Butterfly Network, Inc.

The Butterfly Network Q2 2023 earnings call is due to begin shortly. Thank you for your patience. As a reminder, if you would like to ask a question, you may do so by pressing star followed by one on the telephone keypad. Thank you. 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. If you would like to ask a question, you may do so by pressing staff below by one on your telephone keypad. I will now hand you over to your host, Heather Getz, to begin. Heather, please go ahead when you're ready.

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 investor section of the company's website at ir.butterflynetwork.com. I, Heather Goetz, Chief Financial and Operations Officer at Butterfly, alongside James 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 approvals, 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 event section in the investor 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?

Thank you, Heather. I'm pleased to review our results for the second quarter of 2023 and share perspectives from 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. Butterfly 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 from multiple parts of the body, deliver in the cloud, streamline enterprise imaging while documenting in 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 point of care 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 roadmap when the time is right. The Butterfly team also quite honestly has been through a lot. They've had three CEOs over the past five years, hired and let go hundreds of people, shifted strategies multiple times, and tried 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 for the smaller teams, focusing on our strengths and leveraging only what we can do to add value in healthcare 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 and 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 focused 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 several 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, Two 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 sold. You will hear me refer to U.S., international, and VET. Within each of these categories, we may sell directly or through distributors and e-commerce. Into these markets, we sell product, software, mobile apps, 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 two 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 has 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. That's the result of a lot of enterprise software deals closing each quarter over the past year. We've sold it into 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 placed last year. As mentioned, we've hired a new sales leader based in Europe, and I'm committed to getting our business organized correctly. We are direct in the UK and Germany, and those teams have developed a really nice pipeline, and I'm pleased with their progress. Fixing international distribution is something I've done before. It takes continued focus, 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. In 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 Kenyan public facilities. In a one-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 for their patients, and 81% use Butterfly 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're 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 the growth in the second half of the year. To that end, I'd like to discuss some recent activity. So when we launched our auto beeline counter last quarter for human care, our vet business saw an opportunity to use it in production cattle. There are one million cattle producers in the US alone, and that's pretty much just about as many US physicians there are. They often leave prophylactically, give their cattle expensive antibiotics that control disease spread and protect their herds. What if respiratory disease could be detected earlier to reduce antibiotic use, saving time, money, and cattle. Our auto beeline 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 is now researching the effectiveness of the Auto B-Lines counter for the early disease detection in 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 three near-term opportunities for growth. Our next generation probe, IQ3, Butterfly Garden, and Butterfly Academy. 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 POCUS 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, PZO-based handhelds. 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'll be a game changer for the market. IQ3 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 a cave, you'll press 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 IQ Plus 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 IQ3 so there's no incentive to wait. 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 theirs. 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 IQ Plus probe. When they open their app and plug in 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 install 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. Butterfly investors have funded an incredible semiconductor chip technology, which warrants use even outside of POCUS. 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 quote unquote powered by Butterfly and will be vigorously protected by our thousand 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, Butterfly Academy has a compendium of virtual training courses. Training is so important in point-of-care ultrasound because ultrasound is hard to learn. Making it more accessible to healthcare 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 train 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 practicing. So with that, I'll turn it over to Heather. Heather.

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, and VET. Underlying all of these are both product 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 per 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. VET and other revenue declined by $500,000 due to two large sales in VET that occurred in prior year. Breaking our revenue down between product 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 two 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, an increase 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 2022. 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 margin by 400 basis points. For the second quarter of 2023, adjusted EBITDA loss was $17 million, compared with a loss of 37.1 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 reduction, which led to lower payroll, consulting, and other outside services. Moving to our capital resources. As of June 30th, 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 10-2, 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 in how we get there. This process culminated in a more specific tactical roadmap 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 one-time deals occur for the remainder of the year. Based on these assumptions, we are expecting full-year 2023 revenue of at least $64 million. This is lower 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 2023 when compared to the prior year. In addition, the market is expecting us to deliver a next-generation probe at some point in 2024. We believe this is contributing to a sort of Osborne effect where purchases may be delayed pending the launch of a new product. These factors coupled with the disruption caused by the reorganizations 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 to $75 million. which is an improvement of approximately $10 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 right-sized to accomplish its goals with a strong base of technological and organizational assets to build on, and the people who are re-energized and excited about the future of Butterfly. With that, I will now turn the call back to Joe for closing remarks. Joe?

