Conference Transcript - BFLY 2026-09-15

Operator

All right, perfect. Thank you everyone for joining and I'm excited to welcome the Butterfly Network team. There is a disclaimer on the Morgan Stanley website that I encourage everybody to go check out. We have a lot of questions to get through today, so I think we're going to just get started here. You know, Jill, maybe I'll start with you and giving a little bit of the strategic direction that Butterfly is headed. What's your vision for what Butterfly can become and how has that changed over the last few years, particularly as opportunities beyond the traditional point-of-care ultrasound have emerged?

Joe DeVivo, CEO

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

Operator

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

Joe DeVivo, CEO

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

Operator

you know standing start five years for someone else and they have to figure out how to get around six to seven hundred patents um you know what i think has been fascinating is you have a strong core focus franchise but then you also have this very early stage but extremely promising and potentially larger opportunity with the butterfly-embedded market. How do you think about investments across both parts of the business and how are you thinking of prioritization in particular?

Joe DeVivo, CEO

So butterfly, you know, to the credit of our founder, Dr. Rothberg, butterfly was architected with a very modern architecture up front. What do I mean by that? You know, I've been in health care for 35 years and I've run a lot of businesses in health care. And I've had devices that have software in them. And if I wanted to, and it's actually sadly true today, if I wanted to upgrade the software on my devices in hospitals, I'm sending a rep in with a USB stick. Butterfly originally was architected to be completely cloud-based. So we have 150,000 devices around the world, Probably 80,000 of them are active after all the upgrades. And we have, and I know where, or we know where every single user of the device is. We know what type of scan they're doing, and their scans come into our cloud. We have 25 million images, 25 million CINAs, which a CINA is a collection of images, probably over a billion images in our cloud. and it's growing by 40,000 cines a day. So we were architected to be cloud. We are architected to have iOS and Android applications. We have a unique device with a semiconductor. And then we have a SaaS-based middleware that connects all of what we do into pulling that data, the data into the EMR, into the DICOM, and into revenue cycle management. So all of those capabilities that Butterfly built for ourselves, as we start getting into conversations with third parties, they want to license the chip and the development software to modify the chip. But as they start getting more mature and looking at commercial, they want to have the ability to stream all their images into our cloud they want to all of a sudden now start using our middleware to capture their data so what we're doing with our architecture is we're taking the point of care ultrasound business from the center of the circle and pushing it out to the outside of the circle and saying this is a sales and marketing effort in point of care ultrasound then we're taking our cloud capability our ai android capability our data aggregation capability with health systems and our semiconductor capability and pulling it into the center of the business and we're modularizing all of those components so we then develop in a single-minded way of advancing all of that and then we provide to point of care everything it needs and then each of our partners now we have brain computer interface partners we are then they will turn around and say well we want this version of the chip and we want this sdk we want to have this you know application we want to have access to this data in your cloud. And it turns into we're this technology company that services all these different capabilities. Does that make sense?

Operator

Yeah, no, it does. And, you know, I do want to spend some time unpacking Butterfly Embedded in particular. You know, the mid-journey and merge partnerships really validate the technology and applications beyond traditional handheld ultrasound you know how do you think about those partnerships and how have they changed the way you think about the addressable market that butterfly has a right to win in um so uh both companies um mid-journey and merge are very sophisticated um and have i won't say unlimited funding but access to they're not capital constraint right And they have very big dreams.

Joe DeVivo, CEO

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

Operator

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

Joe DeVivo, CEO

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

Operator

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

Joe DeVivo, CEO

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

Operator

Okay, that makes sense. I mean, you know, the way you talked about the TAM opportunity growing so substantially, do you feel like what MidJourney and Merge partnerships are representative of the total opportunity set, or do you think we're still really early on in just discovering what is the power of this technology?

