BFLY - NYSE

Good afternoon. Thank you for attending today's Butterfly Network's Q4 and Fiscal Year 2023 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to hand the call over to Heather Getz with Butterfly Network. You may proceed.

Good afternoon, everyone, and thank you for joining us today. Earlier today, Butterfly released financial results for the fourth quarter ended December 31, 2023, and provided a business update. The release and earnings presentation, which include a reconciliation to management use of non-GAAP financial measures compared to the most applicable GAAP measures, are currently available on the investor section of the company's website at ir.butterflynetwork.com. I Heather Getz, Chief Financial and Operations Officer of Butterfly, alongside Joseph DeVivo, Butterfly's Chairman and Chief Executive Officer, will host this afternoon's call. During today's call, we will be making certainly forward-looking statements. These statements may include, among other things, expectations with respect to financial results, future performance, development and commercialization of products and services, potential regulatory approvals, and the size and potential growth of our current or future markets for our products and services. These forward-looking statements are based on current information, assumptions, and expectations that are subject to change and involve a number of known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in the forward-looking statements. These and other risks are described in our filings made with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, and the company disclaims any obligation to update such statements. As a reminder, this call is being webcast live and recorded, and we will be referencing a slide presentation in conjunction with our remarks. There may be a short delay between the live audio and the presentation being shown, and the slides visible within the webcast platform will also not play animations. To access the animated versions of our slides, visit the events section of our investor website. And then under upcoming events, you will see today's earnings call with an option to click called presentation with animated videos. On the same page, you will also be able to access the webcast live and as a replay once the call has been completed. I would now like to turn the call over to Joe. Joe?

Thank you, Heather. Good afternoon and thanks for joining the call, everyone. I'm pleased to report that our 2023 revenue finished at $65.9 million worldwide, above our expectations of at least $64 million. I was pleased to see each one of our channels performing well as we headed into 2024. In fact, our Q4 and full year direct sale revenues grew 10% and 11% year-over-year. Moving forward, we have every opportunity to realize growth across all of our channels and grow the company double digits in 2024, while investing efficiently. Over the last 18 months we removed over $170 million of cash cost from the business yet continue to invest in our technology roadmap and our commercial team. 2023 was a necessary transition year for the company. We chose to resize the business and focus our strategy. We've matured as a company and can now rely less and less on online sales and more on higher end hospital sales. The operational disruptions over, our sights are set today on growth of our existing business, new products recently launched, and building new market opportunities only ultrasound on chip technology can deliver. During my first full call last year, I laid out what we would deliver in 2023 to set the foundation for growth in 2024. It was one, introducing new ultrasound education offerings to make POCUS accessible to healthcare providers and grow our users. Two, accelerate the easy use by increasing the availability of AI solutions. Three, identifying new development partnerships to bring our core technologies into markets that are not competitive to Butterfly, but will create value for shareholders by leveraging our core semiconductor investment. And four, introduced more products from our roadmap to drive top line growth. I'm very pleased to say that we've completed each of these commitments. One, for new education offerings, we delivered Butterfly Certified, an expert-led education services helping customers master point of care ultrasound with Butterfly by training and certifying proficiency in certain scan types. This offering was operationalized very quickly. We've already seen Butterfly Certified revenue, and we've embedded education as a service into all of our quotations to health systems going forward. Two, on the AI offerings, we received FDA clearance and launched our AI powered auto beeline counter in the second quarter of 2023. It was key FDA AI milestone for us. We also launched Butterfly Garden, our AI marketplace. Since 2018, we've grown a leading customer base of over 143,000 probes. And now third-party ultrasound AI companies can build and sell new AI applications to them. These new AI tools, which will be compatible with Butterfly devices, will be incredibly valuable to all Butterfly users. We signed 13 partners to-date, and our newest partner, Deepecho, just press-released their entrance into the program this week. Three, we've announced previously that we delivered on the core technology partnerships by successfully launching our Powered by Butterfly program in 2023 and introducing Forest Neurotech and Mendaera as mission partners. Four, and lastly, we delivered ahead of schedule on two key product launches, InLab and iQ3, which I will review in more detail in just a bit. We Butterfly employees are very proud of our accomplishments in 2023. We weathered the storm, stayed together, delivered on our construction goals, while implementing our core priorities and investing in our commercial organization. Thus, we've set ourselves up in 2024 to be laser-focused on revenue execution. At this point, I'll turn the call over to Heather to walk through 2023 results in more detail before returning to our 2024 execution strategy. Heather?

