Butterfly & Nanox Q2 Earnings Reviews
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Butterfly & Nanox Q2 Earnings Reviews
Exploring the reports of 2 medical imaging disruptors.
1. Butterfly Network
“We are very encouraged by the broad demand for our solutions across a wide range of customers. Our offerings, footprint and partnerships continue to expand every day.” — CEO Dr. Todd Fruchterman
a. Results
Analysts expected Butterfly to generate $14.5 million in sales for the quarter. It posted $16.5 million thus beating expectations by 13.7%.
Year over year (YoY) product revenue growth faced a tougher Q2 2020 comp due to a sales pull-forward in the comparable period last year. This was because of Butterfly’s pandemic-specific use cases.
b. Profitability
Note that first quarter 2021 net income margin of (5.6%) was boosted by $54 million from a change in fair value of warrant liabilities. Without it, net income margin last quarter would have been (441%).
Similarly, in this quarter net income margin of (17.5%) was boosted by $33.5 million from a change in fair value of warrant liabilities. Without it, net income margin this quarter would have been (160%).
Overall cost of revenue shrank by 29% year over year to complement the 39.8% rise in sales. This is due to Butterfly moving from development-stage to commercial-stage manufacturing.
c. Annual Guidance
d. Business Highlights
CEO Dr. Todd Fruchterman
Future software upgrades are planned to:
Improve imaging quality further
Add more specific use-cases
Integrate more diagnostic-aid tools.
Butterfly is now present in over 100 medical schools across the globe. The Lewis Katz School of Medicine at Temple purchased an iQ+ for all of its first-year medical students and gifted the device to them at the white coat ceremony.
“Our goal is to solidify Butterfly from the beginning to ensure our practitioners of the future have the ability to make more informed clinical decisions, regardless of specialty or care setting.” — Fruchterman
It signed its “largest distributor relationship to date” with Chindex in Hong Kong. This “solidified a substantial multi-year commercial commitment for the Hong Kong region.”
The Texas Tech School of Veterinary Medicine became the first vet-school to deploy the iQ+ college-wide.
“We believe Butterfly is well-positioned to disrupt and advance veterinary medicine. We see this as an attractive market for growth beyond our core human efforts.” — Fruchterman
Butterfly licensed a new OB/GYN solution that was delivered with a seamless software upgrade to the iQ+. Butterfly’s ultrasound on a chip approach ensures it can upgrade its hardware with new software features without actually having to build new hardware. The upgrade comes with the following features:
Enhanced imaging quality
Gestational age calculation (single most important variable for determining infant mortality)
Audible fetal heart zone (in the USA and Canada so far)
ESC Heart Failure (part of the Journal of the European Society of Cardiology) recently published an interesting Butterfly iQ+ study. It was determined that patients with no medical training could be taught to “self-perform a lung ultrasound exam” after an iQ+ training session with the image then being remotely interpreted by medical professionals. Remote monitoring unlocks more fluid, real-time care. Note that any self-scanning capabilities must receive proper regulatory clearance before use.
The company has a secure supply of semiconductors but Butterfly is impacted by lead-time increases just like everyone else. It does not anticipate any difficulty fulfilling near-term deliveries.
Butterfly is now in 20 countries across the globe with international business contributing 30% of total revenue.
Butterfly has seen a 30% sequential efficiency boost from its enterprise sales team in terms of volume. Butterfly also plans to continue hiring more salespeople.
“We remain on track with important momentum thanks to interest from a wide range of customers.” — Fruchterman
CFO Stephanie Fielding
Fielding spoke on the strong demand pipeline across a “wide-breadth of use cases.” She shared that although sales contracts are somewhat lumpy (making quarterly revenue lumpy) they’re excited to by all of the opportunities they’re seeing for Butterfly.
Fielding expects subscription revenue to fall as a % of total revenue in the short-term as product sales accelerate. Over the longer term, Fielding expects subscription revenue to rise as one-time product sales convert to more and more monthly subscription fees.
It has $509 million in cash & equivalents + marketable securities with no debt. Liquidity is not a concern at this time.
e. My Take
This was a solid quarter for the company. Revenue beat expectations but the company maintained its 2021 revenue guidance. Gross profit margin has positively inflected as expected and enterprise momentum appears to be strong. The deal with the Temple Medical School should be just the first domino in a long stream of contracts within academia. The contract with Texas Tech’s veterinary school carries similar meaning within that niche.
For me, all eyes are on the second half of the year when Butterfly is expected to see dramatically ramping growth and adoption. I have no interest in trimming or adding to my position at this time. Let’s see if it continues to deliver. So far, so good.
Click here for my broad overview of Butterfly.
2. Nano-X Imaging (Nanox)
a. Leadership Changes
Founder, Chairman and CEO Ran Poliakine will step down as CEO effective January next year and will stay on as Executive Chairman. Erez Meltzer — a current board member — will become the new CEO.
