Butterfly Network, Inc. (BFLY) on Q1 2021 Results - Earnings Call Transcript
Operator: Hello and thank you for standing by. And welcome to Butterfly Networks First Quarter 2021 Earnings Call. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Agnes Lee, Vice President of Investor Relations. Please go ahead.
Agnes Lee : Good morning and thank you for joining us today. Earlier this morning, Butterfly released its financial results for the first quarter which ended March 31, 2021 and provided the 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. Dr. Todd Fruchterman, Butterfly Networks' President and Chief Executive Officer; and Stephanie Fielding, Butterfly Networks' Chief Financial Officer, will host this morning's call.
Todd Fruchterman: Thank you, Agnes, and good morning, everyone. We appreciate you taking the time to join us today. I welcome you to this earnings call. Our second since Butterfly became a public company and look forward to updating you on the results we achieved during the first quarter of the year. Following my overview of Butterfly's performance, Stephanie will walk through the details of our financial results. We will take your questions at the very end.
Stephanie Fielding: Thank you, Todd. I will take you through the details of our Q1 financial performance shortly, and then end with 2021 guidance. But first, I would like to share a highlight from the quarter in light of the forecast we shared ahead of our February SPAC merger. Notably, our gross margin has turned positive over the course of the past two quarters and now outpaces the forecast we shared in November. Total revenue for the first quarter of 2021 was $12.4 million, which is a 44% increase year-over-year from $8.7 million in the first quarter of 2020. Product revenue for the quarter was $9.6 million, an increase of 33% from $7.2 million in the same period in 2020. Units fulfilled the main driver of product revenue were 5,013 in the quarter, compared with 3,711 in Q1 2020, an increase of 35%, reflecting the early steps in the expansion of our customer base within hospitals and larger institutions. Subscription revenue was approximately $2.9 million in the first quarter, growing approximately 93% from approximately $1.5 million in Q1 2020. Our subscription mix, which we define as a percentage of our total revenue, recognized in reporting periods that is subscription based was 23% compared with 17% in the first quarter of 2020, up six percentage point increase. Subscription revenues increased along with device sales, as well as with renewals on year-on-year sales. Due to the timing of revenue recognition, and mix of revenue, we currently expect quarter-to-quarter variability for subscription revenue. But over time, we expect that recurring revenues such as subscription mix will continue to grow. Turning to cost of revenue, the cost of revenue for Q1 2021 was $6 million, a decrease of approximately 37% from $9.5 million in the first quarter of 2020. Cost of product revenues was $5.6 million for Q1 2021, a 39% decrease from $9.3 million in the same period in 2020. And the cost of subscription revenue was $379,000 increasing 55% from $244,000 year-over-year. In line with our expectations, our gross margins turned positive over the course of the past two quarters and in Q1 gross margin was 51.6% while adjusted gross margin was 47.8%. Gross profit was $6.4 million for Q1 2021 compared to Q1 2020 gross profit of negative $836,000. Adjusted gross profit which includes a one time adjustment for warranty accrual methodology was $5.9 million. Adjusted gross margin and adjusted gross profit reconciliation calculations to GAAP net loss can be found in today's press release and at the end of the slide presentation. Consistent with our intent to use the proceeds of the Longview merger, to invest aggressively in long- term capabilities, operating expenses were $60.2 million for Q1 2021, an increase of $36.5 million, or 154%, compared to Q1 2020. The increase was primarily due to headcount growth and changes on a year-on-year basis. Expenses associated with stock-based compensation and costs associated with going public. Loss from operations was $53.7 million, an increase from $24.5 million in Q1 of 2020, primarily driven by higher operating expenses, offset by the increase in gross margin. Net loss was $700,000 as compared to a net loss of $24.4 million during the first quarter of 2020. Adjusted EBITDA was a loss of $26.5 million, compared with a loss of $21.5 million in the same period in 2020. Adjusted EBITDA reconciliation calculations to GAAP net loss can be found in today's press release. Moving to the balance sheet. Throughout much of 2020, we focus on having adequate capital resources and liquidity to support the business over the near and long term. As of March 31, 2021, cash and cash equivalents and marketable securities were $545.3 million. Of note inventory in the first quarter was $36.1 million, a $10.3 million increase over $25.8 million reported in the fourth quarter of 2020. This increase was primarily related to our contractual wafer commitments that we described in our last earnings call. This inventory will help ensure that we have access to product and innovation as we scale and innovates our business models. I would now like to take a moment to update all of you on a recent SEC 8-K filing; the SEC issued a statement on accounting and reporting considerations for warrants issued by SPAC. This has a broad impact on SPAC and former SPAC generally, not just Butterfly. As a result, we have filed an amendment to