Thank you, Joe. As you noted, we accomplished a lot in 2023 to right-size and reset the company and are now on what we believe to be a solid path for growth in 2024 and beyond. But first, let me cover the 2023 results. Revenue for the fourth quarter was $16.5 million, down compared to 2022 revenue of $19 million, driven by lower volume, partially offset by higher price. The lower volume was mostly due to lower e-commerce, as well as large orders, including the deployment of Gates in Africa and others from international distributors, and to a lesser extent, the vet market. These large orders occurred in 2022 and did not repeat in 2023. In the U.S., we realized 11 million in total sales, slightly higher than prior year. This was driven by increased ASPs and higher revenue from software and subscriptions, partially offset by lower per sales, predominantly in e-commerce. Total international declined, 24% over the prior year to 4.6 million. This was due to the previously mentioned large orders in 2022 that did not reoccur in 2023. Partially upsetting the decline in global health and international distribution was a 27% increase in the international direct market. Breaking our revenue down between product and software, product revenue was $10.2 million, a decrease of 20% versus Q4 2022. This decrease was driven by lower volume, spread largely across e-commerce, international distribution, and VET due to the large deals in '22 that I mentioned. Software and services revenue was 6.4 million in the fourth quarter, flat to the prior year period. Software and services mix was 39% of revenue, an increase by approximately 5 percentage points versus Q4 2022. This increase was due to a higher installed base of subscription software as compared to prior year, renewals on the existing base of software users, and software implementations completed during the quarter. Our total annual recurring revenue, which is reported as part of software and other services, grew by 4%. This was led by an increase of 35% in our enterprise software, which is now 41% of our total ARR versus 32% in Q4 2022. When looking at the full year 2023, versus '22, while total revenue declined 10% to 65.9 million due to lower sales in the e-commerce and distribution channel from the non-recurrence of the previously mentioned large orders in 2022. Partially offsetting these declines were double-digit increases in our direct businesses, both domestically and internationally. As Joe noted in his remarks, excluding these large deals from '22 revenue, 2023 revenue was essentially flat year-over-year and our direct market increased 11%. At the end of 2023, we made additional investments in our direct sales teams, and we have begun signing new distributors in existing and in new markets internationally. We expect these investments to gain further traction in 2024. Turning now to gross profit. Gross profit excluding a non-cash write-down of excess inventory totaling $21.9 million was $9.4 million in Q4 2023 compared to $10.3 million in the prior year period. On the same basis, gross profit margin was 57% for the fourth quarter of 2023, which was higher by 210 basis points compared to Q4 2022. This was driven by higher average selling prices, a shift in product mix reflecting a higher proportion of higher margin software and other services revenue, and operating efficiencies. Higher amortization, reduced margin by 150 basis points. To expand on the inventory write-off, during Q4 of 2023, we took a 21.9 million non-cash charge to our cost of sales for the write-off of excess quantities of our previous generation chip that are used in the manufacturing of our iQ+ probes. The number of chips on hand was higher than our updated forecast for future demand of the iQ+. Our forecast was adjusted down as a result of the newly launched iQ3. While we continue to sell iQ+ worldwide, our previous forecast assumed usage of the chips based on 100% of our sales demand being attributed to iQ+. Moving to EBITDA and capital resources, for the fourth quarter of 2023, adjusted EBITDA loss was $15.7 million, compared with a loss of $27.7 million for the same period in 2022. The improvement in adjusted EBITDA loss was driven by the previously announced cost reductions, which led to lower payroll, consulting, and other outside services. Capital resources as of December 31, 2023, were cash and cash equivalents, including restricted cash of 139 million. Excluding 4.4 million of severance and other non-recurring expenses, our total use of cash for the fourth quarter was $11 million. As we have mentioned, over the past 18 months, we have taken over 170 million of cost out of the business and have reduced our annual cash burn to approximately $60 million. Based on this, we estimate that our cash balance conservatively provides us with a runway into 2026. Moving to guidance. As Joe discussed, we have been executing against the roadmap we laid out in August. We launched Butterfly Garden with 13 deal sign, completed and launched our education at ScanLab. We invested in our sales teams and received an early approval and launched our iQ3. All while completing a reorganization that conservatively extends our cash into 2026. While we have many exciting and potentially meaningful tailwinds, in establishing our 2024 guidance, we have not included in our forecast any material acceleration from either the launch of iQ3 or any new revenue streams or markets. We also need to respect the medium-term adoption cycle of large providers who could benefit greatly from wide-scale adoption of Butterfly, but can't buy immediately, as well as the fact that the company has for the first time, introducing next generation device while keeping the existing product in the market, thus creating segmentation