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

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 for my first 100 days on the job. I've done a complete review of the business over the quarter and now have a pretty good feel of where we are. Puttifier Network is a great technology platform. We're leading point of care ultrasound with simply the best solution in the market. Our ultrasound on chip technology allows us to tune a single probe for multiple parts of the body, delivering the cloud, streamline enterprise imaging while documenting an EMRs, billing, managing proficiency for physicians, all at our competitive price point. It has put us in a league of our own. Now, we'll continue evolving how PointCere ultrasound is used -- we will now be pushing the boundaries of our technology to reach new care settings, making it easier to use and empowering more caregivers to understand ultrasound. I look forward to revealing our complete road map when the time is right. The Butterfly team also quite honestly, has been through a lot. They've had 3 CEOs over the past 5 years, hired in Lecco hundreds of people, shifting strategies multiple times and try to do too many things at once in my opinion. After my first 100 days, I've grown very fond of the people in this company, and I'm really excited about what the technology can deliver. I believe getting back to basics with smaller teams focusing on our strengths and leveraging only what we can do to add value in health care will bring the bounce back in our step and return the company to organic growth. Stakeholders need a healthy and successful butterfly. Investors deserve better performance employees deserve stability in a place to grow and achieve and…

Thank you, Joe. Revenue for the second quarter of 2023 was $18.5 million, down slightly compared to the prior year revenue of $19.2 million. As Joe mentioned, we will start talking about sales in terms of the U.S. international net. Underlying all of these are both products and software, which are sold directly as well as through distributors and e-commerce. Starting with the U.S., we realized $14.4 million in total sales, up 21% from prior year, driven by higher subscription revenue, higher average selling prices, and partially offset by lower perm sales. Total international declined 44% to $3.3 million. In international, we are still working down initial stocking orders with distributors that occurred in prior year as we entered new markets. We also had the initial deployment of the Gates grant in Africa in the prior year quarter. But in other revenue declined by $500,000 due to 2 large sales in that occurred in prior year. Breaking our revenue down between products and software, product revenue was $12.3 million, a decrease of 9% versus Q2 2022. This decrease was driven by lower volumes spread across all segments, except for the U.S., where we had 2 large medical school deployments. Software and services revenue was $6.2 million in the second quarter, growing by 7% over the prior year period. Software and services mix was 34% of revenue and increased by approximately 3.5 percentage points versus Q2 '22. This increase was due to a higher installed base of products with the accompanying subscription software, renewals on the existing base of software users and software implementations completed during the quarter. As Joe mentioned, we will start talking about our annual recurring revenue, which is reported as part of software and other services. Total ARR grew by 23%. This was led by an impressive…

Thank you, Heather. We feel it's important to create a revenue baseline for the business without all the noise of large initial deals then manage the expenses accordingly for sustainable top line growth. As I mentioned earlier, we've learned the business out while maintaining a robust R&D pipeline and increased sales and marketing focus and investment. We're mindful of our hardware sales in the face of a new platform launch, and we're being cautious. Some cuts in the business through the year have hurt our top line momentum, and I commit to you, we'll get it back. Butterfly has many levers for growth. Over the next several quarters, we will continue announcing initiatives that take advantage of Butterfly's unique capabilities and our desire to build new markets that only we can serve. You'll hear more about Q3, AI applications and other capabilities that are novel. I'm intent on completely leveraging the technology investments that we have made and flexing the muscles of what ultrasound on ship can bring. Frankly, peso crystal-based imaging will become increasingly irrelevant in handheld ultrasound in the future, or at a minimum, relegated to niche use cases. The physics of energy, imaging and heat have been maximized in these analog handhelds. Over the past several years, Butterfly has built the largest installed base in the world for handheld point-of-care ultrasound, selling more than any of the biggest companies. But ultrasound on the chip is still in its infancy. Moore's law is on our side, and that will be evident when you see what our next pro can do. Butterfly started by disrupting handheld Ultrasound. It introduced unprecedented capabilities to clinicians throughout the world. We made handheld ultrasound affordable, easy to use and that helps patients everywhere receive care at the point of care. And I'll close by reminding you that Focus is here to stay. 2/3 of medical schools and growing have focused on their curriculum. 42% of first year residency positions across all specialties in the United States have a requirement to learn focus. Meeting these program requirements is logistically impossible without handheld ultrasound and the software and services to get faculty up to speed. Our education offering is not only timely for the next generation of doctors, but critical for the older generation that must keep up with new standards of care that result from this change in training. Butterfly is proving time and again that we have the product, software and services to not only make the transformation feasible, but practical at an accelerated rate of adoption. As I mentioned earlier, the next 3 quarters will be quite busy as we launch many new products and initiatives. We are reorganizing our sales and marketing strategy, shifting more of our spend towards commercial efforts and will return to double-digit organic growth into 2024. It's a very exciting time for the company. So, thank you so much for the time today. And operator, please open it up for questions.

