All right. Perfect. Thank you everyone for joining, and I am excited to welcome the Butterfly Network team. There is a disclaimer on the Morgan Stanley website that I encourage everybody to go check out. We have a lot of questions to get through today, so I think we are going to just get started here. Joe, maybe I will start with you and give me a little bit of the strategic direction that Butterfly is headed. What is your vision for what Butterfly can become? How has that changed over the last few years, particularly as opportunities beyond the traditional point-of-care ultrasound have emerged?
Well, first of all, thank you for having us here. It is really a pleasure, and I appreciate all the work that you have done. We have learned that we have built a very strong technology and patent portfolio to be the leader in semiconductor-based imaging. I think that is a new concept for us. We built our business and our platform around a semiconductor-based ultrasound device that can image the entire body at low cost, that can be used to image anywhere in the body, anywhere in the world. That is our core mission. But the concept of democratizing imaging through a semiconductor, that aperture has grown quite greatly recently. We have learned that our core technology can be leveraged for many different clinical use cases.
Butterfly still is a company that is developing a large market in point of care, but by licensing out our tech, working with partners on new use cases, it brings shareholders into a much larger TAM and a much larger opportunity. I think what we have learned is we have solved a major foundational technology problem that serves the point-of-care market, and many others. We are pulling our core technology to the center of our circle, and we are leveraging it for markets, all different types of markets, of which one of them is point-of-care ultrasound that we are developing ourselves.
Okay, great. I think it is important for people to understand your competitive advantage and how parts of that competitive advantage actually might become even stronger as the company scales.
Well, I really think big imaging made a mistake. Big imaging looked at semiconductor-based imaging as something that can never really go upstream that can never get higher image quality, that can never challenge a lot of the core tech. And they are wrong. We are benefiting a lot of the. When I talk about the part of imaging that we are focusing on, it is not the back-end image processing and all the work that could be done. That could be done by anything. It is about being dynamic on the front end on how to capture the image and how to be dynamic about that image capture. And I think they did not think we can get to the higher levels of imaging.
They didn't think we could accomplish harmonics, which is a major threshold of moving sound easier through the body to get that higher image. Our fourth-generation chip that will be out next year will be harmonic. We will have proved their hypothesis wrong, and when you think about the competitive advantage, it cost us $300 million to make our first chip. We will launch our fourth chip in early 2027, and with the best handheld imaging device on the market. Not the best device, the best imaging device.
With 600 patents, with hundreds of millions of dollars of know-how and supply chain, with a partner with the best chip fab in the world, TSMC is our partner. Standing start, five years for someone else. They have to figure out how to get around 600 to 700 patents.
You know what I think has been fascinating is you have a strong core focus franchise, but then you also have this very early-stage, but extremely promising, potentially larger opportunity with the Butterfly Embedded market. How do you think about investments across both parts of the business, and how are you thinking of prioritization in particular?
Butterfly, to the credit of our founder, Dr. Rothberg, Butterfly was architected with a very modern architecture upfront. What do I mean by that? I've been in healthcare for 35 years, and I've run a lot of businesses in healthcare, and I've had devices that have software in them. It's actually sadly true today. If I wanted to upgrade the software on my devices in hospitals, I'm sending a rep in with a USB stick.
Right.
Right? Butterfly originally was architected to be completely cloud-based. We have 150,000 devices around the world. Probably 80,000 of them are active after all the upgrades, and I know where, or we know where every single user of the device is. We know what type of scan they're doing, and their scans come into our cloud. We have 25 million images, or 25 million cines. A cine is a collection of images, probably over 1 billion images in our cloud, and it's growing by 40,000 cines a day.
We were architected to be cloud. We are architected to have iOS and Android applications. We have a unique device with a semiconductor, and then we have a SaaS-based middleware that connects all of what we do into pulling that data, the data into the EMR, into the DICOM, and into revenue cycle management. All of those capabilities that Butterfly built for ourselves, as we start getting into conversations with third parties, they want to license the chip and the development software to modify the chip. But as they start getting more mature and looking at commercial, they want to have the ability to stream all their images into our cloud.
They want to all of a sudden now start using our middleware to capture their data. What we are doing with our architecture is we are taking the point-of-care ultrasound business from the center of the circle and pushing it out to the outside of the circle and saying, "This is a sales and marketing effort in point-of-care ultrasound." Then we are taking our cloud capability, our AI Android capability, our data aggregation capability with health systems, and our semiconductor capability and pulling it into the center of the business.