for those customers who crave iQ+'s affordability and are not yet in a position or need to fully utilize the capabilities of iQ3. As such, we are taking a prudent and conservative approach to guiding for the full year 2024 with low double-digit top-line growth and an EBITDA loss of $60 million to $50 million. As mentioned, we believe there is upside to this plan, and as the year progresses, we will provide updates and further clarification. Specifically looking at Q1, we expect to see growth in the mid-single digits as we ended Q4 higher than expected, and Q1 tends to be a tougher quarter for closing hospital deals. We do expect this growth to accelerate into the second half of the year as we ramp iQ3 and our newly hired sales resources continue to come up to speed. For Q1 adjusted EBITDA, with expenses related to the launch of iQ3 and payroll tax and the 401k reset, we expect slightly higher expenses and lower EBITDA in the first quarter relative to the remainder of the year. To summarize, this was a transition year, and we look forward to growth in 2024. The reorganization and the investments we laid out are all completed, including investing in the direct sales force, as well as launching Butterfly Garden, ScanLab, and iQ3. While we were forecasting low double-digit revenue growth for 2024, as mentioned, we believe there is upside to this plan and additional efficiencies to realize. Furthermore, we have maintained a solid cash position and have extended our cash runway into 2026, while continuing to invest in the business. We will continue to execute against our plan, drive adoption of iQ3 and expand uses of our product across all our channels. Butterfly is set up to accomplish its goals with a strong base of technological and organizational assets that we are continuing to invest in, and a team who is energized to capitalize on this attractive market opportunity. With that, I will turn the call back to Joe to detail 2024. Joe?

Thank you, Heather. We discussed 2024 guidance of low double-digit top-line growth with an opportunity for upsides. This will be driven by further penetration of health systems with the launch of IQ3 and our investment in our commercial seat. Two, global expansion. Three, further medical school adoption. And four, alternative uses for our technology, including in the vet space. So we all know Butterfly had tremendous success building relationships with doctors directly around the world. Today we have a comprehensive and global online go-to-market strategy. Each quarter we sell more than 1,000 probes online directly to doctors in 18 countries around the world. This allowed us to build the Butterfly brand quickly and reliably as we launched our inexpensive all-in-one ultrasound device for just a couple thousand dollars, making ultrasound a daily fixture in physicians' hands for the first time. So Butterfly did not invent POCUS, but we certainly accelerated its adoption and in many countries put it on the map by selling more handheld POCUS devices than any other ultrasound company in the world, over 143,000 since 2018. While individual doctors were way ahead in embracing POCUS, hospitals were slower to adopt. Emergency rooms led the way, showing hospitals that bedside ultrasound for immediate diagnosis can be a potentially life-saving tool for patients. Early adopters of POCUS originated there. Hospitals became [delouse] [ph] with either having to buy expensive carts to wheel around for POCUS or multiple PISO-based handhelds, which together cost as much as a cart. Then Butterfly introduced the first all-in-one handheld device. And we did a very good job penetrating the ER. If there was a criticism of Butterfly, it was that the image quality needed to be even better to get into more places in the hospital. With the launch of Butterfly iQ3, we doubled the processing power from 4.8 gigabytes per second to 9.6 gigabytes per second. Moore's Law proved true again. Our exponential growth in processing power and image capability since the launch in 2018 is not just an exciting fact today, it's the principle for which we can set our sights on capturing the whole ultrasound industry in the future. As mentioned earlier in January, we received FDA clearance of iQ3 earlier than expected. On February 13th, we launched iQ3 ahead of schedule. And now we have the tool that has at minimum equivalent imaging power to any other handheld on the market, all-in-one, low-cost device. In our industry, image quality is often in the eye of the beholder. So to validate our belief that iQ3 image quality is best-in-class, we commissioned a survey through a reputable third-party vendor and asked 475 medical professionals across eight clinical specialties to do a blinded image review. They were given images from Butterfly's iQ+, Butterfly's new iQ3, and GE's Vscan Air CL. On average, the majority of blinded participants responded that Butterfly's iQ3 had a better image quality than GE's Vscan CL. Other qualitative feedback from KLL said that they believed iQ3 had closed the image quality gap even compared to some hospital multipurpose parts. For Butterfly, the hospital market is now open to our probes like never before. Hospitals now may think twice about reordering the next multipurpose cart and instead consider giving an iQ 3 to each of their doctors so they no longer have to share the cart. There would be minimal cost difference in a one cart versus a fleet of Butterfly's. And on top of that, the benefit of our handheld portability could improve diagnostic time and patient care. The handheld benefits are validated by 1600 clinical-focused papers published in 2023 alone, where Butterfly was cited in nearly half. Not only do we have a world-class ultrasound device, we will continue to deliver