our annual report on Form 10-K, in which we restated Longview's audited financial statements, as us and for the year ended December 31 2020, to account for our public warrants, and private placement warrants as derivative liabilities, rather than prior accounting as components of equity. The classification of these warrants as liabilities did not have any impact on the company's previously reported operating expenses, cash flows or cash. And finally, on to guidance, as Todd discussed earlier, now that he has been on Board for three months, and has had a chance to evaluate the business, we want to provide an update on our 2021 financial plan. We also expect to provide more transparency on our operating plans, which will inform our expectations for 2022 in the second half of this year. For the full year 2021, total revenue is projected to be approximately $76 million to $80 million, or 64% to 73% growth year-over-year. Gross margin is expected to be 43% to 47%. And net loss is expected to be $135 million to $155 million. Adjusted gross margin is expected to be 42% to 46%. And adjusted EBITDA is expected to be negative $140 million to negative $160 million. Our revenue guidance reflects the anticipated acceleration of our investment in enterprise sales, where we believe there are attractive opportunities to implement the Butterfly solution. This has the potential to offer institutions the benefits of access to clinical information earlier to make more informed decisions, allowing for improvements across the care continuum, device management and governance solutions, along with integrated workflow. Finally, we plan to continue to build upon the touch points we have with customers, including direct-to-user, which we previously referred to as ecommerce, the iQ Vet offering and the partnership arrangements like the one we just described with Sientra. We expect revenue growth to accelerate in the second half of the year, and we expect the investments we are making to yield both near and long-term results. Our guidance for gross margin and adjusted gross margin is influenced primarily by our expected revenue mix. The net loss and adjusted EBITDA guidance reflects the investments we plan to make in the business. We have opportunities to drive growth through people and infrastructure; specifically we plan to invest in software solution enhancements designed to assist with customer workflows and AI to support insight and clinical decision making. Te breadth of ranges reflects the uncertainty around the timing of our investments as we evolve our strategy and innovation roadmap. And with that, I will pass it back to Todd for summary comments.
Todd Fruchterman: Thank you, Stephanie. And thank you all for participating in Butterfly's first quarter 2021 earnings call. We are still at the very beginning of our journey as a public company. But our rapid and broad progress this quarter in areas such as talent, clinical partnerships, and commercial models, gives me confidence that we are poised for continued success and growth. I would like to thank the Butterfly team for their dedication to our mission and the excellent progress we made in Q1 to expand our markets and partnerships. I hope that you share my excitement. And I look forward to our next update with you. I will now turn the call over for questions.
Operator: Your first question comes from Josh Jennings from Cowen.
Josh Jennings: Hi, good morning, Todd and Stephanie. Thanks for taking the questions. So hoping to just start off on the 2021 guidance. It's encouraging to see and implies a nice ramp throughout the rest of this year. And I was hoping to just get a little bit more insight into your team's visibility into revenues. But particularly on the enterprise contract side, if you could help us understand when your visibility and then to just remind us just the kind of timing of book-to-bill and those contract processes. Because it sounds like that channel is already full. And you're continuing to build out that pipeline is full with enterprise contracts and continue to build up that salesforce. But anyway, a lot in that one question. But wanted to just understand visibility and revenues and then just a reminder on how the enterprise contracts, the timing sets up in terms of initial contact with these enterprise or these hospital system customers and then generation revenue.
Todd Fruchterman: Good morning, Josh. And thanks for the question. So first, if you think about the build, right, we are looking to see more growth than the back half of the year with sequential improvement, as we continue to see the revenue mix shift, both with the product and usership more from the direct to the enterprise. And I think that's what we've been working through. And I think you'll see that build as the course of the year goes on. And we're doing the investment behind that to execute that which we talked to you about investing in the salesforce and continue to do that. And we also see some elements of the realization of our product pipeline, enabling that as the year goes through, as it relates to how it builds in the enterprise segment, it's a vast segment. And we are working at approaches right now with partners where we're having great conversations at the highest level with lots of excitement in that and we are continuing to begin to create these partnerships. And we will see that happen over time, and really start accelerating towards the end of the year and into next year. And I turn it over to Stephanie, for a few comments on how that's starting to be realized.