We are modularizing all of those components. So we then develop in a single-minded way of advancing all of that, and then we provide to point of care everything it needs.
Right.
Each of our partners now, we have brain-computer interface partners. They will turn around and say, "Well, we want this version of the chip, and we want this SDK. We want to have this application. We want to have access to this data in your cloud." It turns into we are this technology company that services all these different capabilities, if that makes sense.
Yeah, it does. I do want to spend some time unpacking Butterfly Embedded in particular. The Midjourney and Merge partnerships really validate the technology and applications beyond traditional handheld ultrasound. How do you think about those partnerships, and how have they changed the way you think about the addressable market that Butterfly has a right to win in?
Both companies, Midjourney and Merge, are very sophisticated, and have, I won't say unlimited funding, but they are not capital constrained.
Right.
They have very big dreams. If they could reach their dreams without Butterfly, they would.
Yes.
We have gone through very significant negotiations. We have gone through IP, we have gone through everything, and we are delighted to have them as partners because they are literally pushing the boundaries of what is going to happen in the future. What we have learned is we have a business.
Yeah.
This is real. Forget about, "Oh, I'm going to let someone use my whatever and charge them whatever for it." What's valuable to them is the over a decade of evolution-
Right.
-of technology development. What's valuable to them is they can stand on top of our intellectual property platform and start filing IP on top of ours.
They get all the dates from the original Butterfly of what we've innovated, and it creates a foundation for their business to solely stand on our shoulders and innovate past where we are in their certain use cases. Those deals, we have other deals with very sophisticated partners that we are not at liberty to talk about. But those deals helped us validate that we have a really serious foundational technology. We have a significant lead. We have intellectual property that protects us and is extremely valuable, and we have a partner that can scale to the type of volumes that these type of companies
would want to scale. I can't talk at all about what Merge is doing other than what's in their press releases, but they're going for very big TAMs.
Yeah.
For us to be a part of that, for us to be an enabler for them, it is going to constantly keep our need to be at the cutting edge of what we do.
We are not like, "Oh, we have this 5-year lead on everyone else, and we are just going to sit back and enjoy that lead." They are pushing us-
Right.
-to the boundaries of data acquisition, of AI, of processor capability and speed. It is an extraordinary experience for us.
Yeah. The way you have described it is, it feels like the long-term ambition of Butterfly Embedded is to become an ecosystem, right? Where other companies are taking your technology, building products on top of that, more of a platform model, versus you all needing to develop every single end market application that is possible.
Correct. Our P&L is full of market development activity for clinical ultrasound. Sales forces, conferences, clinical work. All the money we spend in our digital activation to get to market is a lot. But we are now bringing to shareholders so much more TAM.
Right.
I think we took a stab at it, and it went from a $20 billion to $250 billion TAM.
Right.
Which is nuts. Again, sometimes companies solve problems that other people have, and there is many examples in history of companies doing that and then monetizing that foundationally across the industry, and we are just the next one to do it.
Yeah. It does beg the question, though, as you are evaluating partners, which ones are better to enter through partnerships, meaning some applications are better to work with a partner on, versus some where you have the capability set and you want to own the end market and the end product and the economics itself. How do you think about that decision?
We have kind of ring-fenced what we believe the Butterfly opportunity is.
The Butterfly opportunity basically has to do with general medical imaging, where on one side, we are say in the middle, where we have a probe for every doctor, and they can bring it in and out of the hospital. We are going to go upstream into the hospital over the next several years. Our fourth-generation chip that comes out in the beginning of 2027 will have image quality better than any other piezo handheld in the world.
We are going to start asking the question, why would you have an analog piezo handheld if the semiconductor-- It is like, why would you walk into Blockbuster when you can just go and just download the film on Netflix?
Right.
Why? It is the same experience that digital photography had. Kodak came out with the first digital camera. Two years later, they shut it down because it was a 1-megapixel image. It did not matter if it was cloud, it does not matter if you can store and forward. It did not matter that you did not need film. The image quality was not good enough. All those digital benefits were not worth the fact the primary outcome was substandard. The moment you got to equivalence and even better, then all the digital capabilities now come into the purchase decision, and that is where we are at now. We are going to turn medical imaging, core medical imaging, on its head, and we are going to capture more and more.