the best ultrasound middleware in the market, our Compass Software, bolstering our health system strategy, user proficiency, quality assurance, automatic data transfer into the EMR and packs for billing and storage, reimbursement automation and more benefits. Compass is the best ultrasound management software in the market. While we have been very successful with Compass deployments with 123 new accounts in 2023 alone, not many of those deals were bundled software and hardware. With iQ3 and Compass, we now have a killer one, two punch for health systems. And today, the best point of care health system offerings in the world. iQ3 checks the box on image and sets the stage for advanced digital tools to make image acquisition even easier. I'd like to share one with you today. As you know, ultrasound is a hard image to get. The operator must manipulate the probe to get that one perfect image. But what if we can make it easier? Well, have any of you had an MRI before? The technician puts you on the table and asks you to watch your head as you're automatically slid into this big circular magnet. The tech then leaves the room and starts an automated protocol. Over 20 to 30 minutes, the machine slices the body into many cross-sectional images. It automatically captures images. On a lesser scale, of course, a new feature in our iQ3 called iQ Slice performs a similar task. If you're viewing our animated slides, you'll see this feature on the screen. With the probe in a stationary place over a piece of anatomy, and in this example here, it's a kidney, you press a button and like the burst mode on an iPhone, 46 images are taken as the ultrasound beam moves across the organ. Once captured, the doctor simply scrolls through the images and chooses the one they wish to use. Said a different way, iQ Slice enables capturing a series of images from the single position and gives the user the option of rapid assessment of the target organ or the ability to select the best image for annotation or storage. iQ3, once positioned, automatically takes the images for the user. So this marks the beginning of a new era. I once told you that when reviewing digital and film photography, that when digital equals analog, digital wins. Why? Well, digital always has more unique features and capabilities. In photography with digital, you don't have to develop pictures that you don't want. You can store it in a cloud and share them as you see fit. Well, in ultrasound, the digital benefits are an all-in-one device for imaging, automated image capture, byline imaging, 3D in the handheld, and more and more capabilities to come. We also have a cool proprietary feature called iQ Fan, which you can see on this next slide. It fans the lung automatically without ever moving the probe. The B movement is a profound new capability, which will remain a core differentiation to analog and will be core to our wearable strategy in the future. The hospital market is a big growth opportunity for us in 2024, but it's important to remain conservative in this early going as hospitals also have the longest selling cycle of our channels. The hospital market for ultrasound is over $8 billion a year in the U.S. and Butterfly now has greater access to it than ever. And as Heather mentioned, we hired more sales people and managers in our direct U.S. market who are now focused and outselling in 2024. Butterfly's new iQ3 is in addition to our current product offering, not a replacement to our second generation iQ+. iQ+ is still the best selling handheld ultrasound device in the world and priced at $26.99 for the probe. We will continue to sell this workhorse for a while for this foreseeable future. iQ3 is a premium product and it's priced at $38.99 per probe plus subscription. So for the hospital market where we compete clearly with handheld devices priced between $5,000 and $7,000, remember each needing four devices to do what Butterfly can do in one. We remain the lowest cost ultrasound alternative by far. The big companies charge $20,000 to $28,000 for their four handheld devices priced at $5000 to $7,000 each. That's the same overall price as a multipurpose cart. You see how that works for big ultrasound? In comparison, $38.99 remains a fraction of the current hospital purchase cost today, and we hope we'll accelerate the adoption of a one probe per doctor model in the future. Our iQ+ will remain available for all healthcare practitioners around the world, who want to have access to the best-selling device in the world. iQ3 is completely incremental to Butterfly's mission to democratize ultrasound for everyone. Our next major growth driver in 2024 will be our global expansion. So last year we retooled, educated, and reinvested in our international distribution partners. We hired a new senior commercial leader. With clean house and set ourselves up for growth in 2024. So first, we will expand our footprint in Asia for the first time. We are in the process of opening new markets in Indonesia, Philippines, Malaysia, Bangladesh, and Singapore, while increasing our work in India and Pakistan. We've developed the China strategy, which will take a couple of years to implement, but it's in flight, and we're working to expand into this important market. I'm also pleased to announce that this month we've completed our EU MDR review of our Butterfly iQ+ ultrasound system, with a positive recommendation for certification from our notified body. To put this into context, EU MDR certification has been and is one of the biggest regulatory milestones for numerous medical device manufacturers looking to enter the EU market and remains a struggle for many companies in search of EU MDR certification. For clarity, our iQ+ received CE Mark with our first few set of