Butterfly Networks (BFLY 6.16%) delivered its second earnings report as a public company before the market opened on May 13. Revenue for the manufacturer of handheld ultrasound probes totaled $12.4 million for the first quarter, up 44% year over year, and in line with prior estimates. Product revenue was up 33%, while unit sales of its current probe offering, dubbed iQ+, were up 35% -- a result that left some investors concerned that the average selling prices of its probe were heading in the wrong direction.

The ultrasound-on-a-chip company is slightly ahead of schedule on expanding its gross margins, however. Management had previously mentioned a year-end goal of 43%; the company now projects margins for the full year will land in the 43% to 47% range. It maintained a guidance range of 64% to 73% revenue growth for the year, to $76 million to $80 million. Wall Street was unimpressed, sending Butterfly Networks' stock price down by 15.9% on the day of the report. Since then, it has recovered some of that ground, but remains down by about 5%.

buy sell hold dice. money.


Multiple avenues for growth, or poor focus?

Butterfly Networks' focus has seemed stretched thin from the beginning -- and the earnings call reflected that.

Management kicked things off with a semi-coherent discussion about the potential for its products in the cardiology market. There was an anecdote about a primary-care clinician determining the cause of a patient's dizziness and borderline shock to be a rather large amount of fluid around their heart -- heroically diagnosed with the aid of the iQ+. They proceeded to discuss the addition of a heart failure specialist with ties to several Manhattan hospitals to the company's commercial leadership team.

I was hoping that this would dovetail into a discussion of plans for a wearable device that could help patients with congestive heart failure better manage their condition. Management has previously suggested that such a wearable would be out by 2023. But that topic was never brought up, and my hopes began to fade for a 2023 wearables launch.

Management then swerved hard toward the subject of the company's partnership with Sientra (SIEN -0.32%), a manufacturer of implantable plastic surgery devices. This will expand Butterfly's footprint in the cosmetic and plastic surgery marketplace. Currently, the U.S. Food and Drug Administration (FDA) recommends that an ultrasound or MRI screening for breast implant rupture in asymptomatic patients be performed five to six years postoperatively, then every two to three years thereafter. With 88% of the approximately 7,000 plastic surgeons in the U.S. performing breast augmentations, the addressable market in this indication amounts to just under $13 million in product sales roughly every three years, plus the potential for $3 million in recurring subscription revenue.

Next, management discussed the iQ Vet -- the company's ultrasound probe for veterinary use. With more than 120,000 veterinarians in the U.S. alone, the iQ Vet has a potential addressable market worth $240 million in product sales every three years and about $48 million in recurring subscription revenue. The handheld device maker has built a dedicated commercial team for the iQ Vet, and plans to aggressively ramp up the business this year, with a global expansion coming within the next few quarters.

The inventory problem

This $2-billion-market-cap company also noted that it had inventory at the end of the quarter worth $36.1 million, up $10.3 million from the end of Q4. Given that it increased its inventory by almost as much as its total revenue for the quarter, management is apparently really banking on sales to accelerate in the second half of the year. While Butterfly Networks may be ramping up production for its coming push into the veterinary market, I have to wonder what has taken so long. The iQ Vet has been available since November 2019, and we still have not seen a breakout of its sales -- which is starting to make me wonder how much of the veterinary market it can capture.

While it is good to see that Butterfly Networks' technology is being adopted across multiple specialties, there's cause for concern that the company may be spreading itself too thin. Investors at this point are being asked to take a leap of faith and believe that management will come through with increased sales in the second half of the year. This is a bit of a tough ask in the face of a reduction in average selling price -- particularly when management has previously stated that margins were better with the iQ+ than with the previous iterations of the device.

Coupled with the company's rising inventory, management's failure to mention anything about its planned wearables offering potentially puts the long-term investment thesis for Butterfly Networks in doubt. With the stock trading at a price-to-sales ratio of 25, healthcare investors should wait to see whether management can achieve its revenue and gross margin targets for the next couple of quarters before adding to their positions.