Butterfly Network, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Butterfly Network is a digital health company offering handheld, whole-body ultrasound devices, accessories, cloud-connected software, and related services. The filing covers the unaudited quarter and nine months ended September 30, 2023, compared with the same 2022 periods. The company operates as one reportable segment and markets through direct sales, distributors, and eCommerce.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $15.4 million | $19.6 million | $49.4 million | $54.4 million |
| Product revenue | $8.8 million | $13.2 million | $29.9 million | $37.6 million |
| Software and services revenue | $6.7 million | $6.5 million | $19.5 million | $16.8 million |
| Gross profit | $9.4 million | $11.0 million | $29.4 million | $29.9 million |
| Gross margin | 60.8% | 56.0% | 59.5% | 55.0% |
| Loss from operations | $(32.6) million | $(46.0) million | $(98.9) million | $(144.0) million |
| Net loss | $(27.4) million | $(54.7) million | $(89.6) million | $(135.0) million |
| Net loss per share | $(0.13) | $(0.27) | $(0.44) | $(0.68) |
| Operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 | $(85.7) million | $(140.3) million |
All dollar amounts above are in U.S. dollars. Financial statement amounts are presented in thousands in the filing.
- Q3 software and services represented 43.2% of revenue, up from 32.9% in the prior-year quarter. Management views the mix shift toward software as supportive of future profitability and margin expansion.
- Cash and cash equivalents were $150.0 million at September 30, 2023; cash, cash equivalents, and restricted cash totaled $154.3 million.
- The company reported no debt or floating-rate debt. Total liabilities were $76.8 million, including $23.4 million of operating lease liabilities and $1.4 million of warrant liabilities.
- Inventories increased to $94.0 million from $60.0 million at December 31, 2022, primarily reflecting higher raw materials.
- Remaining performance obligations were $32.0 million at September 30, 2023; the company expects to recognize 55% within the following 12 months.
Material changes versus the prior comparable period
- Q3 revenue declined 21.4%, driven by a 33.5% decrease in product revenue. Management attributed the decline to prior-year large deployments to the University of Rochester Medical Center and the Gates Foundation, lower sales across channels, and customers awaiting the next-generation probe expected in 2024.
- Q3 software and services revenue increased 3.3%; nine-month software and services revenue increased 16.1%.
- Units fulfilled decreased by 40.1% year over year in Q3, or 2,290 units.
- Gross margin improved by 4.8 percentage points in Q3 and 4.5 percentage points for the nine-month period, benefiting from product mix and lower product costs.
- Operating expenses decreased 26.4% in Q3 and 26.2% for the nine-month period, primarily due to workforce reductions and lower operating spending.
- Research and development, sales and marketing, and general and administrative expenses declined substantially; however, “other” operating expenses increased to $9.2 million in Q3 from $2.9 million, principally due to severance and legal costs.
- The company implemented workforce reductions announced in July 2022, January 2023, and July 2023, representing approximately 10%, 25%, and 25% of the workforce, respectively.
- The fair value of warrant liabilities declined to $1.4 million from $5.4 million at December 31, 2022, producing a $3.5 million Q3 gain and a $3.9 million nine-month gain.
Outlook, commentary, risks, and unusual items
- Management expects existing cash, cash equivalents, and operating cash flows to fund operations and liquidity needs for at least the next 12 months, while also expecting negative annual operating cash flow.
- The July 2023 restructuring is expected to reduce operating cash requirements by approximately $2 million per month on average and extend liquidity.
- Fixed office lease payment obligations were $32.2 million, including $3.3 million payable within 12 months. Inventory purchase commitments were $22.4 million, including $6.8 million payable within 12 months; approximately 25% of the near-term amount is expected to be funded through vendor advances.
- The company terminated one office lease and modified another during Q3, reducing fixed lease obligations by approximately $6.0 million and generating a $0.2 million gain. It also recorded a $1.8 million impairment of related leasehold improvements.
- The company recognized $1.6 million for an estimated potential loss related to patent litigation with Fujifilm Sonosite. The company expects to resolve the matter within one year but cannot assure the outcome or absence of further effects.
- Other legal matters include a putative securities class action, a stockholder derivative action, and employment-related claims. The company cannot predict the outcomes or reasonably estimate potential losses for certain matters.
- Key business risks include dependence on customer adoption, lower device demand, execution of the next-generation probe launch, regulatory requirements, reimbursement and pricing conditions, competition, intellectual property disputes, supply commitments, and continued operating losses.
- Management stated that there were no material changes to previously disclosed risk factors and that disclosure controls were effective as of September 30, 2023.
Important facts for investors to verify
- Whether the expected 2024 next-generation probe launch converts deferred customer demand into higher device sales and units fulfilled.
- Whether software and services growth continues to offset declining product revenue and supports sustained gross-margin improvement.
- The pace of cash consumption relative to the $150.0 million cash balance and management’s projected $2 million monthly savings.
- Inventory levels, excess and obsolete inventory exposure, vendor advances, and the $22.4 million of purchase commitments.
- The ultimate costs and business implications of the Fujifilm patent litigation and other pending legal proceedings.
- The extent to which restructuring-related savings are recurring versus offset by severance, litigation, product development, and commercial reinvestment costs.