A few months ago, I wrote a cautious article on Butterfly Network, Inc. (NYSE:BFLY), arguing the company has not delivered the financial performance to justify its valuation.
The latest Q3 earnings report does little to change my initial conclusion. Although it has a novel product, Butterfly Network has been unable to spur adoption. Perhaps it is simply a matter of time required for hospitals to get comfortable with the technology, but with a cash runway of less than 2 years, time is quickly running out.
First off, kudos to those who bought the stock in July based purely on technical analysis. As I had highlighted in my prior article, BFLY was forming a bottoming pattern since May, and shortly after my article, BFLY skyrocketed to almost $9 on the back of the summertime risk-on rally (Figure 1, for reference, the chart annotations have been kept the same from my prior article). Sometimes it really is better to ignore the fundamentals and just go with momentum.
However, since topping out in August, BFLY has since fallen back to essentially the same stock price as when I initially wrote about the company. Have the stock fundamentals changed to warrant a different thesis?
As a quick refresher for those not familiar with Butterfly Network, the company is a digital health company with a mission to make ultrasound imaging more affordable with its proprietary 'Ultrasound-on-Chip' technology (Figure 2).
Historically, the global ultrasound market has been dominated by large conglomerates like GE Healthcare, Canon, and Philips that sell cart-based ultrasound devices that cost between $45,000 to $60,000 based on piezoelectric crystal technology.
Butterfly Network's proprietary 'Ultrasound-on-Chip' technology is based on semiconductor microchips and allows Butterfly to offer handheld devices at a much lower $2,000 price point.
Butterfly was a stock market darling and came public via a transaction with Larry Robbins' Longview Acquisition SPAC. The company counted the Bill and Melinda Gates Foundation as early backers, and Cathie Wood as an early public investor.
My main issue with Butterfly Network was that despite a promising technology and famous backers, the financial performance of the company has been lackluster since going public. I previously wrote:
For example, when the company de-SPAC'ed, Butterfly delivered promising 68% YoY revenue growth from 2019 to 2020. What investors did not plan on was a deceleration in revenue growth to 35% YoY for 2021. And the deceleration continued, with the recently released Q1/2022 quarter showing only 25% YoY revenue growth.
Unfortunately, its latest quarterly earnings report showed more of the same slow growth that I highlighted in my prior article. Revenues for Q3/2022 was $19.6 million, a 34% YoY increase, but YTD revenues were only $54.4 million, 25% higher than YTD 2021's $43.6 million (Figure 3).
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 (Figure 4).
Furthermore, Butterfly Network expects FY2022 to generate a net loss of $165 - 175 million or ~$0.85 / share. For a $3 - 4 stock, that's an astounding level of losses.
YTD, Butterfly Network has burned through $140 million in operating cash flows (Figure 5). With $268 million in cash and marketable securities, the company has enough cash to last another 5-6 quarters (note, the pace of cash burn has not materially improved since my article in July. In my last article, I estimated the company had 2 years' worth of cash, and that was before Q2 results were published).
Although the company has enacted cuts to cash expenses in Q3 that annualizes to $36 million, it's simply not enough to plug the large gap between revenues and expenses. Recall from Figure 4, at the current rate of revenues and costs (with the cost cuts built into the Q4 figures), Butterfly expects FY2022 EBITDA of -$150 million.
In my prior article, I speculated that the adoption of Butterfly's technology has been slow because healthcare practitioners are generally risk averse when it comes medical technology that can mean the difference between life and death for patients. Furthermore, it is wishful thinking that frontline workers can pick up a novelty scanner and be able to accurately use it within a short period of time when ultrasound sonographers train for 3-4 years in specialized programs to gain the skill.
It appears management is finally acknowledging the challenges. Here are some excerpts from the CEO's prepared remarks: (author highlighted important sentences)
We are proud that enterprise level software development has now become a positive differentiator for Butterfly, a platform for our solution and a catalyst for providers to begin their journey of care transformation. But given the significant strains on practitioners throughout the healthcare system, we've learned that they need specialty applications that are highly focused, streamlined, easy to learn, and easy to use. The burden of learning ultrasound cannot be put on them. All practitioners don't want to learn, nor do they have time to become experts in ultrasound.
And it's this distinction that we believe will lead to a major shift in how medicine is practiced, and how care is delivered across all settings. We expected this shift to take time because leading people through behavior change takes time, both in practice and implementation. But just as others are experiencing within the industry, the budgeting and workforce pressures have intensified, resulting in implementation delays.
Some of our future partners are simply delaying implementation and commitments until they can catch up on people. We are prioritizing the appropriate coordination for successful launches and rollout over the speed of short-term revenue generation that doesn't meet our long-term objectives.
- CEO Todd Fruchterman on Q3/2022 Earnings Call
In response to poor sales adoption, Butterfly Network is replacing its Chief Commercial Officer as of November 24th, 2022. CCO Stacey Pugh is being replaced with SVP of Commercial Operations Mike Bhatia and SVP of Commercial Development Nikki Montgomery. Whether this change in leadership will have any impact on future product adoption remains to be seen.
In summary, the latest Q3 earnings report confirms my initial thoughts on Butterfly Network. Although it has a novel product, Butterfly Network has not been able to spur adoption. Perhaps it is simply a matter of time required for hospitals to get comfortable with the technology, but with a cash runway of less than 2 years, time is quickly running out.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.