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

Heather, can you hear me all right?

Yes.

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

Well, it's a great question, and I appreciate it. It's funny because what you see is something that is of an individual preference. And so certain levels of imaging and clarity and presentation can be very subjective. And I actually was asking myself that same question. When you think about a digital camera, you think about -- if I told you something was 1 megapixel I told you something was 3 megapixel or 7-megapixe 10, you would know that you don't have to see the image initially to know that it's going to be greater clarity because simply you have greater pixel concentration. And that is kind of the trend that you saw in digital cameras you initially had the 1 megapixel image and always people thought that the film image was so much clearer. But then as, again, Moore's Law perpetuated, you saw that ability to bring on greater level of prices, the ability to pack in the image and create that type of clarity, things would become more empirically evident to translate into what would be a perceived benefit. Same thing is happening in ultrasound. And we will be talking specifically in the next launch around those things that drive image quality. And one of the things that drives image quality is processor speed. And the faster you can process the image, the faster that you can get in and bounce sound off for the architecture, the better that image will be. And then also the frequency and the ability to tune the frequency as well. So there are going to be numeric ways that over time, people are going to see that these computational capabilities translate into imaging performance. But that said, we have looked at our IQ3 image. We have every other competitive device. We have experts, we have clinicians on our staff, and we have experts on consultation. And our team is excited with what they see. We've -- so from a subjective evaluation of side-by-side imaging, the IQs the IQ3 is a step function in greater clarity to IQs, which is, obviously, with 100,000 units out in the marketplace and growing is an incredibly acceptable technology. But as you evolve and you want to get into more use cases and more specificity, that processing power can help deliver it. And so this is -- it's a very linear or exponential thing in Moore's Law, where as your compute power increases and improves, it has the ability to transfer the sound and to compile the image in a manner that's clearer and more pleasing to the eye. Does that help?

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

As far as -- when I look at our chip technology, again, we are the first company in the world to create a semiconductor wafer with a MEMS technology to deliver SEP. There's -- 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 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 -- in areas where we don't have distribution channels, 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. And we've allowed ourselves to talk -- we've allowed ourselves to talk with partners who we believe in a marketing perspective are non-competitive, but will benefit because the chip is very small and the chip can be embedded, it's the size of a finger that if they wish to image and see and do things for different applications, I'm coming into this company looking at the investment that investors have made and now 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. Roberge. 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 a number of territories, but Heather can maybe answer the second part of the question.

Suraj, the way I would think about it is that in is 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. The sales and marketing number may go down a little bit, but it will be restored as we add additional sales reps to that. And obviously, we believe that, that 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 cost. And when you do that, it's sometimes not perfect. And 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. Ultrasound is complex in that it can be used there everywhere. I can go through every clinical specialty, MSK, women's health, cardiac, pulmonary, any type of liver or gall bladder. And 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. And so we focused on investments where we know we can win or 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 in being in robotic surgery, early late '90s there was one focus on robotic surgery, and that was on urology. Could the robot be used everywhere? Yes. But it was until there was a 5-year prospective randomized trial in prostate that showed that all of a sudden tip the scales and then everything went. If that wasn't done at that time, they didn't focus on that one use case, then that adoption wouldn't have occurred. And so there's -- 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. It's just 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 just elaborate on kind of the large initial international deals and kind of other onetime 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. So when you look at last year, we had 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 rig, I'm not quite sure I understood your question about the end of '23.