We are going to be launching our own cart in the next year, which is going to bring us into about an existing $3 billion market opportunity of existing revenue upstream.
We are also going into the home to be able to help nurses diagnose or capture images in where they are, to keep them there and keep them out of the hospital. Those are our core markets. There are companies that have very specific use cases in women's health and others, and it would cost us so much money to go and develop that individual use case.
It is almost like building another point-of-care business.
Right.
But we get to participate in that business now because they're going to do that market development. So wherever there's very specific niches or very specific clinical applications that we're not going to develop ourselves and someone's there we're going to choose the partner.
Okay, that makes sense. The way you talked about the TAM opportunity growing so substantially, do you feel like what Midjourney and Merge partnerships are representative of the total opportunity set, or do you think we're still really early on in just discovering what is the power of this technology?
Well, I think it's still very early. I think Merge is our fourth or fifth BCI company today. There will be more.
Yeah.
We have learned that in communicating with the brain, you can put a wire in the brain. There is an amazing company called Cortical Labs who is actually growing brain neurons into the chip, into the brain, or you can use sound waves to communicate with the brain.
There is a lot of vision there from dealing with chronic conditions or dealing with trying to restore function, to ways of enhancing the brain, and ultrasound is the least invasive way to be able to understand neural activity. We have even had partners start imaging through the skull which people thought was not possible with ultrasound. If you are interested, Aleph Neuro, A-L-E-P-H Neuro, has some images online that are some of the most extraordinary images of a living brain-
Wow.
-ever taken through the skull. There are so many applications in intravascular cardiac ablation. They are in HIFU on a micro scale. There are so many different applications of the technology that we haven't fully discovered yet. We are actually talking quite actively to our first Butterfly Embedded partner that's not healthcare.
Interesting.
It has to do with a company that does material stress. If an airplane wing, if it's under a significant amount of stress, you can see the material start changing form prior to a crack.
Right.
If you're pushing an envelope of something, and there are all kinds of construction, military applications where you can sense the changes in these materials. I think we actually today don't fully understand-
Yeah.
-the full opportunity. We've done the best we can, and we've now, in the beginning of the year, have started to staff up the part of the business to be able to be much more proactive. Most of the relationships we have today were all inbound-
Inbound.
-to Butterfly.
Yeah. As you explore other industries within healthcare, beyond healthcare, how does that change the business model fundamentally, the org structure, your capital allocation priorities? I assume it's kind of an evolving decision process.
Yeah. Excuse me, I'll take that one. Joe touched on it earlier. One of the beauties of what we're doing and what we have is we've already made $300 million of investment for the core platform that we have and the 600 patents that we have. Our ability is to leverage that, and we're leveraging that into our core focus business, as well as leveraging that into Butterfly Embedded. The strength for us going forward will be that leverage that we have from an operating perspective as well as from the investment that we've already made. In working with our partners, we're learning as well, so it's kind of like a virtuous circle where we're-
Yeah.
-taking that learnings back into our business, and we can use it across our existing business, plus other partnerships, provided it's not an exclusive relationship like what we have with Midjourney.
Great. Okay, well, you said Midjourney, and I did want to go a little deeper on that one. What does Midjourney's approach to whole-body imaging tell you about ultrasound's role in healthcare and how it can evolve over the next decade?
Well, first of all, ultrasound's safe. You don't have to worry about a piece of metal being ripped out of your body if you didn't properly communicate to the nurse. You don't have to worry about radiation and how much radiation you'll have. It's something that can be done very frequently, weekly, biweekly, monthly. I think Midjourney's vision is we have a sick care system today. We don't have a healthcare system today. What I mean by that is if you want to know what's going on in your body, you can't just go get an MRI. If you can, you're going to have to pay $5,000 and go through a bunch of hoops. An MRI happens when you've injured yourself. It happens when a doctor thinks you're sick. It happens when you might have some type of risk factor that people want to look at.
You have to get a prior off from a payer. You have to get a prescription from a doctor. So it is highly captive, highly regulated, and high cost, and highly necessary. If I am injured, if I am sick, I want an MRI. So I am not talking against an MRI. But there is a whole segment to healthcare, which is about, as you are younger, learning about your body. How is your body changing? How are the behaviors that you have as a human being affecting your health, your diet, your alcohol consumption, your smoking, your stress, your lack of sleep? We all see this with Apple Health, with Oura, with Whoop. There is this desire to understand how we are progressing through life. I think Midjourney takes it to the next level, where Midjourney is going to democratize imaging.