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 leaned 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 IQ3, AI applications and other capabilities that are novel. I'm intent on completely leveraging the technology investments that we've made and flexing the muscles of what ultrasound on chip can bring. Frankly, Piezo 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 install base in the world for handheld point-of-care ultrasound, selling more than any of the biggest companies. But ultrasound on a chip is still in its infancy. Moore's Law is on our side, and that will be evident when you see what our next probe 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 it helps patients everywhere receive care at the point of care. And I'll close by reminding you that POCUS is here to stay. Two thirds of medical schools and growing have POCUS in their curriculum. 42% of first year residency positions across all specialties in the United States have a requirement to learn POCUS. 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 three 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 we'll return to double-digit organic growth in 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.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure that your line is unmuted. Our first question today comes from Suraj Kalia from Oppenheimer and Co. Please go ahead. Your line is now open.

Good morning, Joe. Heather, can you hear me all right?

Yes. Good morning. Perfect.

Hey, Joe, it's refreshing to hear clear a plan of attack here, especially given everything going on. A few comments caught my attention, Joe. I was wondering if you could give some additional color. So first and foremost, you know, you mentioned in your prepared remarks perceived image gap that would be bridged by IQ3. Can you help us understand, you know, how should we think about objectively measuring this gap has been closed. And specifically on IQ3, how do you think about the competitive landscape, you know, whether it's market share, initial uptake, you know, just some additional color, that would be great.

Well, it's a great question and I appreciate it. You know, it's funny because, you know, 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, uh, you think about if I told you something was one megapixel or I told you something was three megapixel or seven megapixel or 10, you would know that, you know, you don't have to see the image initially to know that it's going to be a greater clarity because simply you have greater pixel pixel concentration. And, and that is kind of the trend that you saw in digital cameras. You know, you initially had the one 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 pixels, 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 that sound off 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, you know, 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, you know, so from a subjective evaluation of side-by-side imaging, the IQ Plus is a, the IQ3 is a step function in greater clarity to IQ Plus, 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 uh can help deliver it and so uh this is it's a very linear or exponential thing in moore's law where your as your compute power increases and improves it has you know the ability to transfer uh the sound and to compile the image in a manner that's that's clearer and more pleasing to the eye does that help got it

Yep, fair enough. I get your point. Joe, Heather, I'll just give you my other two questions and 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, you know, just where this might, but I'd love to understand, you know, you didn't throw that comment out there by chance. You'll have thought through that. And it would be a first of its kind love for you to give just an additional peek inside the tent 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. you know, at least in the U.S., how many reps, rep productivity, territory coverage, you know, just if you could give us some guideposts would be great. Folks, thank you for taking my questions.

Sure. So, first of all, the As far as when I look at our chip technology, again, we're the first company in the world to create a semiconductor wafer with a MEMS technology to deliver sound. The butterfly investors have invested a significant amount of capital in creating this technology. And this technology has the most sophisticated supply chain and the best chip manufacturer in the world behind it. And when I look at the cost to develop this technology and I look at the use of the technology, so we are using the technology specifically to translate sound for imaging inside the body for the use to democratize care and allow all caregivers to build it into everyday practice. The desire and need to be able to take this imaging capability exists across health care. And it exists in endoscopic surgery. It exists in implantables. And instead of encapsulating this technology for ourselves alone, in areas where we don't have distribution channels, you know, we are willing to partner with people who can leverage the technology for their benefit and in turn benefiting the butterfly investors. So we've ring-fenced the markets that we believe that we will be in individually. uh and we've allowed ourselves uh to to talk um we've allowed ourselves to talk with partners who we believe uh in a marketing perspective are non-competitive but will benefit because the chip's very small and and and and the chip can be embedded uh you know it's the size of a of a fingernail uh you know and it can be embedded in technologies that if they wish to image and see and do things for different applications. You know, I'm coming into this company looking at the investment that investors have made and I want to leverage that investment and I want to find ways to create and increase the breadth of it because it's an incredible discovery by our founder, Dr. Rothberg, and it probably deserves to be in society beyond the marketing channels that we have. Now, I'll turn it over to Heather, but we don't specifically talk about number of territories, but, you know, Heather can maybe, you know, answer the second part of the question.