Joe DeVivo, CEO

Well, I think it's still very early. I think Merge is our fourth or fifth BCI company today, and there'll be more. And so we've learned that, you know, in communicating with the brain, you can put a wire in the brain, there's an amazing company called science who's actually growing brain neurons into the chip into the brain or you can use sound waves to communicate with the brain and there's a lot of vision there from you know dealing with chronic conditions or dealing with you know trying to restore function to ways of enhancing the brain and and ultrasound is the least invasive way to be able to understand neural activity. And we've even had partners start imaging through the skull, which people thought was not possible with ultrasound. And if you're interested, Aleph Neuro, A-L-E-P-H Neuro, have some images online that are some of the most extraordinary images of a living brain ever taken through the skull. But there are so many applications in intravascular, cardiac ablation, there in HIFU on a micro scale. There are so many different applications of the technology that we haven't fully discovered yet. And then we are actually talking quite actively to our first embedded partner that's not healthcare.

John Martin

Interesting.

Joe DeVivo, CEO

It has to do with a company that does material stress. So if, like an airplane wing, if it's under a significant amount of stress, you can see the materials start changing form prior to a crack. And so if you're pushing an envelope of something, and there are all kinds of construction and military applications where you can sense the changes in these materials. And so I think we actually today don't fully understand the full opportunity. We've done the best we can. And we've now, in the beginning of the year, have started to staff up the part of the business to be able to be much more proactive. Most of the relationships we have today were all inbound to a butterfly. Yeah.

Operator

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

John Martin

Yeah. Excuse me, I'll take that one. Joe touched on it earlier. One of the beauties of what we're doing and what we have is we've already made $300 million of investment for the core platform that we have and the 600 patents that we have. So, you know, our ability is to leverage that and we're leveraging that into our core focus business as well as leveraging that into embedded. So, you know, the strength for us going forward will be that leverage that we have from an operating perspective as well as from the investment that we've already made. And in working with our partners, we're learning as well. So it's kind of like a virtuous circle where we're taking that learning back into our business and we can use it across our existing business plus other partnerships, provided it's not an exclusive relationship like what we have with MidJourney.

Operator

Great. Okay. Well, you said MidJourney, and I did want to go a little bit deeper on that one.

Joe DeVivo, CEO

What does MidJourney's approach to whole body imaging tell you about ultrasound's role in health care and how it can evolve over the next decade? well um first of all ultrasound's safe um you don't have to worry about a piece of metal being ripped out of your body if you didn't properly communicate to the nurse you don't have to worry about radiation and how much radiation you'll have it's something that can be done very frequently you know weekly bi-weekly monthly i think mid journey's vision is this isn't you know We have a sick care system today We don't have a health care system today And what I mean by that is If you want to know what's going on in your body You can't just go get an MRI If you can, you're going to have to pay $5,000 And go through a bunch of hoops But an MRI happens when you've injured yourself It happens when a doctor thinks you're sick It happens when you might have some type of risk factor that people want to look at. And then you have to get a prior off from a payer. You have to get a prescription from a doctor. So it's highly captive, highly regulated, and high cost. And highly necessary. I mean, if I'm injured, if I'm sick, I want an MRI. So I'm not talking against an MRI. But there's a whole segment to health care, which is about, as you're younger, learning about your body. How is your body changing? How are the behaviors that you have as a human being affecting your health, your diet, your alcohol consumption, your smoking, your stress, your lack of sleep? And we all see this with Apple Health, with Aura, with Whoop. There's this desire to understand how we are progressing through life. And I think mid-journey takes it to the next level, where mid-journey is going to democratize imaging. They're going to make it really low cost to be able to get a scan. And it's going to be a part of your life. You're going to be able to know how is my visceral fat, how I've been working out at the gym on arms, are my arms getting bigger? And these things might seem pejorative, but, you know, it's knowing about your body and knowing that behaviors that you are taking are changing your body is going to allow. That's the only way our health care system is ever going to succeed on the back end because poor Medicaid has to take on, Medicare has to take on 65 years of bad decisions every year instead of finding a way. There's no constituent in health care that cares about your health. Your employer has you three to five years. They want you to have the best health possible, but they're not there for your entire life. Your payer, how many payers have you had? How many different jobs have you had? And so, you know, the health systems just want to be able to, you know, manage you. And if you're lucky enough to live in Rochester, Minnesota for your entire life, you can be embraced by the Mayo health care system and you'll have the best care ever. But the moment you move, you know, you're starting that clock again. So I think what MidJourney is teaching us, first of all, is ultrasound safe. Ultrasound can be an everyday part of your life. And ultrasound is inexpensive. What they're also teaching us is that this is a text-to-image company. This is, let me take a little bit of data and let me extrapolate it into something very meaningful. And I think what they do with this data is going to be, I predict it, will be extraordinary. It'll be helpful, it'll be illustrative, and it'll change the way we think of imaging. I know if you were on X for five days after Majority's announcement, this was a top five trending topic for five days in global communications to actually talk about this because there was a huge debate between technologists and the medical community. The medical community thought and thinks this is a bad idea because you're going to, you know, you're going to run into your doctor with every scan and you're going to take up their time with a bunch of unnecessary stuff. I think it's going to be the exact opposite. I think it's going to inform patients. I think more data, thinking that people are dumb is not a good platform to stand on. Being more educated, being more aware, having more data, and then having intelligence that can extrapolate data to help you make the best decisions, I think, is the future of health care. And I'm just in awe of MidJourney's boldness and their vision. And, you know, they pretty quickly networked 40 of our devices into a single image. And, you know, a normal MRI is about 40 teraflops of data, if I have that correct, you know, one mid-journey scan will be 400 teraflops of data for every one of these low-cost and expensive scans. So I think it's one of the steps that are going to make a massive impact on humanity.