Stephanie Fielding: Thanks for the questions, Josh. Yes, I think as you noted, the direct user is formerly ecommerce channel is an immediate sales, the sales cycle for the enterprise is a longer sale. And so but as Todd noted that enterprise or Health Systems Group is not a uniform walk of customers. And so there is a range of the sales process there as well. As we continue to build there, we get better and better at that sales cycle and understanding our customer needs and working with them. And as we bring on a sales team that gets more experienced in engaging with those customers, that process also improves over time. So we do expect that ramp happen in the back half of the year, both because we're investing now. And because that sales cycle take some additional time.
Todd Fruchterman: And I just say the last thing about from that is that as we enter into this relationship, the scope and standards then increase the time too. So I think that's one of the nice things, the nice pieces of our business is not just a piece of equipment that goes into the account, we're actually enabling value in how they practice medicine and getting value out of their institution. So that's why some of this is evolving. And that's why it's actually really quite exciting.
Josh Jennings: No, excellent. And so it segue to my next question; we appreciate the clinical value proposition of Butterfly iQ. And then the anecdotal case you shared in your prepared remarks, Todd, I think that's very clear. I was wondering if you could share any anecdotes or case studies on and how you're marketing the financial instead of a Butterfly iQ adoption for both individual practitioners and enterprises. Because that seems like another attractive element of the technology clearly for individual practitioners to have an alternate revenue stream in their practice and in their business, but also on the enterprise side, in terms of using ultrasound, more imaging and with reimbursement fully in place capturing additional revenues, but I was wondering if you could share any details there on the -- just the financial incentive for prospective customers and how you're marketing that angle of the story. Thanks a lot.
Todd Fruchterman: Sure, Josh. Actually Stephanie we'll start.
Stephanie Fielding: Yes, as you noted, Josh, we have existing reimbursement codes for these use cases, I think what's exciting about Butterfly is that there's both the existing reimbursement model, but also the tailwind to value based care and how this can drive better insight, better decision making, and ultimately, we believe a lower cost of care overall. And we think that the range of customers are seeing those benefits, both from the direct reimbursement as well as the kind of larger institutional change in their both cost structure and patient care outcomes.
Todd Fruchterman: And just a follow on to that, Josh to your point, we're starting to -- it's really become how you bring the information that you obtained with the Butterfly, into your clinical practice and into your workflow and your -- it's really into the decision making, and how you realize that value in the institutional view. So we're seeing that in primary care practices, now moving that forward, both in the value of doing a more enhanced exam rapidly to your point that you made, where you can get a different level of feeling for doing that, but being able to do it in a timely and efficient way. And then for the institutional piece of that, realizing that value in what it can do later on in the economic benefit of how care is delivered, that reducing secondary imaging studies, reducing unnecessary referrals, because you bring more valuable information to the actual decision making point of care. And that's where we see a lot of value. There's and then as you put that into standardization, and larger institutions and workflows, that's where you get a lot of value out of the information. So we see that both at the individual practitioner level and at the institutional level, and it's really about getting powerful information at the right time. And that's what Butterfly I think, really brings is an ability in a format that you can get a level of information that you couldn't get at that primary decision making.
Operator: Your next question comes from Matt Taylor from UBS.
Matt Taylor: Hi. Good morning and thanks for taking the question. So the first one I wanted to ask about was, obviously you assume some acceleration from the year so there's two things that I wanted to touch on. The first is in the press release and in your comments, you talked about the doubling of a salesforce and continued commercial investments, could you just give us an understanding of the cadence of hiring that you've been doing and the current state of salesforce how many folks you have and how you expect that to grow over the course of the year?
Todd Fruchterman: So, Matt thanks. So we're looking at, obviously, building to meet the needs that we have, and currently we have the Delta 00 we've doubled the Delta Force in the first quarter. We're at about 27 heads currently, and we're continuing to evaluate where we think we need to enhance coverage as we look at how we use our direct sales force to help with the value proposition and what we just talked about mainly in the enterprise segment, and we're continuing to look at as we are having these conversations, having to, you need to continue to add, but we add, we doubled it in the first quarter.