features. Then the regulations changed to EU MDR and we've waited a few years for this approval and launching features, our customers need. Our quality and regulatory teams are currently finalizing documentation and are expecting issuance of the finalized certificate very soon. Having this certification will allow us to release additional features not yet available on the iQ+, such as Pulsed-wave Doppler in a number of presets including abdomen, as well as auto B-lines in the lung preset that our international customers have been patiently waiting for and will be excited to access. This also sets the foundation for the launch of iQ3 in Europe later this year with its advanced tools like iQ Slice and iQ Fan. The iQ3 is also currently under review with Health Canada and we anticipate approval there soon along with several other international markets later this year. ScanLab which I'll talk about more in a moment, was also launched in many of our international markets last month. We have focused our quality and regulatory resources on growing our international markets. So we are so pleased to offer these new features. Continuing in Europe, many of you may not know, but in 2006, the European Commission implemented what is called the Restrictions of Hazardous Substances Directive, or RoHS. RoHS was a sweeping directive banning hazardous materials to be added to electronics. Medical devices were covered by this directive, and piezoelectric ultrasound devices ran afoul of the standards because crystals and analog ultrasound devices contain a level of lead contaminant that exceeds the RoHS standards. So at the issuance of the directive, the analog ultrasound industry lobbied for an exemption solely on the basis that there was no alternative to their lead crystal devices. For the past two decades, they have enjoyed the exemption and are only meeting RoHS standards due to the commission's good graces. Well, Big Ultrasound has wasted 20 years in my view because Butterfly Semiconductor Technology, which is RoHS compliant, today surely can do everything the piezo handhelds can do. There is no medical basis to claim piezo lead crystals and handhelds do not have an alternative. They do. So I truly don't know what's going to happen here, I don't know how it's going to go. Big ultrasound's lobby is quite powerful. Gosh, two of them are in Europe. Will the European Commission have the courage to actually ban piezo handhelds? Well, who knows? But it's good to know that Butterfly's on the right side of history. We filed two briefs with the EC, educating them on our position, while asking them not to renew the exemption this go-around. We'll stay focused on them to hopefully remove this old hazardous handheld technology from their market. Our third growth driver in 2024 will be to drive adoption into medical school programs. So as I mentioned previously, 60% of medical schools train on a Butterfly, but not all use the one probe per student model. We will grow by converting more programs to Butterfly, while upgrading existing ones to a one-to-one model. Students don't truly learn unless they practice and having their own probe is essential to fully committing to ultrasound. One catalyst in our medical school strategy will be ScanLab. ScanLab is another way users can practice their scanning skills. The AI-driven tool helps them with walkthroughs on probe positioning that actually labels anatomy using very advanced AI tools driven by the largest ultrasound image repository in the world. ScanLab has been made available free to all subscribers in January and thousands of downloads have already occurred. ScanLab has been added to our Compass, iQ+, and iQ3 product offerings. We aspire to pitch every medical school this comprehensive offering in 2024. On top of these primary growth drivers are additional opportunities. For example, our vet business continued pursuing use in the feedlot cattle market for detection of interstitial pneumonia, a primary cause of mortality in the feedlot cattle industry by using our custom AI auto B-line tool for cattle. Preliminary findings from our research partners at Kansas State University are affirming the opportunity in shoot side cattle treatment and management, which could be of use to the 1 million cattle producers in the U.S. If this hits, it's yet another growth driver in 2024 for Butterfly. I'd like to conclude by restating my belief that conservatively, Butterfly will return double-digit growth this year. I believe aside from tough comps in Q2, we will deliver accelerating revenue growth each quarter throughout the year. And it doesn't stop there. Butterfly is well into development of our fourth generation chip, with our longstanding chip partner, DSMC, the world's leading semiconductor foundry. And as I've discussed before, Moore's Law is on our side. Our chip will continue to get faster, more advanced, more compact. This coupled with our beam-steering capability will be core to our wearable strategy in the future, analog, ultrasound, [beware] [ph]. Before I turn the call back to the operator for questions, I wanted to make sure that you're aware that we'll be holding an Investor Day, Monday, March 18th at the New York Stock Exchange. I'm very excited for this event, where we'll unpack more of our innovations, will have demonstrations and tables and discuss our pathway in the wearables and the home that we will begin introducing in the first half of '25, which will help drive growth past '24. The future of Butterfly's ultrasound-on-chip is one where doctors monitor patients in their homes. which represents a sizable TAM when considering the more than 150 million patients globally living with chronic diseases. So thank you again, and operator, we can now open the call for questions.

