Butterfly Network, Inc.

Hello, thank you for attending the Butterfly Network Q3 2023 earnings call. My name is Victoria and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. In the upcoming remarks, there will be references to video clips that will not be animated on the live slides. We anticipate the animated video version of the slides will become available online at ir.butterflynetwork.com within 24 hours of today's call. I would now like to pass the conference over to your host, Heather Goetz. Thank you. You may proceed, Heather.

Good morning, and thank you for joining us today. Earlier today, Butterfly released financial results for the third quarter ended September 30th, 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 of Butterfly, alongside Joseph DeVito, Butterfly's Chairman and Chief Executive Officer, will host today'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, and the size and potential growth of current or future markets for both our products and services. 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, and we will be referencing a slide presentation in conjunction with our remarks. There may be a short delay between the live telephone audio and the presentation being shown. To access the webcast, please visit the events section of the investor relations 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. So it's a pleasure to speak with you all today. I'm excited to share our results and the progress we've made in our business transformation since I joined just about six months ago. As I noted on our last earnings call, Butterfly Network is a great technology platform with leading products and services. We're now focused on not only providing the best point of care ultrasound solutions, but also expanding our addressable market through adjacencies to return the company to organic growth. We've made some great progress in the third quarter, including a number of exciting announcements while continuing to execute against our operational plan. And as a result, we remain on track to meet our fiscal 2023 guidance of at least $64 million in revenue and provide improved EBITDA guidance. Butterfly's go-to-market strategy is centered on our proprietary semiconductor technology and accompanying software. We continue to successfully execute against it, positioning us on a path to growth. First, we sought to identify and disrupt the market that our product and technology could displace, and we did. Point of care ultrasound. Here, we have the most versatile handheld device at the most competitive price point, and we already have a large and growing share in terms of units sold globally. With new entrants and established players following the path to investment in ultrasound AI, even introducing new devices that are also chip-based, albeit still relying on piezo crystals, we've successfully proven this to be a viable and growing market that we will continue to win in, The next part of our roadmap, which we are currently executing on, is to continue to grow and develop a focused market while identifying new use cases for our proprietary semiconductor chip and software to address. The upcoming launch of Butterfly IQ3 and our recent co-development partnership announcement, which I'll discuss in a few minutes, are but two examples of Butterfly successfully executing this strategy as we move through the second half of 2023 and into 2024. And further out, as our core technology and software evolve, we'll move into wearable form factors to build markets that no one else can. On the last call, I shared with you a number of near-term strategic initiatives our team is taking to accelerate our growth. Namely, these are, one, introducing new products like IQ3 to strengthen and solidify our position as the leading POCUS handheld. Introducing new education offerings to enhance POCUS competency and drive awareness and adoption. Three, accelerating ease of use and access to AI tools through Butterfly Garden, our partner ecosystem. And four, identifying growth areas outside of POCUS application through our Powered by Butterfly chip development partnerships. I'm happy to report that our team is delivering on all of these efforts with significant progress made in this past quarter. We're confident that these will be meaningful contributors to our 2024 numbers. Operationally, as we mentioned last quarter, from August of 2022 to July of 23, management took steps to eliminate $170 million of operating costs from our expense structure. In this transition year, we're making business more efficient while we continue to invest in long-term growth and innovations. Importantly, our focus on expense reduction and cash preservation does not end here as we continue to identify ways to increase productivity and efficiency. Simultaneously, we've been investing in new product development to support Butterfly's growth. In the U.S., we hired several new salespeople and managers to increase the footprint of our U.S. organization focused on enterprise deals. For international, under new sales leadership, we're working on opening several new markets while partnering with distributors to move current inventory. And in that, we're testing our current AI tools on other more lucrative animal groups, including cattle. We're confident that these investments in our team and capabilities will reap benefits going forward. Now I'll move to our strategic initiatives. As mentioned, education is a top priority, and one of the ways we're expanding our addressable markets. The butterfly paradox is that we continue to make ultrasound accessible through cost and product quality, yet