Yeah. Hi, Suraj. The way I would think about it is that in the latest reorganization, we've reduced expenses within R&D, but within sales and marketing, we've reallocated them. So we had some indirect spend within sales and marketing that we're now reallocating to direct sales people. And what you'll see is that at least initially the sales and marketing number may go down a little bit, but it'll be restored as we add additional sales reps to that. And obviously we believe that that will help accelerate our top line revenue number.

Yeah, Siraj, you know, if you look at from August of last year to this year, butterfly management's taken out $170 million of cost, of one rate cost. And, you know, when you do that, it's sometimes not perfect. And, you know, I believe in the beginning of 23, there were some sales and marketing costs that were taken out that impacted our momentum. It's indisputable. And so we've needed to recover that spend and then also come up with a very focused strategy. Ultrasounds, you know, is complex in that it can be used everywhere. I can go through every clinical specialty, MSK, women's health, cardiac, pulmonary, you know, any type of liver, gallbladder. And you can't fund a study in every organ. You can't, you know, say you do everything because when you do everything, you do nothing even though you can't. And so we focused on our investments where we know we can win, where we know we're better than the competition in use cases. And we're going to drive a truck to it. And then, of course, all the other applications are going to get pulled along with it. But, you know, in being in robotic surgery, you know, early, late 90s, you know, there was one focus in robotic surgery, and that was on urology. Could the robot be used everywhere? Yes. But it was until there was a five-year prospective randomized trial in prostate that showed that robotic surgery was actually better than laparoscopic surgery and standard surgery. That all of a sudden tipped the scales and then everything went. If that wasn't done at that time, if they didn't focus on that one use case, then that adoption wouldn't have occurred. There's, you know, I mentioned on my last call how excited I was to join the team because when I see everything that R&D's worked on and I see all the things that they've created, there's so much now to bring to market. It's just the focus was necessary.

Fair enough. Thank you.

Thank you. The next question comes from Neil Chatterjee from BeRiding. Please go ahead. Your line is now open, Neil.

Good morning. Thanks for taking our questions. Um, maybe just on, on the new guidance, uh, you know, two questions here, you know, one, if you just maybe just elaborate on, on kind of the large, you know, initial international deals and kind of other one-time orders from 22, uh, and how pursuing, you know, those types of deals might be different in the back half and beyond. Uh, and then secondly, um, could you just maybe talk about the dynamic of customers kind of waiting for the next gen, you know, IQ3 launch next year versus ways to maybe incentivize them to continue to purchase IQ Plus and make it easy to upgrade?

Heather, you take the first, I'll take the second.

Okay, sounds good. So, you know, when you look at last year, we had a a pretty big push into international markets through distributors. And they occurred throughout 2022. And they had their initial stocking orders. And what we're seeing is that they're continuing to sell through those initial stocking orders. And we haven't had those same large initial orders repeated in 2023. So we would expect to the extent that we stay in those markets that we would see that pick up at the point in time in which they sell through. And the part about 23, I'm not quite sure I understood your question about the end of 23.

Well, I think I can take that second part. Okay. What we wanted to do is to provide guidance of where we saw the business run rate was today. Now, don't get us wrong. We love large deals and we want to close large deals. But also, we didn't want to guide to something that we didn't have control over the timing. There are some things that we're working on and we actually even just mentioned a large global health win, which will be another large deal, which we love. It's just the predictability of them, and then when you have them in your run rate, they are hard to anniversary because it's not a consistent deployment of large deals. So what we wanted to do is just present to you, hey, here's where we're going to come in if things just go as it is and we don't close the next large deal. And then truthfully, as I have greater comfort with the business, as I have more of a track record and I can see more of the pulse I've only been here 100 days. And so I haven't had enough time to see the length of our sales cycle and to understand how to trust metrics to predict to the future. And so I wanted to create just a baseline just to be conservative. But yes, we're going to be hunting a lot of things. And I actually think there's an opportunity to build a large pump with enterprise strategy, but it's not mature enough. It's not enough time for me to be able, you know, with credibility to tell you what will happen when. So I hope that's helpful, and I'm happy to try to continue to elaborate if I didn't really answer your question.