“I intend to be very involved in the company’s longer-term initiatives and future collaborations. I will now focus on hunting elephants (large clients) with Erez focused on execution.” — Poliakine
Meltzer has ample chief executive experience as he has served as the CEO for 3 of the 10 largest companies in Israel. Most recently, Meltzer was the Chairman of Israel’s world-renowned Hadassah Medical Center.
Nanox also announced Ran Daniel will replace Itzhak Maayan as the CFO on August 15th. Daniel will be based in the United States to build out Nanox’s business here.
“2021 has been a year of infrastructure building and getting ready for primetime. The year of 2022 is going to be the year of execution, execution, execution. We wanted to make sure we put forward the right team to globally manage the organization. We selected the best people we know to lead the change from an r&d company to primetime.” — Poliakine
b. Operational Highlights
The company is pre-revenue so does not have any demand growth metrics to share. It does now have 6,150 units under contract for deployment pending clearance. At a minimum this would represent $166 million in annual revenues based on the most pessimistic possible outcomes. It could represent closer to $350 million in annual revenues.
Some more highlights:
Nanox reiterated its goal of deploying 15,000 Arc units by the end of 2024.
Ran reiterated that the first Arc deployments will take place later this year.
The South Korean semiconductor factor (owned with its partner SK Telecom) is scaling up “as planned” & both tube manufacturers — glass and ceramic — are as well. There are no supply chain issues to report.
It has $193.4 million in cash on hand and posted a quarterly net loss of $13.6 million. This burn rate would give Nanox 3.5 years of liquidity before running out of cash.
“We have all of the confidence that at least 1,000 Arc units will be shipped during 2022 as previously planned and reported.” — Poliakine
The company is still assembling units in its temporary Israel factory as its permanent Foxconn facility in Taiwan is developed. The units made in Israel will come with slightly lower gross profit vs. the future units built in the permanent Taiwan plant.
c. M&A
Nanox agreed to purchase Zebra Medical Vision LTD. Zebra is a medical artificial intelligence (AI) software developer. The combination will help Nanox deliver more actionable insights using its proprietary Arc technology; Zebra’s AI will directly integrate into Nanox’s imaging capabilities.
The deal is for $100 million up front and another $100 million tied to Zebra meeting operational milestones such as signing 3 new contracts within 6 months of this deal closing. The purchase brings a new layer “of clinical and diagnostic credibility” to Nanox. Zebra will operate as a separate entity under the Nanox umbrella.
Zebra’s team is predominately made up of software engineers and the company comes with 7 FDA-cleared patents. Global healthcare organizations like Apollo India, Intermountain Healthcare, the U.K’s NHS, Johnson & Johnson and many more use Zebra’s offerings.
“The purchase will allow us to capture a larger portion of the $40 per scan included in Nanox’s contracts.” — Poliakine
Nanox also signed a binding letter of intent to purchase its distribution partner USARAD Holdings along with its global network of 300+ radiologists. This will give Nanox access to a broad network of experts to combat the global shortage of radiologists and thus to boost accessibility further. The deal is for $27 million total: $18 million in Nanox shares and $9 million in cash.
The $9 million will be paid at closing with the remaining $18 million in shares paid out as milestones are reached. Nanox also agreed to purchase Medical Diagnostic Web (MDW) — a subsidiary of USARAD — for $3 million in Nanox shares.
USARAD is backed by Siemens, and Nanox thinks this purchase will make deployment into urgent care settings around the United States far more seamless. It also sees USARAD providing incremental deployment opportunities for Nanox.
“Zebra will move to profitability by 2023 and USARAD is currently cash breakeven.” — CFO Itzhak Maayan
It has also established the Nanox Academy to educate radiologists on how to most effectively use the disruptive hardware and software. USARAD will play a significant role here.
The 2 purchases would create what Nanox is calling an “end-to-end, globally connected medical imaging solution.” Pending the closure of the deals, Nanox will now feature groundbreaking imaging technology, AI diagnostic tools and a dedicated team of radiologists all under one roof.
b. My take
Vitally, we did not get any more production setbacks or new supply chain issues related to its X-ray tubes. We did, however, get another CFO change which hopefully will be the last for several years.
I’m actually encouraged to see Ran step down as CEO and remain on as Executive Chairman. It was time for a seasoned operator to step in and that’s exactly what Meltzer is; now Ran can focus on what he does best: selling and growth. I’m also pleased to see that large pieces of the proceeds from its 2 acquisitions will only be paid out if performance milestones are met. That reality keeps Zebra and USARAD motivated to continue executing.
This is my most speculative holding, and one of my smallest positions. A lot could go wrong for Nanox, but the potential upside if it can execute makes that worth it to me. I have no interest in trimming or adding to my position at this time.
Click here for my broad overview of Nanox.