Butterfly Network, Inc. Q2 FY2023 Earnings Call

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. I would 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 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?

Thank you, Heather. So I'm pleased to review our results for the second quarter of 2023 and share perspective 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 for multiple parts of the body, delivering the cloud, streamlining enterprise imaging while documenting in EMRs, billing, and 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 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 have had three CEOs over the past five years, hired in Lecco 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 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, and 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 focused and, in my opinion, more impactful plan. We ensured our new strategy is matched with the right cost structure to deliver on it. 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 a 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, two other cost-cutting efforts over the past twelve 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 they're 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 products, software, mobile app subscriptions, and other services such as implementation and education. At the end of the day, the mechanism for sale is less important than what and to whom we are 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 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. That's the result of a lot of enterprise software deals closing each quarter over the past year. We've sold it in health systems who both use and don't use Butterfly probes. Each relationship is an upsell opportunity. 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 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. 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, 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 breach presentation, low fluid, or fetal distress; 95% are using Butterfly to decide on a treatment plan for their patients, and 81% used it 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. We launched our Autoline counter last quarter for Human Care, and our vet business saw an opportunity to use it in production cattle. There are one million cattle producers in the U.S. alone. That's pretty much just about as many U.S. physicians there are. They often 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 and money in cattle, our auto D-line tool can now help with that. 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 Robin counter for 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 focused 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 handhelds. Our IQ3 software platform also has 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 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 IQs now so they can get in and get going with ultrasound, and we'll make it easy and cost-effective for them to transition to 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 of bringing 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. 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 their tools. 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 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 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 foundations, 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 to 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 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, Butterfly Academy has a compendium of virtual training courses; training is so important in point-of-care ultrasound because ultrasound is hard to learn, and 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 reviews 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 a 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?

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 the 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 the 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 two large sales that occurred in the 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 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 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, consulting, 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 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, 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 probe at some point in 2024. We believe this is contributing to a sort of holding 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, are leading to this estimated decline. That being said, over the past year, we have taken $170 million of annualized expenses out of the business. 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 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?

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 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-chip 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 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 that helps patients everywhere receive care at the point of care. And I'll close by reminding you that focus is here to stay. Two-thirds 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 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 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.

Thank you. Our first question today comes from Suraj Kalia from Oppenheimer & Co.

Heather, can you hear me all right?

Yes.

Perfect. Joe, it's great to hear your clear plan of action, especially with everything happening. A few comments stood out to me, and I would appreciate some further insights. First, you mentioned in your prepared remarks the perceived image gap that you aim to close by Q3. Can you help us understand how we should objectively measure the closure of this gap? Additionally, regarding IQ3, how do you view the competitive landscape in terms of market share and initial uptake? Any further details would be appreciated.

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. Certain levels of imaging and clarity and presentation can be very subjective. I actually was asking myself that same question. When you think about a digital camera, if I told you something was one megapixel, I told you something was three megapixels or seven-megapixels, ten, 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. Initially, you 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 the ability to bring on a 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. The same thing is happening in ultrasound. We will be talking specifically in the next launch around those things that drive image quality. One of the things that drives image quality is processor speed. 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. Also, the frequency and the ability to tune the frequency as well. There will 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. Our team is excited with what they see. From a subjective evaluation of side-by-side imaging, TV IQ3 is a step function in greater clarity to IQs, which is an incredibly acceptable technology with 100,000 units out in the marketplace and growing. But as you evolve and want to get into more use cases and more specificity, that processing power can help deliver it. So this is 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 compile the image in a manner that's clearer and more pleasing to the eye. Does that help?

Got it. Yes, that makes sense. Joe, Heather, I'll share my other two questions and then return to the queue. Joe, your comments about embedding ultrasound on a chip in implantables really caught my attention. I can think of several examples where this could be beneficial, but I'm eager to understand more; you didn’t mention that casually. You must have given it considerable thought. Could you discuss any initial applications? And Heather, regarding the 50% increase in investments for commercial activities, could you provide some baseline details? Specifically in the U.S., how many representatives are involved, what is their productivity, and how is territory coverage structured? Any guidance on these points would be greatly appreciated.