Sure. I mean, maybe just on that kind of the second part of that question, just in terms of the, you know, the IQ3 launch next year and, you know, if customers are waiting, I think you also kind of in the prepared remarks also kind of talked about, you know, ways to make that, you know,

you have great easy and still be able to purchase iq plus now so just maybe maybe just elaborate on that yeah sure so you know usually our fourth quarter sales are pretty robust and so um but as as we get closer to iq3 there is risk that people may you know hold off um and so we're we're planning for that but we're also uh communicating to our team that there'll be a clear upgrade path so if If someone has purchased something for a particular value, that value can be placed towards the cost of IQ3, and then we'll work to make it really simple for users to upgrade. And they won't be out of pocket any additional dollars. It's just a normal thing that capital equipment companies go through when they're getting close to those launches. So we just want to address it head on and not react, but actually plan. And I think that's what we're doing.

Great. Maybe just one quick follow-up here. Just in terms of kind of getting back to basics here and in terms of, you know, commercial strategy and execution, kind of curious what that means for a few things. So, one, on the e-commerce strategy, you know, the enterprise software strategy, and then lastly, I don't think we touched on this much today, but just kind of the the, you know, butterfly IQ in the home or self scanning? Or, you know, how does IQ three maybe change that? Or is there other other things in the pipeline? Thanks.

There's a lot of things in the pipeline. I'm a big fan of our e commerce strategy. You know, we've been able to help us build a brand very quickly. You know who we're competing against. And so there's no There's no misunderstanding in the marketplace who these companies are. And so e-commerce has allowed Butterfly to go big and go fast, has allowed us to communicate and continue to communicate relationships with our customers. And we're going to continue that. I think our messaging, by having more to offer and more products to offer, is going to make the overall effect of e-commerce more potent. You can only sell the same things for so long and message it over and over. So as you come up with new value propositions, that channel and that ability to connect directly to the customer is very powerful. Regarding enterprise software, enterprise software is a winner. The team did a great job in the pivot and the product is excellent. And we're selling each account $100,000, $200,000 an account. to get to 7.7 million, there's a lot. And actually each one of those accounts as they add departments grows in their overall revenue. So we're increasing our counts. And then as they're having success with the software, they're adding more and more departments and then that price is going up higher. So, and if you look at the ARR chart, it's not lumpy and it doesn't, you know, it's a very, very good upward sloping straight chart. Because, you know, we're booking revenue, you know, in period, not at one time. So our enterprise sales, as our software gets more and more adopted, you know, we're going to now focus on linking our software with our hardware and other services and continue to sell bigger and bigger deals. I think we've gotten past the credibility mark of, hey, is this software really creating value? Now we're going to be wrapping it with hopefully larger deals in health systems and and that's where we're you know certainly uh encouraging our team um so regarding iq3 you know iq3 is is next generation i think it's it's going to be water rises uh and so do all the chips and all the products will benefit from you know a product that can do it all uh and i think and not only can do it all but it could do some things that nothing else has been done before in ultrasound. You know, a kind of a Dr. Spock, you know, press the button and scanning in the body is pretty amazing. And I look forward to starting to show the images to thought leaders and the market as we get closer to launch. Because, you know, ultrasound is so hard. You know, you have to be able to have that flashlight in the cave to find exactly what you want to get. And then you have to know what it is that you found and so the challenge here is we're bringing it to people who haven't been classically trained in ultrasound and healthcare professionals who are at the point of care in the field in the ambulance and so we need to make it easier for them to at a minimum be able to acquire that image because with our teleguidance capability we can move that image to a remote caregiver who immediately can diagnose and so when we talk about getting into the home If we can have an auto-capture capability where there's not this art of having to search for the anatomy, but if it's easy for a patient in the home to just place a device on wherever it is, have them in their chest, et cetera, press a button, have a scan, and then that scan's sent to a third party or a remote physician who can immediately, whether it's immediate or whether it's an ongoing type of management, then that really changes the game and changes the model. That's why we're a software-enabled technology company, because we have this great technology, but software is what extracts the additional value out of it, just like we talked about in VET. Normally, it's up to 10 centimeters of depth that you're scanning in a human body, but to get to 30 centimeters, that's a whole different game. Our software tunes it and sends different energy into the probe and creates that type of image. We are going to get into the home. We are going to get into skilled nursing facilities, nursing homes. We are going to get into the battlefield. We are going to get into places where the injury or the patient is and not just have to come into a hospital and then have a cart and then go through a time-laden process. Every single health system is looking for ways to reduce readmissions. They're looking for ways to manage chronic care patients in the home. And remote patient monitoring is is a massive business that's fully reimbursed and has been growing and will continue to grow because it works and it allows patients to be managed in lower cost care settings. And so as we go with our IQ3 and with this new type of easily to scan technology, that's also going to transfer and translate into our wearables. And as our wearables come in, then people can place devices and do the same. This is a part of a multi-pronged strategy. Butterfly has been investing in technology for years. As I mentioned on my first call, I was just so giddy when I sat with the team and saw what they created. I'm very excited about the focus strategy now. We've played in their game. We've come into this market, which is a mature ultrasound market competing against big companies who have wraparound GPO contracts, who have ways to bundle in leverage and price and do all these different things. And so, you know, to get into the hospital setting alone as a little company, you know, we have to do things differently and better. And we've proved that we can get into a mature market and we can win. Now we're going to continue to win in that mature market, but we're going to build a market, especially as we just mentioned in the home with remote patient monitoring and wearables and self-scanning. that they can't do because crystals can't do this. Only the type of technology we have does. So, you know, we're reorienting ourselves. We're focusing on our technology. We're going to win in this mature market, and then we're going to build a point of care. And then as we do that, we're going to build new markets that only we can serve.