Operator

Yeah. And, I mean, for you all, beyond the economics, I have to imagine the strategic value of the partnership in demonstrating in particular what ultrasound on a chip can enable was probably one of the, you know, most interesting things as you've seen the excitement around the announcement and also your relationship evolve over time.

Joe DeVivo, CEO

You know, so John and I have been working really hard to communicate to investors what we think are going to happen in the future. We, you know, do the best we can to indicate what's to come. And we do that, you know, very mindfully on a quarterly basis and at times like this. but we do it in a manner that when we say we're going to do something we're going to deliver on and if you go back in time you'll see over the last several years we've delivered everything that we've told you that we're going to deliver and seeing Mid Journey come out in the type of way they pronounced the announcement many of the people who've been following Butterfly have come back to us and said, oh, I did it. Now I understand. And we try to do as much as we can with direction and breadcrumbs. But, yeah, I think when that came out, it opened the minds of investors like this is real, holy cow. But it also opened minds of many other technologists in all different walks of life. You know, Merge is a Sam Holtman company. Neuralink is a $9 billion startup from Elon Musk to do brain-computer interface. Sam Altman is now starting his own Neuralink, and he chose Butterfly. So, I mean, we're dealing with some very, very smart people. And I think David Holtz at MidJourney is a complete genius. And for us to even be in a zip code of this brain power, it means we belong first of all but we're going to learn and grow and there's a lot of other things that are going to follow.

Operator

Yeah and you touched on merge a bit I do want to go into some more details around that because it takes butterfly into a completely different frontier with BCI you know what do you think about the opportunity itself and what does it do in terms of validating the fundamental capabilities and potential of the butterfly platform?

Joe DeVivo, CEO

I think their selection of us is enough. I don't, what I can't really do is go into what they intend to do other than what they've stated publicly. It's very, very sensitive stuff. But, you know, as I said in the beginning, very heavily negotiated. And if they didn't need us, we wouldn't be there. And so it's a validation of what we've accomplished and it's a validation that they believe where they want to go will be a lot faster if it's if it's with us and we are so honored there's seven founders in the business each genius you know the next to the next genius and it's been an it's just been extraordinary for us to again rub elbows with a lot of these you know future future leaders and and to be considered a core part of this technology that the concept of you know that there's there's gonna be and we just held a BCI conference in the Bay Area a couple weeks ago and when I learned you know a lot of what people think about in brain computer interface has to do with restoration of function especially from an accident or chronic disease you lose function of your arms so now you can direct the robot to feed you and or whatever you can move a cursor on a screen um and i think that's where a lot of the initial bci attention was i think a lot of the future attention is going to be you know how do i how do i improve my function as a healthy person and there's going to be a lot of cool things and a lot of ideas as to living more productive lives and and whatnot and when you look at you know the consumer tam of some of these ideas it's it's kind of hard to calculate um it's it's so big so it's a major validation of our platform uh it's a it's a major validation of our ip and um i it being now the fourth bci company and there's others we're still talking to that'll be a major category for butterfly in the future but i just think that's one category of a universe of other possibilities.