ultrasound remains the most difficult to master imaging modality. This quarter, we're attacking this challenge head on by introducing two new additions to our suite of educational offerings. In September, we launched the Butterfly Certified program, which is actively being quoted by our sales force. Butterfly Certified is a series of live training opportunities with virtual and in-person options that target improving user proficiency for one or multiple exams. The customer can purchase a range of services from a virtual scan review to a full year course to be a certified trainer. By providing these solutions, we can accelerate POCUS adoption and give a clear roadmap of success to our customers. So continuing education Recently, at the American College of Emergency Physicians annual meeting known as ACEP, Butterfly previewed our new ScanLab app. The app uses AI anatomical labeling tools to demystify ultrasound to a new user and teaches learners how to place a probe on the body to get the desired image. As you can see on this slide, the user has selected an apical four-chamber view. On the left, there's a walkthrough with a reference imaging and specific instructions. Before the user scans, they see an example of what the video should look like on the right. And when they plug their butterfly probe and start scanning, live ultrasound image comes up and the anatomic labels tag each part of the anatomy. This helps to make ultrasound imaging more approachable, building users' confidence as they begin their ultrasound imaging journey. The app will also support existing users in extending their skills and drive success in medical education by helping schools further engage and empower students to embrace ultrasound learning and development. Early reception at ACEF for ScanLab was very encouraging, and we look forward to launching the app to all existing Butterfly subscribers for free. We expect ScanLab access to continue to drive adoption and software sales, to existing and new users once launched in early 2024. With our Butterfly Academy online modules, Scan Lab app, Butterfly Certified Services, today we have the most powerful and complete pathway to success for new ultrasound users. I'm proud of the team for making both of these initiatives happen so quickly and executing effectively this quarter. Last quarter, we introduced Butterfly Garden, and our plans to build a partnership ecosystem for accelerating access to new ultrasound AI. As you know, Butterfly has the largest handheld install base in the world with over 100,000 units placed and growing. AI developers want access to our customers who want access to their solutions on their Butterfly. We launched Butterfly Garden at the beginning of the quarter. Since then, we've received inquiries from over 100 prospective partners. We've already signed three universities, including Caltech, University of Maryland, and UNC. Dr. Stringer's team at UNC recently published impressive findings about the autogestational age AI tool they built on butterfly for maternal health, which you can see on the slide. And under Butterfly Garden, they're expanding that into a tool to autodetect multiple fetal conditions. We've also signed leading AI companies like ThinkSono, and others not yet announced publicly. Our business model is to charge partners an annual fee to maintain the software development kit, or SDK, as well as a revenue share on their future apps sold to Butterfly customers. So relatedly, we also announced our first Powered by Butterfly deal with Forrest Neurotech. Powered by Butterfly represents the next level of Butterfly-enabled development where partners not only have access to our SDK, but also to our novel ultrasound on chip. This allows them to develop around the core technology and bring it to non-competitive markets to butterfly. This way, butterfly investors can capitalize on those new markets and gain significant leverage as each of these companies reach their goals through commercial success. Forest Neurotech is founded by a group of brilliant engineers and entrepreneurs with track records of bringing disruptive healthcare technology to market. It is backed by Eric Schmidt, a founder of Google, and Citadel's Ken Griffin. They intend to use our chip to create a brain-computer interface, which will be a minimally invasive implant able to scan and process the brain to understand where therapies are needed. The jointly developed technology will also treat those areas. Remember, our chip is uniquely capable of moving the ultrasound beam through the body without having to move the device. We look forward to announcing another Powered by Butterfly deal in the fourth quarter. Again, I'm proud of our team for executing on these growth initiatives. Both Powered by Butterfly and Butterfly Garden offer meaningful new sources of revenue for the company. We anticipate them becoming positive contributors to our numbers in 2024 and beyond, while also enriching our platform for our users. So moving on. Many of you know Moore's Law, as seen on this slide, states that the number of transistors on a chip will double every two years, meaning the computer processing power doubles every two years. We all know how many industries were transformed using digital technology. So what I'd like to highlight is photography. which is similar to ultrasound imaging. After the digital camera was launched in 1993, most users saw it as an interesting and novel tool, but didn't really take it seriously because image quality did not rival film. In 1997, 2001, and 2003, digital camera manufacturers continued to benefit from Moore's Law