Great. I appreciate that, Colin. That's great. Thanks.

Thank you. Joe and Heather, are you happy to take more questions?

Sure. Yes, please continue. I could do this all day.

The next question comes from Josh Jennings from TD Calum. Please go ahead. Your line is now open.

Hi. Good morning, Joe and Heather. I wanted to just start off on the Butterfly IQ3 just to make sure we're clear on where that development program stands. Now, it seemed to catch, or my understanding from this call is that you've already kind of crossed the threshold where this imaging quality improvement is in hand, or are there still, what are the development steps left, and then are there any regulatory hurdles that need to be cleared? I guess the reason I'm asking is just with this Osborne effect that you guys are calling out for the second half of, of 23 and then the launch of IQ3 in 24. Just saying, could that Osborne effect last into 24 as we think about updating our models and our out-year estimates? Or is this an early 2024 launch?

So, the launch date will be determined by regulatory clearance. Everything is done.

Excellent. So is that submission on the time?

It's, you know, the submission will be placed shortly. Within the quarter, the submission will be placed.

That's outstanding. And then how early can you start showcasing the IQ3 and the improvements to, key opinion leaders or your customer base? Are you able to market this in front of approval?

No, we don't market in front of regulatory approval. What we do do is we have thought leaders that we have NDAs with. We do have, let's call them demo IQ3 probes that we can do IRB protocols with. under appropriate FDA guidance. So we're compliant with FDA rules. So we're, yes, we are actively in front of thought leaders. We are working through our internal, we have a robust internal clinical team. And we will make sure that prior to launch, you know, those thought leaders are are helping us, you know, understand, you know, the message and, you know, the capabilities of the product. So, yes.

Excellent. Well, that's great to hear. And one of the reasons I asked, I think I believe if our consultants' feedback on the IQ Plus and the potential for image quality improvement may not have just cleared that expectation hurdle, but it sounds like IQ3, you've already cleared that hurdle. that closing of the perceived imaging gap has been accomplished, and now it's just a matter of getting regulatory approval and launching, just to be 100% clear.

