BFLY - Butterfly Network: Same Old Slow Growth

Summary

• Butterfly Network is disrupting the ultrasound market with a low-cost handheld scanner.
• Despite promising technology, adoption of the devices has been lackluster, causing a large quarterly cash burn.
• Recent departure of CEO suggests major shareholders are looking for a change. Could the company be sold?
• At this point, I think a sale is unlikely until the business model is de-risked and adoption picks up.

I have been quite critical about the slow adoption of Butterfly Network Inc.'s (BFLY) handheld ultrasound devices, with a cautious initiation article and a follow-up article in November.

Although BFLY has a noble mission to democratize ultrasound scanning and is backed by major investors like Bill Gates and Cathie Wood, it may be wishful thinking to expect frontline health care workers to pick up a novelty scanner and be able to accurately use it within a short period of time when ultrasound sonographers must train 3 to 4 years in specialized programs to gain the skill.

Furthermore, health care practitioners are generally risk averse when it comes to medical technology since it can mean the difference between life and death for their patients. So it is not surprising adoption of BFLY's technology has been excruciatingly slow.

BFLY's recent fourth quarter results continued to show sub-par growth. Revenue was flat YoY and devices revenue actually declined, but EPS was better than expected due to cost cuts.

With the departure of the CEO, a change in direction may be brewing at BFLY. However, until the adoption rate picks up, I believe it would be difficult for BFLY to appeal to any suitors.

Q4 Was A Mixed Bag

On February 28th, BFLY reported a mixed set of financial results , with revenues of $19 million (flat YoY) and EPS of -$0.17 vs. -$0.08 in Q4/2021. Analysts were expecting a -$0.24 loss, so BFLY surprised positively on earnings (Figure 1).

Growth Stagnating

However, low growth remains the problem for BFLY. As I wrote in my last article:

Importantly, the company reduced its full year guidance to $73 - 76 million in revenues, down from $83 - 88 million it previously expected in August. With 3/4 of the year already completed, this implies Q4 revenues of $18.6 - 21.6 million vs. $19.0 million in Q4/2021. At the low end of the range, this would actually be negative YoY growth.

BFLY's Q4/2022 revenues of $19.0 million was barely above the low-end of management's guidance from last quarter, with product revenues actually suffering a 12% decline YoY to $12.7 million.

Subdued 2023 Forecast

Looking forward to 2023, BFLY is expecting full year revenue growth "in the high teens to low 20 percent range" with H2/23 expected to be stronger than H1. For Q1/23, BFLY expects flat to slightly positive revenue growth compared to Q1/2022.

However, due to cost cuts, the company expects an improvement in adj. EBITDA from a $140 million loss in 2022 to a loss of $85 - 95 million in 2023.

Reduced Cash Burn Expected In 2023

The smaller YoY EBITDA loss would be welcome for shareholders, as BFLY's loss leading business model burned through $169 million in operating cash flows in 2022 (Figure 2)

Looking forward, BFLY currently has $238 million in cash and marketable securities, which decreased $30 million from Q3/2022. Using the Q4 burn-rate, BFLY has enough financial resources to sustain operations for another 7-8 quarters.

Yet Another Management Change

Following last quarter's departure of BFLY's Chief Commercial Officer, on December 6th, 2022, investors got news that CEO Todd Fruchterman and BFLY have mutually agreed to go their separate ways. This was a shocking development as Mr. Fruchterman was a professional manager hired prior to the SPAC transaction to run BFLY's business.

However, given the failure of the business to gain traction, perhaps it should not come as a surprise that major shareholders, including founder Jonathan Rothberg who owns 76% of the voting shares, have decided it was time for a change of management.

Mr. Rothberg will serve as the company's interim CEO while BFLY searches for a new permanent leader. Mr. Rothberg is a serial entrepreneur who has founded many companies including as CEO of CuraGen, a genomics company that reached a multi-billion dollar public market cap at one point, so acting as interim CEO for BFLY should not be a problem for Mr. Rothberg.

Valuation Getting Interesting, Will Founder Sell The Company?

In fact, could the departure of the CEO be a sign that Mr. Rothberg and other major shareholders are looking to sell the company? At this point, BFLY's valuation is actually starting to look interesting, with enterprise value of just $255 million (Figure 4).

This figure is a drop in the bucket against the company's total addressable market ("TAM"), which BFLY estimates to be as large as $100 billion if handheld ultrasound replaces stethoscopes (Figure 5).

It is not hard to imagine one of the large existing players in the ultrasound space, namely GE Healthcare, Canon, or Philips, making a run at BFLY if the market for handheld ultrasound scanners begins to take off.

However, before BFLY can be sold, I believe the company will have to further de-risk its business model and prove that its ultrasound scanners are not just a novelty toy but are actually used by front-line health care professionals on a day-to-day basis. That is why it is vitally important that current trials in progress with major partners/customers like the University of Rochester Medical Center is important, not just for revenues, but for any indication that BFLY's scanners are actually useful to frontline health care workers.

The key question is whether BFLY has the financial resources to wait for adoption to ramp up?

Conclusion

BFLY's fourth quarter results were more of the same slow growth that we have highlighted in our last few articles. Revenue was flat YoY, although cost controls allowed the company to report a lower loss. With the departure of the CEO, BFLY may now be looking at a potential sale to salvage value for beleaguered shareholders. However, until the adoption rate picks up, I don't think there will be any serious suitors for BFLY.

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