and delivered two, five, and seven megabyte images And in 1995, for the first time in history, digital cameras outsold film cameras when the image quality was perceived to be equal. Once digital equals analog, analog loses. Because all the digital benefits, such as no cost to develop film, better storage, become the tiebreaker and buyer behavior shifts to those benefits. I believe it's inevitable that analog piezo-crystal based ultrasound will be a thing of the past like film camera is today. PISO crystals make good images but provide fixed lenses, are limited in their frequencies, and are heat inefficient. They also require multiple probes to achieve butterfly's whole body scanning range. That will never change. It's just physics. That goes for PISO-based chips or PMUTs as well. Crystal-based carts require sophisticated arrays and wiring These mechanisms are fragile and expensive to fix. With digital scanning instead, I believe piezo-based carts will be obsolete by the end of the decade. With that said, on my first call, I told you I felt like I was a kid in a candy store when I reviewed all that is in Butterfly's R&D pipeline. I also told you that I'd show you one of our new hardware devices before the end of the year. And now I'm going to do just that. This is IQ3, our third generation platform and fifth iteration of our processor. In addition to a marked improvement in image clarity and better ergonomic design, there will be many new one-of-a-kind capabilities that will change the way we can capture and review images. I'm not going to unveil them today. We need to keep a couple competitors who like to copy butterfly guessing But what I'll show you is IQ3's improved processing power and image quality. This next generation device has doubled the data rate transfer for better and faster ultrasound beam control and improved image quality and will fully charge in less than half the time. The improved processor is so powerful, its image quality is now equal to and arguably exceeds analog devices like GE's VSCAN. a benchmark competitor for cardiac imaging. We believe IQ3 even rivals some cart-based systems. In our opinion, we've met that turning point where image quality associated with more expensive handhelds will no longer be a barrier. And our digital capabilities will compel users to move completely to butterfly, all while being at a more competitive price point. So let's look at a couple images. We'll start with lung. Our lung scanning is already best in class. As you can see, IQ Plus here in the middle delivers excellent images. And for most ER and primary care use cases, it's an excellent option. You can see the middle image IQ Plus shows a distinct set of A lines visible as bright horizontal lines throughout the image with minimal drop off in the far field or the bottom of the image. IQ Plus A-lines are arguably even more distinct than V-scans on the left. But when you look at the right in IQ 3, the bar is clearly raised. It has sharp, defined A-lines all the way into the far field. Now, here's a four-chamber view or kind of a cardiac money shot. You can see V-scan here on the left, and IQ Plus is right next to it. Quite close in quality, though the slower frame rate of vScan gives the perception of the heart beating slower. And IQ Plus already has a wider field of view that's able to include the ventricular walls. Now take a look at IQ3. Just incredible what it looks like with even better frame rate and fewer ventricular artifacts. It's amazing how this much clarity can be delivered in a compact all-in-one probe that is still less expensive than analog counterparts. You can see here clearly that IQ3 can be used for the most challenging images. As a single probe allowing the user to effortlessly choose a different preset and scan anywhere in the body. The benefits of digital come shining through when all becomes equal. Did I mention that our next generation chip is well underway? For those carts, beware. So we've heard about the new PMUT chip being previewed by a competitor. We haven't gotten a device to test with it like we have at the others, but we have taken all the images they've put online and compared them to our images, assuming that they've put their best foot forward. Here is a PMUT, then IQ Plus, and then IQ3. Butterfly IQ Plus maintains the B-mode image quality simultaneously with color Doppler enabled, and the hemodynamic color fill is good. Then with IQ3, We have even better color sensitivity and true real-time hemodynamic flow. In our opinion, the PMUT chip image doesn't present even as well as our second generation IQ+, nevertheless IQ3. But see for yourself. So we're hopeful the IQ3 is approved for sale by the end of the first quarter of 2024, and we'll be off to the races then. We're preparing every phase of our business for this launch and are gearing for the demand. At the recent ASET meeting, we previewed IQ3 for thought leaders around the country. I personally saw their excitement when they viewed the image that they didn't think would be possible this soon on a butterfly. They also loved the new advanced digital capabilities, which I'll show you next quarter. So thank you for indulging me in this demonstration. I look forward to unpacking more about IQ3 for you soon. We believe 2024 will be the year where digital ultrasound imaging becomes equivalent to higher-end handheld probes. All this to say, why should hospitals own multiple probes with poor battery life and run times that are too hot to the touch? Very soon, they can just put them in the drawer next to their Kodak cameras. With that, I'll turn it over to Heather. Heather?