That's what we believe, and that's what our interpretation of the improvement of imaging. Again, our processor speed has doubled. Our frequency has increased. All of the metrics that you have to pump through a semiconductor chip have improved in a level that is consistent with image. And that's not stopping. We have the next generation technology beyond our P4.3 chip already out in development. And what's great in the way that IQ3 is designed is, A, we can continue to enhance the software and release new software capabilities to the existing product dynamically. So that's one thing that we're going to even continue because we're not stopping here. We're going to grab our surfboard and ride the Moore's Law wave. We're continuing to test the boundaries of the technology that we have. But then also we're continuing with the next generation chip technology. and we'll be able to insert that next generation chip technology right into this hardware platform. We won't have to, you know, at least, you know, until we come up with, well, we do have a next generation, you know, a next generation really cool thing behind this that I'll talk about hopefully in early of 24, mid-24, as it's a 25 release. But we're going to be able to continue to improve our chip. We're going to be able to continue to improve our software, and we can insert it into, a current hardware form factor, and increase our power, increase our capability to image. And this is just the journey. We're going to go from 1 meg to 3 meg to 5 meg to 7 meg to 20 meg imaging, and we're going to lap film, and we're going to do in handheld to piezo crystals what happened to the film industry. So that's what we believe.

That's outstanding. Thanks for those details. And then just how she'll be thinking about the potential of IQ3 launch next year to kind of enhance or pull forward the replacement cycle, just thinking about adopters in 19, 20, 21, even 22, and their drive to, I mean, I think it's pretty clear that this should enhance the replacement cycle or pull it forward. But any just high-level thoughts for 24 and 25 about the replacement? replacement cycle contributions to revenue growth?

I honestly don't. We haven't modeled that out. I can't honestly give you a specific answer. Obviously, when new technology comes out with greater capabilities, I think for us, the current IQ Plus users are using IQ Plus very happily. The people who are not using IQ Plus because of whatever specific additional reason they have are going to be, in my view, more enticed or satiated now to be able to get into IQ3. So I'm hoping, you know, I'm sure there'll be some upgrades because there's a cool factor. But it's not like those who are using it today aren't getting value. They're certainly getting value. But the increased capabilities and the increased, imaging capabilities are certainly going to meet the needs of certain markets that we haven't participated. So I think the base just widens. And then, as I mentioned in my prepared remarks, you know, as hospitals start looking at standardization, you know, if they can get out of the bundled, you know, agreements that the big companies, you know, put the golden handcuffs on them, um we have the ability to standardize because we meet you know we meet all the use cases we believe now and uh you know so that that that's our thought and that's that's our point of view great thanks so much for the answer questions no problem thanks josh

Thank you. Our final question today comes from Danielle Antelfi from UBS. Please go ahead, Danielle. Your line is now open.

Hey, good morning, guys. Thanks so much for taking the question. Joe, you touched on this a little bit with Josh's question, but just any color you can give on the go-to-market strategy for the IQ3, is this something you'll go to your existing customer base with first? Is it something that you're going to tried to win new accounts with, and also on the pricing side of things, if you guys have ironed that out. And that's all for me. Thanks.

Thank you for the question. We're going to go out to everybody, and we're going to go into hospitals. We're going to go everywhere. We're not going to keep this in our back pocket and just show it to one or two people. It'll be in our e-comm channel. It'll be through our U.S. channel, and then following U.S. clearance, we'll be filing for our international clearances in sequence. So, no, we're intent on this being, you know, not a specialized product, but a broad-based product. And what was the last thing that you mentioned? What was the last question you said?

Just on – I know you guys just – Oh, I'm pricing. Yeah, just on price, if this is something – yeah.

Yeah, we haven't finalized. We have a little bit of time. We have a bunch of thoughts on pricing, but we do think the price has the possibility of being higher than the current, but I don't want to peg it at a particular price, but it'll certainly be higher. And that also plays into a segmentation strategy because we'll have now two probes on the market, and we'll have a lower-priced probe and a higher-priced probe.

Thank you so much.

Thank you. This concludes our Q&A session, so I'll hand back over to Joe for any closing remarks.

So I just want to thank all the Butterfly employees for their loyalty over the last year. And we have a lot of people who are even no longer with us and you know they're awesome people and my you know we're going to return ourselves to a really nice growth we're going to please our investors we're going to continue to be a great place to work continue to be a way where we're solving problems for health care helping patients this is you know we're still in our infancy And I'm just very excited about the next 12 months. So I really appreciate your time and look forward to giving you the next update.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.