Operator

Yeah. And I have to imagine, you know, being in a partnership with Merge also creates technology advantages for you all. Meaning, is there lessons learned around imaging, sensing, software, or AI that's also helping you continue to evolve the technology?

Joe DeVivo, CEO

Yeah. Yes. And that's why we've taken the core technology into the center of the business. And we've put the best minds in the center of the business. And whatever point of care ultrasound needs we give it but some of our partners are asking us to do things on the edges of what we do today and they're pushing us in this realm whether it's in longevity and battery life or frequency or voltage they want to do all these different things and it's testing us and it's pushing our boundaries into places and at times as we've thought through something new a new partner comes in with a very similar requirement and now that other partner helped us kind of you know push ourselves to a place so yeah i think and the beautiful part is is the way we structure our partnerships is you know if there is you know unique technology that's developed in a certain area in a certain field for that partner that partner owns it but for the outside that field of the area comes back to our core so our our brain is just getting smarter and smarter based upon being tested by all these extraordinary use cases and and so far all of the core tech that we're developing is fungible so we're not developing a unique chip for a partner it's all how do we make the next technology better and then it benefits everybody there may be a day where someone says, we'll pay you this to go here and we want it just for ourselves and that'll have to be an extraordinary, an enormous deal, but we're fully willing and capable of doing it. But today so far, everything has been leverageable and fungible.

Operator

Okay, wonderful. I'm going to switch topics again to go to P&L and John maybe has spent a little bit of time around.

John Martin

All the fun stuff.

Operator

Exactly. I mean, a 20% growth trajectory is very impressive. I think investors are always keen to understand, you know, what is durable recurring revenue from partnership versus transaction-driven revenue?

John Martin

Yeah, as I mentioned, the beauty of the partnerships are, you know, these are longer-term partnerships. So they are enduring and recurring. I mean, what we did with MidJourney is a five-year agreement, $74 million, and that's really the floor of what we expect to get from that agreement, both in terms of years. We do expect that that's going to be extended, as well as in terms of what we can get from development, from chip sales, from revenue share as well. On the other side of the business, on the core business, you're really looking at our pipeline. As Joe mentioned, we're moving upmarket. We're still selling across our e-com platform, but we're also moving upmarket with our Compass AI software. And so from that perspective, you pay really close attention to the pipeline and how that's accelerating, as well as how we're landing and expanding. So revenue per customer is pretty key in how that's growing as well.

Operator

Okay, wonderful. I guess maybe to wrap, you know, what do you want investors to understand about the model today and how do you want that to evolve over the next few years? If you could just give us a couple of KPIs, that would be good.

John Martin

Yeah, we touched on it briefly, but it's really the operating leverage that we have and the portfolio of opportunities that we have. I mean, on the core side of our business, we're not just a one-trick pony. In terms of probe sales, as I mentioned, we have Compass. We have the launch of our home business in October. We're coming up with two new products, out with two new products next year. Early in the year, we'll have our next-gen probe, and later in the year, we'll have the station. And similarly, on the embedded side, we're not a one-trick pony. Yes, the mid-journey deal, I think, certainly put us on the map. People may not remember. We can call it our Sally Field moment where we're somebody now. Somebody remembered. So there, in addition, with the merge partnership, there'll be more partnerships to come looking at that pipeline and how that's developing as well. So tremendous operating leverage, and we have significant portfolio opportunities that are coming off of a core platform of investment.

Operator

Wonderful. Well, we're out of time. Unfortunately, I could spend all afternoon digging into your brains around the opportunity set here. But Joe, John, thank you so much for taking the time to speak with us and giving us that detail.

Joe DeVivo, CEO

Thank you. Thank you. Appreciate being here.