When I consider our chip technology, we are the first company globally to develop a semiconductor wafer using MEMS technology for ultrasound applications. Butterfly investors have significantly funded this development, which boasts the most advanced supply chain and top-tier chip manufacturer in the industry. The technology is specifically designed to translate sound for imaging within the body for medical purposes. There is a strong demand for this imaging capability across the healthcare sector, including in endoscopic surgery and implantable devices. In areas where we lack distribution channels, we are open to partnering with organizations that can utilize this technology for their advantage, which will also benefit Butterfly investors. We have identified specific markets we intend to enter and have engaged in discussions with potential partners that are non-competitive but would gain from the technology, as the chip is compact and can be embedded, roughly the size of a finger. As we explore the potential from the investments made by our investors, our goal is to expand its applications because it represents an extraordinary innovation by our founder, Dr. Roberge. We believe this technology should have a broader impact on society beyond our current marketing efforts. I will now pass it over to Heather, who can address the second part of the question regarding the specifics of our territory strategy.

Suraj, the way I would think about it is that in our expenses within R&D, but within sales and marketing, we've reallocated them. Some indirect spending within sales and marketing that we're now reallocating to direct salespeople. The sales and marketing number may go down a little bit, but it will be restored as we add additional sales reps to that. Obviously, we believe that this will help accelerate our top line revenue number.

Yes. Suraj, if you look at from August of last year to this year, Butterfly management has taken out $170 million of cost of run rate costs. When you do that, it's sometimes not perfect. I believe at the beginning of '23, there were some sales and marketing costs that were taken out that impacted our momentum. It's indisputable. We've needed to recover that spend and then also come up with a very focused strategy. Ultrasound is complex in that it can be used everywhere. I can go through every clinical specialty; MSK, women's health, cardiac, pulmonary, any type of liver or gall bladder. You can't fund the study in every organ. You can't say you do everything because when you do everything, you do nothing, even though you can. We focused on investments where we know we can win or we know we're better than the competition in use cases. We're going to drive a truck to it. Obviously, all the other applications will get pulled along with it. I mentioned on my last call how excited I was to join the team because when I see everything that R&D has worked on, and I see all the things that they've created, there's so much now to bring to market. The focus was necessary.

Thank you.

The next question comes from Neil Chatterji from B. Riley.

Maybe just on the new guidance. Could you just maybe elaborate on kind of the large initial international deals and kind of other one-time orders from '22 and how pursuing those types of deals might be different in the back half and beyond? And then secondly, could you just maybe talk about the dynamic of next year versus ways to maybe incentivize and 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. When you look at last year, we had a pretty big push into international markets through distributors, and they occurred throughout 2022. They had their initial stocking orders, and what we're seeing is that they're continuing to sell through those initial stocking orders. We haven't had those same large initial orders repeated in 2023. 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.

What we wanted to do is provide guidance on our current business run rate. We appreciate large deals and want to close them, but we didn't want to set expectations that we couldn't control regarding timing. We're working on several initiatives, including a significant global health win that will be another large deal. We value those opportunities, but their unpredictability makes it difficult to forecast. We aimed to show you where we might land if everything continues as is and we don’t finalize the NextAR deal. As I become more comfortable with the business and build a track record—I’ve only been here 100 days—I haven't had sufficient time to fully grasp the sales cycle length and accurately assess the metrics to predict the future. I hope this is clarifying, and I'm happy to elaborate if I didn't quite address your question.

Sure. I mean maybe just on that kind of the second part of that question, just in terms of the launch next year. If customers are waiting, I think you also kind of in the prepared remarks, also talked about ways to make that you have great easy and still be able to purchase IQ Plus now. So just maybe just elaborate on that.