They are going to make it really low cost to be able to get a scan, and it is going to be a part of your life. You are going to be able to know, how is my visceral fat? I have been working out at the gym on arms. Are my arms getting bigger? These things might seem pejorative, but it is knowing about your body and knowing that behaviors that you are taking are changing your body. That is the only way our healthcare system is ever going to succeed on the back end because poor Medicare has to take on 65 years of bad decisions every year instead of finding a way. There is no constituent in healthcare that cares about your health. Your employer has you 3-5 years. They want you to have the best health possible, but they are not there for your entire life.
Your payer, how many payers have you have? How many different jobs have you had? The health systems just want to be able to manage you. If you are lucky enough to live in Rochester, Minnesota for your entire life, you can be embraced by the Mayo Clinic Healthcare system, and you will have the best care ever. But the moment you move, you are starting that clock again. So I think what Midjourney is teaching us, first of all, is ultrasound is safe. Ultrasound can be an everyday part of your life, and ultrasound is inexpensive.
What they are also teaching us is that this is a text-to-image company. This is, let me take a little bit of data and let me extrapolate it into something very meaningful. I think what they do with this data, I predict it will be extraordinary. It will be helpful, it will be illustrative, and it will change the way we think of imaging. I know if you were on X for 5 days after Midjourney's announcement.
This was a top five trending topic for five days in global communications to actually talk about this because there was a huge debate between technologists and the medical community. Medical community thought and thinks this is a bad idea because you are going to run into your doctor with every scan, and you are going to take up their time with a bunch of unnecessary stuff. I think it is going to be the exact opposite.
I think it is going to inform patients. Thinking that people are dumb is not a good platform to stand on. Being more educated, being more aware, having more data, and then having intelligence that can extrapolate data to help you make the best decisions, I think is the future of healthcare. I am just in awe of Midjourney's boldness and their vision. They pretty quickly networked 40 of our devices into a single image.
Wow.
A normal MRI is about 40 terabytes of data, if I have that correct. One Midjourney scan will be 400 terabytes of data for every one of these low-cost, inexpensive scans. I think it is one of the steps that are going to make a massive impact on humanity.
Yeah. For you all, beyond the economics, I have to imagine the strategic value of the partnership in demonstrating, in particular, what Ultrasound-on-Chip can enable, was probably one of the most interesting things as you've seen the excitement around the announcement and also your relationship evolve over time.
John and I have been working really hard to communicate to investors what we think are going to happen in the future. We do the best we can to indicate what's to come, and we do that very mindfully on a quarterly basis and at times like this. But we do it in a manner that when we say we're going to do something, we're going to deliver on it. If you go back in time, you'll see over the last several years, we've delivered everything that we've told you that we're going to deliver. Seeing Midjourney come out in the type of way they pronounced the announcement, many of the people who've been following Butterfly have come back to us and said, "Oh, I get it.-
This is it. Right. It clicked.
-Now I understand. We try to do as much as we can with direction and breadcrumbs. But yeah, I think when that came out, it opened the minds of investors like, this is real, holy cow. It also opened minds of many other technologists, in all different walks of life. Merge is a Sam Altman company. Neuralink is a $9 billion startup-
Right.
-from Elon Musk to do brain-computer interface. Sam Altman is now starting his own Neuralink, and he chose Butterfly.
Yeah.
We're dealing with some very smart people.
Right.
David Holz at Midjourney is a complete genius. For us to even be in a zip code of this brain power, it means we belong, first of all, but we're going to learn and grow, and there's a lot of other things that are going to follow.
Yeah. You touched on Merge a bit. I do want to go into some more details around that because it takes Butterfly into a completely different frontier with BCI. What do you think about the opportunity itself, and what does it do in terms of validating the fundamental capabilities and potential of the Butterfly platform?
I think their selection of us is enough. What I cannot really do is go into what they intend to do other than what they have stated publicly. It is very sensitive stuff. But as I said in the beginning, very heavily negotiated.
Yeah.
If they did not need us, we would not be there. So it is a validation of what we have accomplished, and it is a validation that they believe where they want to go will be a lot faster if it is with us. We are so honored. There are seven founders in the business, each genius, the next of the next genius, and it has just been extraordinary for us to, again, rub elbows with a lot of these future leaders and to be considered a core part of this technology. We just held a BCI conference in the Bay Area a couple of weeks ago, and what I learned, a lot of what people think about in brain-computer interface has to do with restoration of function, especially from an accident or chronic disease.
