Backed by the Bill & Melinda Gates Foundation, Butterfly Network (BFLY -6.55%) produces a sleek portable ultrasound probe that can plug into a smartphone and enable the user to acquire images anywhere -- from the doctor's office, to the ICU, to rural Uganda. The company released its first earnings report as a public company last week, and the market shrugged, sending the stock down over 5%.
The company, which first started selling its product in late 2017, reported a full-year revenue increase of 68% year over year for FY 2020 ending Dec. 31, 2020. Additionally, the company's second-generation product, the iQ+, which launched in October 2020, is smaller and less expensive to produce. It has a longer battery life, and improved interoperability versus the first-generation Butterfly iQ handheld ultrasound probe.
Overall, the company sold 56% more units in 2020, with 20,208 units sold for the year. Importantly, in regards to being an "ultrasound-on-a-chip" company with today's widespread chip shortages, Butterfly Network noted that it is "pleased to enjoy clear supply lines" in the company's most recent conference call.
According to its JP Morgan investor presentation, the company estimates full-year 2021 revenue of $78 million, and is projecting 2022 full-year revenue of $138 million for gaudy 77% year-over-year growth. The company is also projecting gross margins in 2021 of 43%, which it's hoping to grow to over 70% as more revenue comes from recurring software subscriptions.
One way to entice clinicians to pay for the company's presumed juicy-margin cloud service is that subscription to the Butterfly Network cloud is the only way to store images, and the archival of images is a requirement to bill patients for the service. A subscription is also the only way to get access to new features and software updates, and for a limited time, the company is offering to waive the annual fee to individual users in exchange for a one-time charge.
Not that bad after all
The company reported a cost of revenue for FY 2020 of $107.5 million -- an increase of 122% from FY 2019. Butterfly Network did say that there was a $62.7 million non-recurring charge in FY 2020 -- which included $53.1 million in non-cash inventory reserve against award purchase agreements. This outsized loss and accumulation of inventory is what seemed to spook investors.
Aside from this outsized one-time occurrence, the company seems to be well financed, adding over $540 million to its balance sheet after the proceeds from going public earlier this year. Doing some back-of-the-envelope math, if the company hits its 2022 revenue estimates of $138 million, it should come close to profitability.
A promising future
Butterfly Network is viewed as a growth story, and some of the rest of the story depends on the development of the company's "home health" model. There was a good bit of discussion about the company's collaboration with the American College of Cardiology (ACC) to jointly conduct clinical trials in "new patient care settings that are one of a kind," and the company specifically singles out congestive heart failure (CHF).
Total cost of CHF hospitalizations in the U.S. is an estimated $11 billion annually. If Butterfly Network can produce data with ACC to help avoid just a fraction of admissions, especially for a disease with readmission rates of over 20%, then the $6 billion ultrasound equipment market will expand -- of which handheld ultrasound devices are only responsible for 3% of global sales.
With all of this said, it's one thing for clinicians to utilize the iQ in the office or having a home visit for monitoring, but it's another to have a well-selling at-home device with clinicians willing to make clinical decisions based on this device and taking responsibility for the at-home monitoring. We're not there yet, but that seems to be Butterfly Network's ambitious long-term plan.
Lastly, something I wish the company discussed further was the renewal rate of users. Are current users utilizing the Butterfly Network ultrasound probe as a stepping stone to a fancier machine? How many enterprise users and individual users are renewing subscriptions? Given that subscription-based revenue was 17.1% in 2020 compared with 9.1% in 2019, and likely comes with juicier margins, it would be nice to see if the company was leaving money on the table.
A value play for growth investors?
Butterfly Network remains priced for growth, with a price-to-sales (P/S) ratio of 30 and guidance for 77% annual growth over the next two years. This is similar to other ambitious medical device makers such as home-dialysis maker Outset Medical (OM 0.71%). Outset Medical has a P/S ratio of 34, and is guiding for FY 2021 revenue growth of 78% to 88%. Likewise, Inari Medical (NARI 2.89%), maker of products to remove blood clots from patients, has a P/S ratio of 33 and is guiding for 60% to 68% revenue growth in FY 2021.
If Butterfly Network can continue to grow its user base while maintaining high renewal rates, all while continuing to expand into new opportunities like at-home monitoring, investors looking for growth opportunities may want to catch this stock before it flies away.