Yes, sure. Our fourth-quarter sales are usually pretty robust. However, as we get closer to Q3, there is a risk that people may hold off. We're planning for that. However, we are also communicating to our team that there will be a clear upgrade path. 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 very simple for users to upgrade. 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. We just want to address it head-on and not react but actually plan, and I think that's what we're doing.

Great. I appreciate that color. That's it for me.

Thank you, Joe and Heather. The next question comes from Josh Jennings from TD Cowen.

I wanted to start by discussing the Butterfly Q3 to clarify the status of that development program. From this call, it seems that you have achieved the imaging quality improvement, but are there still development steps remaining? Are there any regulatory hurdles that need to be addressed? The reason I'm asking is related to the automotive effect you mentioned for the second half of '23 and the upcoming launch in Q3 and Q4. Could this impact extend into '24 as we consider updating our models and future estimates, or is this an early 2024 launch?

The loss date will be determined by regulatory clearance. Everything is done.

So is that submission on time?

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 Q3 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 before regulatory approval. Instead, we collaborate with thought leaders under non-disclosure agreements. We have demonstration IQ3 probes that we can use with Institutional Review Board protocols following appropriate FDA guidance. This allows us to remain compliant with FDA regulations. We are actively engaging with thought leaders and working with our strong internal clinical team. We will ensure that before launch, these thought leaders assist us in understanding the messaging and capabilities of the product.

Excellent. No, that's great to hear. One of the reasons I asked. I believe from our consultants' feedback on the IQ 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.

We believe that the improvement in imaging comes from our doubled processor speed and increased frequency, along with enhancements in all the metrics that affect a semiconductor chip. This progress is ongoing, as we already have next-generation technology beyond the RP 4.3 chip in development. The IQ3 is designed to allow us to enhance the software and introduce new capabilities dynamically to the current product. We're committed to moving forward and taking advantage of Moore's Law. We're testing the limits of our technology while continuing with the development of next-generation chip technology that can be integrated into this hardware platform. We are planning to announce exciting advancements in early to mid-2024. Our goal is to continuously improve our chip and software, allowing us to enhance imaging power and capabilities, marking a significant journey in imaging from one megapixel to higher resolutions like three, five, seven, and even twenty megapixels. We aim to surpass traditional film standards, particularly in handheld markets, reflecting our confidence in the future of our imaging technology.

That's outstanding. How should we consider the potential impact of the Q3 launch next year on the replacement cycle? Thinking about adopters from '19, '20, '21, and '22, it seems likely that this will enhance or accelerate the replacement cycle. Do you have any high-level insights for '24 and '25 regarding the contribution of the replacement cycle to revenue growth?

I honestly can't provide a specific answer since we haven't modeled it out. When new technology emerges with enhanced capabilities, I believe our current IQ Plus users are satisfied with their experience. Those who haven't adopted it for various reasons may be more inclined to do so, especially if there are upgrades due to the appeal of new features. The existing users are certainly receiving value, but the improved capabilities will definitely address the needs of markets we haven't engaged with yet. As I mentioned earlier, as hospitals consider standardization and potentially move away from bundled agreements that tie them to larger companies, we can offer a standardized solution because we see the importance of having all use cases covered. This is our perspective.

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

Joe, you briefly mentioned this in response to Josh's question, but could you share more details about the go-to-market strategy for Q3? Will you focus on your existing customer base first, or are you planning to pursue new accounts? Additionally, have you finalized the pricing aspects? That's all from me.

Thank you for the question. We're going to go out to everybody; we're going to go into hospitals. We're not going to keep this in our back pocket and just show it to one or two people. It will be in our e-commerce channel. It will be through our U.S. channel. Following U.S. clearance, we'll be filing for our international clearances in sequence. We intend this to be not a specialized product, but a broad-based product. We have a bunch of thoughts on pricing but don’t want to peg it at a particular price. It will certainly be higher. This also plays into a segmentation strategy because we'll have two probes on the market: a lower-priced probe and a higher-priced growth.

Thank you so much.

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