You lose function of your arms, so now you can direct a robot to feed you or whatever, or you can move a cursor on a screen. I think that is where a lot of the initial BCI attention was. I think a lot of the future attention is going to be, how do I improve my function as a healthy person? There is going to be a lot of cool things and a lot of ideas as to living more productive lives and whatnot. When you look at the consumer TAM of some of these ideas
Yeah.
it is kind of hard to calculate. It is so big. So it is a major validation of our platform. It is a major validation of our IP. It being now the fourth BCI company, there are others we are still talking to, that will be a major category for Butterfly in the future, but I just think that is one category of a universe of other possibilities.
Yeah. I have to imagine, being in a partnership with Merge also creates technology advantages for you all, meaning is there lessons learned around imaging, sensing, software, or AI that is also helping you continue to evolve the technology?
Yeah. Yes. That is why we have taken the core technology into the center of the business, we have put the best minds in the center of the business, whatever point-of-care ultrasound needs, we give it. But some of our partners are asking us to do things on the edges of what we do today. They are pushing us in this realm, whether it is in longevity, in battery life, or frequency, or voltage. They want to do all these different things, and it is testing us, and it is pushing our boundaries into places. At times, as we have thought through something new, a new partner comes in with a very similar requirement.
Yep.
Now that other partner helped us kind of push ourselves to a place. The beautiful part is the way we structure our partnerships is, if there is unique technology that is developed in a certain area, in a certain field for that partner, that partner owns it. But for outside that field of the area, it comes back to our core. Our brain is just getting smarter and smarter-
based upon being tested by all these extraordinary use cases. So far, all of the core tech that we are developing is fungible. We are not developing a unique chip for a partner. It is all, how do we make the next technology better and then it benefits everybody? There may be a day where someone says, "We will pay you this to go here, and we want it just for ourselves," and that will have to be an extraordinary, an enormous deal. But we are fully willing and capable of doing it. But today, so far, everything has been leverageable and fungible.
Okay. Wonderful. I am going to switch topics again to go to P&L, and John, maybe you spend a little bit of time around-
All the fun stuff.
Exactly. A 20% growth trajectory is very impressive. I think investors are always keen to understand, what is durable recurring revenue from partnership versus in transaction-driven revenue?
Yeah. As I mentioned, excuse me, the beauty of the partnerships are, these are longer term partnerships, so they are enduring and recurring. What we did with Midjourney is a five-year agreement, $74 million, and that is really the floor of what we expect to get from that agreement, both in terms of years, we do expect that that is going to be extended, as well as in terms of what we can get from development, from chip sales, from revenue share as well. On the other side of the business, on the core business, you are really looking at our pipeline. As Joe mentioned, we are moving upmarket. We are still selling across our e-com platform, but we are also moving upmarket with our Compass AI software. From that perspective, we pay really close attention to the pipeline and how that's accelerating, as well as how we're landing and expanding. So revenue per customer is pretty key in how that's growing as well.
Okay. Wonderful. I guess maybe to wrap, what do you want investors to understand about the model today, and how do you want that to evolve over the next few years? If you could just give us a couple of KPIs, that would be great.
Yeah. We touched on it briefly, but it's really the operating leverage that we have-
Yeah.
and the portfolio of opportunities that we have. On the core side of our business, we're not just a one-trick pony in terms of probe sales. As I mentioned, we have Compass. We have the launch of our home business in October. We're coming out with two new products next year. Early in the year, we'll have our next gen probe, and later in the year, we'll have the station. Similarly, on the embedded side, we're not a one-trick pony. Yes, the Midjourney deal, I think, certainly put us on the map. Maybe people may not remember, but we can call it our Sally Field moment, where we're somebody now. Somebody remembered. So there, in addition, with the Merge partnership, there'll be more partnerships to come, looking at that pipeline and how that's developing as well.
Tremendous operating leverage, and we have significant portfolio opportunities that are coming off of a core platform of investment.
Wonderful. Well, we're out of time, unfortunately. I could spend all afternoon digging into your brains around the opportunity set here. But Joe, John, thank you so much for taking the time to speak with us and giving us that detail.
Thank you.
Thank you.
Thank you. Great being here.