Well, I can -- I think I can take that second part. So -- 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 NextAR [ph] deal. And then truthfully, as we -- and 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 have - I haven't had enough time to see the length of our sales cycle and to understand how to trust the 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 bundled enterprise strategy, but it's not mature it's not enough time for me to be able 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 launch next year and if customers are waiting, I think you also kind of in the prepared remarks, also kind of 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. So usually, our fourth quarter sales are pretty robust. And so -- but as we get closer to Q3, there is risk that people may hold off. And so we're planning for that. But we're also communicating to our team that there'll be a clear upgrade path. So 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. So -- 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 in terms of commercial strategy and execution, kind of curious what that means for a few things. So one, on the e-commerce strategy, the enterprise software strategy? And then lastly, I don't think we touched on it much today, but just kind of the Butterfly IQ [ph] in the home or self-scanning -- or how does Q3 maybe change that? Or is there -- are there other things in the pipeline?

There's a lot of things in the pipeline. I'm a big fan of our e-commerce strategy. It's been able to help us build the brand very quickly. You know who we're competing against. And so there's no misunderstanding in the marketplace who these companies are. And so e-com has allowed Butterfly to go big and go fast and 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 offer is going to make the overall effect of e-commerce more potent. You can only sell the same things for so long over 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 office is a winner. The team did a great job in the pivot and the product is excellent. And we we're selling each account $100,000, $200,000 in account. So 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 accounts. And then as they're having successful to software, they're adding more and more apartments 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 -- it's a very good upward sloping straight chart because we're booking revenue in period, not at one time. So our enterprise sales as our software gets more and more adopted, 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…

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

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

I wanted to just start off on the Butterfly Q3, just to make sure we're clear on where that development program stands. Now I didn't -- it seemed to catch 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 would the development steps left? And then are there any regulatory hurdles that need to be cleared? And I guess the reason I'm asking is just with this automotive effect that you guys are calling out for the second half of '23 and then the launch of Q3 and Q4. Just saying could that add more effect last into '24 as we think about updating our models and our out-year estimates? Or is this -- is this an early 2024 launch?

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

So is that submission on the time?

It's -- 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 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, those thought leaders are helping us understand the message and the capabilities of the product; so yes.

Excellent. No, that's great to hear. And one of the reason I asked. I think 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.

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 and in a level that is consistent with image. And that's not stopping. We have the next-generation technology beyond RP 4.3 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 surf forward 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 at least until we come up with -- we do have a next generation or 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 a journey. It's -- we're going to go from 1 meg to 3 mg to 5 mg to 7 mg to 20 meg imaging, and we're going to lap film, and we're going to do the -- in handheld to peso crystals what happens to the film industry; so that's what we believe.

That's outstanding. And then, just how should we be thinking about the potential by Q3 launch next year to kind of enhance or pull forward the replacement cycle? Just thinking about adopters in '19, '20, '21, even '22 and then their drive to -- 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 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 whatever specific additional reason they have are going to be, in my view, more enticed or associated now to be able to get into -- so I'm hoping -- 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, as hospitals start looking at standardization, if they can get out of the bundled agreements that the big companies put the golden handcuffs on them, we have the ability to standardize because we need all the use cases, we believe now. And so that's our thought, and that's our point of view; no problem.

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

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 Q3? Is this something you'll go to your existing customer base with first? Is it something that you're going to try 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.

Thank you for the question. We're going to go out to everybody, and we're going to go into hospitals. So we're going to go everywhere. There's -- we're not going to keep this in our back pocket and just show it to 1 or 2 people. It will be in our e-comm channel. It will be through our U.S. channel. And then following U.S. clearance, we'll be filing for our international clearances and sequence. So no, we're intent on this being 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 Christine?

Just on I know you guys just on price, if this is something yes.

Yes, we haven't finalized -- we have a little bit of time. We have a bunch of thoughts on pricing, but we don't -- 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 will certainly be higher. And that also plays into a segmentation strategy because we'll have now 2 probes on the market, and we'll have a lower priced proband a higher price growth.

Thank you so much.

Thank you. This concludes our Q&A session. So I'll hand back over to Jay 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 they're awesome people and my -- 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 -- 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 lines.