, can you hear me all right?

Joseph DeVivo: Yes.

Suraj Kalia: Perfect. Joe, refreshing to hear a clear plan of attack here, especially given everything going on. A few comments caught my attention to. I was wondering if you could give some additional color. So first and foremost, you mentioned in your prepared remarks, perceived image gap that would be bridged by Q3. Can you help us understand how do you — how should we think about objectively measuring this gap has been closed? And specifically on IQ 3, how do you think about the competitive landscape in whether it’s market share, initial uptake? Just some additional color there would be great.

Joseph DeVivo: Well, it’s a great question, and I appreciate it. It’s funny because what you see is something that is of an individual preference. And so certain levels of imaging and clarity and presentation can be very subjective. And I actually was asking myself that same question. When you think about a digital camera, you think about — if I told you something was 1 megapixel I told you something was 3 megapixel or 7-megapixe 10, you would know that you don’t have to see the image initially to know that it’s going to be greater clarity because simply you have greater pixel concentration. And that is kind of the trend that you saw in digital cameras you initially had the 1 megapixel image and always people thought that the film image was so much clearer.

But then as, again, Moore’s Law perpetuated, you saw that ability to bring on greater level of prices, the ability to pack in the image and create that type of clarity, things would become more empirically evident to translate into what would be a perceived benefit. Same thing is happening in ultrasound. And we will be talking specifically in the next launch around those things that drive image quality. And one of the things that drives image quality is processor speed. And the faster you can process the image, the faster that you can get in and bounce sound off for the architecture, the better that image will be. And then also the frequency and the ability to tune the frequency as well. So there are going to be numeric ways that over time, people are going to see that these computational capabilities translate into imaging performance.

But that said, we have looked at our IQ3 image. We have every other competitive device. We have experts, we have clinicians on our staff, and we have experts on consultation. And our team is excited with what they see. We’ve — so from a subjective evaluation of side-by-side imaging, the IQs the IQ3 is a step function in greater clarity to IQs, which is, obviously, with 100,000 units out in the marketplace and growing is an incredibly acceptable technology. But as you evolve and you want to get into more use cases and more specificity, that processing power can help deliver it. And so this is — it’s a very linear or exponential thing in Moore’s Law, where as your compute power increases and improves, it has the ability to transfer the sound and to compile the image in a manner that’s clearer and more pleasing to the eye.

Does that help?

Suraj Kalia: Got it. Yes, fair enough. I get to point. Joe, Heather, I’ll just give you my other two questions that hop back in queue. So Joe, for you, your comments about embedding UOC in implantables caught my attention. I can think of a couple of examples just where this man, but I’d love to understand, you didn’t throw that comment out there by chance. You will have thought through that. And it is — it would be a first of the peak inside the tenet of how you all are thinking about it, any initial applications? And Heather, if I could, the 50% investment increase in commercial activity, maybe just set the baseline for us. At least in the U.S., how many reps, rep productivity, territory coverage, just if you could give us some guide points this would be great.