BFLY - Butterfly Network: Will Pivot To AI Be Enough To Restart Growth?
2023-08-28 12:55:48 ET
Summary
- Butterfly Network's mission to democratize ultrasound imaging with handheld scanners has not gained widespread adoption.
- The company's recent Q2/2023 earnings report showed a decline in revenues, and management is guiding for a YoY decline in revenues for the full year.
- Butterfly Network is pivoting towards artificial intelligence, but it remains uncertain if this will be enough to reset the company's growth trajectory.
Butterfly Network, Inc. ( BFLY ) remains one of the more frustrating companies under my coverage. In theory, the company's mission of democratizing ultrasound imaging technologies with its revolutionary handheld scanners is noble and virtuous. BFLY had garnered the backing of major investors like Bill Gates and Cathie Wood, and the company's founder, Jonathan Rothberg , was awarded a National Medal of Technology and Innovation by President Obama.
However, the company has struggled with overly ambitious growth targets and its devices have not gained widespread adoption. Recently, the company appointed a new CEO and is pivoting towards artificial intelligence. Will these developments be enough to reset the company's growth trajectory, or is more downside likely?
Brief Company Overview
Butterfly Network is a digital health company with a mission to make ultrasound imaging more affordable with its proprietary 'Ultrasound-on-Chip' technology (Figure 1).
Figure 1 - BFLY ultrasound on a chip (BFLY investor presentation)
Historically, the global ultrasound market is dominated by large conglomerates like GE Healthcare, Canon, and Philips that sell cart-based ultrasound devices built on piezoelectric crystal technology, costing between $45,000 to $60,000 per system.
Butterfly Network's proprietary 'Ultrasound-on-Chip' technology is based on semiconductor microchips and allows Butterfly to offer handheld scanners at a much lower ~$2,000 price point.
BFLY's vision is not only to replace the traditional cart-based ultrasound scanners, but expand the total addressable market ("TAM") by making ultrasounds as ubiquitous as stethoscopes (Figure 2).
Figure 2 - BFLY envisions TAM expanding to $100 billion (BLFY investor presentation)
Problem Is Slow Adoption
The problem is that health care practitioners are generally risk averse when it comes to medical technology, especially if a misdiagnosis can mean the difference between life and death for patients. Furthermore, overworked and stressed out doctors or nurses simply do not have time to learn a new technology like Butterfly's ultrasound scanners in my opinion (note: ultrasound sonographers train for 3 to 4 years in specialized programs to gain the skills to interpret ultrasound images). So the adoption of BFLY's technology has been excruciatingly slow, with top-line revenues essentially flatlining in the past year (Figure 3).
Figure 3 - BFLY growth has flatlined (tikr.com)
2023 Show Revenues Plateauing
In fact, the recently reported Q2/2023 earnings report showed revenues actually declined 3.6% YoY to $18.5 million, not a good sign for a supposedly fast-growing medical devices company (Figure 4).
Figure 4 - BFLY Q2/2023 financial summary (BFLY Q2/2023 press release)
EPS in Q2/2023 was -$0.14 vs. -$0.18 in Q2/2022, and 2 cents ahead of analyst estimates on cost cuts.
Guiding For A Down Year
For the full year, management is now guiding to revenues of $64 million and an adjusted EBITDA loss of $80 - 75 million.
Relative to 2022's reported revenues of $73.4 million, this new guidance represents a 12.8% YoY decline in revenues and is a far cry from the company's initial 2023 guidance issued just a few months ago, which had called for revenue growth in the high teens to low 20% range (Figure 5).
Figure 5 - BFLY initial 2023 guidance was much more optimistic (BFLY investor presentation)
However, even with the company's extreme cost cutting, BFLY is still forecasting an $75-80 million EBITDA loss for the full year due to the company's cost structure and lack of revenues.
New CEO / AI Pivot
In April , shortly after my last article, BFLY announced the appointment of Joseph DeVivo as the company's new permanent CEO, following the departure of the company's former CEO in December. Mr. DeVivo was most recently Executive Chairman of Caption Health, an AI-guided ultrasound platform that enables early disease detection and monitoring, that was sold to GE Healthcare.
Mr. DeVivo's experience with AI-guided ultrasound aligns well with Butterfly's own recent pivot to become an AI-guided ultrasound platform (Figure 6).
Figure 6 - BFLY is pivoting to be an AI platform (BFLY investor presentation)
In April, Butterfly also announced that it has received 510(k) clearance for its scanner to be used as an AI-enabled Auto B-line Counter for lung function, potentially accelerating the ability of front-line healthcare professionals to make consistent interpretation of B-lines (B-lines on an ultrasound scan appear as bright, vertical lines that indicate wetness in the lungs and are associated with pulmonary air-space disease, such as congestive heart failure, chronic obstructive pulmonary disease, pneumonia and COVID-19).
While still early days, Butterfly's pivot to AI could help reaccelerate top-line growth if its technology is rapidly adopted by healthcare practitioners.
Valuation & Outlook For BFLY
The way I view Butterfly Network's valuation and outlook is simple. I believe the company is basically a bet on whether the company's pivot to AI and continued partnerships with research universities will be able to reaccelerate revenue growth such that the company can reach operating profit breakeven before its cash and investments run out.
BFLY is currently valued at $226 million in enterprise value with $167 million in cash (Figure 7).
Figure 7 - BFLY enterprise value (Seeking Alpha)
However, much of this cash balance will likely be spent in the coming quarters to fund development and operating losses. Looking at the company's YTD 2023 operating cash flows of -$70 million, I estimate BFLY has 1 to 1.5 years of runway left with its cash balance (Figure 8).
Figure 8 - BFLY H1/2023 cash flow statement (BFLY Q2/2023 press release)
Against this 12-18 month timeline, will BFLY be able to switch revenues back into growth?
Assuming the company maintains its YTD gross margins of 59% (Figure 9), I estimate BFLY will have to grow revenues to at least $292 million to reach breakeven, assuming its $172 million ($86 million for H1/2023 x 2) in run-rate operating expenses are all fixed and do not grow with revenues (Figure 10).
Figure 9 - BFLY gross margins (BFLY Q2/2023 press release)
Figure 10 - BFLY Q2/2023 financials (BFLY Q2/2023 press release)
Given management's guidance of $64 million in 2023 revenues, that means 2024 revenues will have to grow by 460% YoY to reach $292 million. While not impossible, I believe this figure is highly improbable. Therefore I highly doubt BFLY will be successful in reaching breakeven with its current cash balance.
Risk
The biggest risk to being overly cautious on BFLY is that Butterfly's 'Ultrasound-on-Chip' technology may attract the likes of GE Healthcare to make a takeover bid for the whole company, given the large TAM. I believe the longer BFLY's share price languishes, the more likely its board of directors will decide selling is a good option.
Conclusion
BFLY's Q2/23 results continue to disappoint, showing YoY decline in revenues. Simply put, the company is now in a race against time to pivot to AI and restart growth, as it literally has 12-18 months of runway left before it runs out of cash. Until we see signs of revenues gaining traction, I recommend investors stay on the sidelines.
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Butterfly Network: Will Pivot To AI Be Enough To Restart Growth?