Matt Taylor: So you doubled it year-over-year, again, you talk about the cadence of the hiring last year, and how it's impacted sales and or anything on productivity, how should we think about that in terms of sales per person?
Stephanie Fielding: Happy to that, so we doubled it from the prior year, not in the first quarter prior year, but actually, sequentially, the sales team is obviously ramping, but we're incredibly pleased with the quality of the talent that we're getting, and the diversity of backgrounds. And given the product and the solution that we sell, it's really important that we find individuals who are able to represent the holistic breadth of what we're offering. And we've been really pleased at the quality of the people who are coming in the door and their connections and ability to work with the institutions that are their customers.
Matt Taylor: Okay, cool. Thanks for that. And then since we haven't seen the quarterly from last year, I know that it's typically a little bit more backend loaded. Can you talk about how you expect sales to fall through the year and in Q4? And, given you're doing some different initiatives this year, like the enterprise selling, do you think the cadence will be different this year than last year?
Stephanie Fielding: Yes, I think this is a unique year for us, both because of the way that we're pivoting our business model, because we have incremental resources to invest as we grow. And so we certainly expect this to be a unique year in terms of the ramp. As you noted, in prior years, we had been more heavily weighted towards the back end and particularly in Q4. That was in part due to the direct to user approach that we've had. Again, we do expect to be backend weighted this year, but for slightly different reasons. In terms of our investment, kind of bearing fruit, I would say that over time the seasonality, the backend weightiness is likely to balance out more as we get more of the kind of subscription, recurring revenues and have that ongoing sales process with our customers where we continue to add value. And that will be more of a conversation that has less of the timing variation to it. But for this year, for sure, we expect that kind of ramp.
Todd Fruchterman: Yes, it didn't matter as it relates to the productivity and to what Stephanie was talking about. I think we tried to convey that at this point in the journey it's -- there's just so much excitement and interest, and people are still filling out the utility. So it's a lot about getting into the workflows, whether it's in practices, or whether it's an institutional account. As we get into those and then the scope of the offerings, more defined themselves, it becomes a little bit clearer as to where we sell in the next account and the next account. So right now, it's actually quite an exciting time. And there's a ton of opportunity in each of the accounts that we're working on because this scope are quite large, because we're not just putting a single product into the account, we're actually unlocking a lot of value. So we work with them both on how they're going to use Butterfly, and how it makes sense across a variety of workflows and practices within them. And then how they take that data and then put it into their institutional workflow and health outcome decision making. And that's why I think the question we're evolving into the after the question, because we're evolving with our account. And what I would say is the opportunity and the demand is just incredibly large. And so we're working on meeting it.
Matt Taylor: Okay, good. That's good perspective. Maybe I could sneak in one more. I just wanted to understand pricing and unit. So you made some disclosures here in the quarter, it looks like pricing was down about a 1%. I mean, I realized that could be due to some of these bigger contracts. You also have the iQ launch in Q3. So, maybe, generally, in the future, how do you expect like for like pricing to trend and including some of these bigger deals? And then when you come out with new products, are they going to be priced higher or the same? What's the right way to think about them?
Stephanie Fielding: Yes, so I think the pricing over time there, there are a lot of factors that go into that I wouldn't read too much into kind of minor variation. It's the international mix has an impact. So there are a variety of things kind of going into that from revenue recognition standpoint. And so I think, the way I would think about this more broadly is we have a pricing structure right now that we've discussed, and it's got different kind of tiers around direct to user and larger health systems accounts. But we are thinking carefully about the ways that we're creating value for our customers, and how we want to structure the relationships over time. So they drive value for the customer and for a Butterfly, because we view that as a kind of partnership relationship. The individual pricing variation I wouldn't read into for this quarter.
Todd Fruchterman: And, Matt, I think the other thing that's important is to remember we're a digital health company. So and the value we bring into the marketplace and with our customers, we have the element of the device which acquires the information, and then we have the software that makes the information usable. And so that aggregate is the value that we work with our customers over. So it's not just on a price per unit basis. And I think as we are evolving our business model, you'll see that evolve with that.
Operator: Thank you, everyone. This brings us to the end of our Q&A session today. I turn the call back over to the presenters for closing remarks.
Todd Fruchterman: I just want to thank everyone for joining us today. And we look forward to our next call with you.
Operator: Thank you everyone. This will conclude today's conference call. You may now disconnect.