[Operator Instructions] The first question is from the line of Josh Jennings with TD Cowen.

Thanks for the thorough update and congratulations on the progress. I was hoping to start with just a question on iQ3. We're assuming that there's buzz already generated within the clinical community, but I was hoping you could just comment on any buzz generated within the sales pipeline, maybe even your customer base. And then just after that, is iQ3 going to drive an acceleration in the potential replacement cycle or upgrade cycle within your customer base? And then, what is the opportunity with iQ3 to go back to hospitals that have adopted the enterprise software solution, but not the hardware? And do those customers represent the low-hanging fruit as you're moving forward with this IQ3 launch? Sorry for the multi-part question. I just have one follow-up.

Sure. I guess yes, yes, and yes. So, we're very excited about the initial reception of iQ3. We've been in many demos, and I have not heard of one situation where we haven't really impressed our clinical partners and gotten them very excited. And that, our pipeline, we don't normally comment, specifically on pipeline. But since our launch, we've added a lot of opportunity into the pipeline in just the first couple of weeks that it's been out there. So we're very, very, very excited about what this means. And now we know, like in each, all of this pipeline work are in hospital settings and we're talking to medical schools on larger deals, we're talking to health systems about upgrades and conversions of competitive product. So a lot of very good activity. So we're excited. Regarding trade-ins, yes. So we have a trade-in path for our health system partners. And actually just today have launched a trade-in for our e-commerce. So we do value the iQs and iQ+'s, we think there are other markets. And so if our loyal customers wish to upgrade, then we're allowing that to absolutely happen.

Thanks for that. And then, just to build out of the commercial team and the reorganization there, hoping to just get some more details on how the sales -- direct sales team in the United States focused on hospitals, how it's situated compared to last year and how we will follow the course of 2024 will continue to add sales reps and managers.

Yes. So I won't go into specific numbers of salespeople or managers, but we've increased the size, Heather, 30% to 50%. And through '23, we were training them, we were getting them up to speed, they were on guarantees, they were on ride-ons with other reps, we were bringing people in and getting up to speed. And now in January, they've all come off their guarantees. They all have to eat with the kill. And then, they're out there aggressively going. And one of the things we've also done is, we have an e-comm channel. We have an out-of-hospital channel, like an inside sales that deals with out-of-hospital. And then we have a direct channel that focuses in-hospital. But one of the things that we've done different this year is to make sure that all three of them work together. So as the leads come into e-comm, whether someone, everyone who buys a product online in the U.S. is a part or affiliated with some health system. And so now we link that e-comm sales to our direct rep so they know which doctor, the major institution purchased the product that all of a sudden now they're looking at that strategically saying, okay, we have another champion who's come into the fold. And interestingly, at times when we look at our health system strategy and we amalgamate the amount of doctors who are affiliated with that health system who have Butterfly's sometimes it creates a tipping point and we've seen that in the past. We've seen where all of a sudden we take inventory of how many individual doctors at a health system have purchased their own product and want to use it in the hospital that typically has led to the software deployment because in the hospital say, hey, we have all these guys bringing this ultrasound in that that we didn't sanction our buying. We said, well, that was, your doctors were buying them individually. Let us put software in place to help you manage it. We can integrate their images into the EMR. We can let them document to the EMR. We have automated tools to help file reimbursement. We have tools that can help automate and allow to manage the proficiency so they can be educated properly. So there really is a one-two punch there. And we're really excited about how, while those 123 accounts, we created software throughout 2023, they weren't really the type of deals that I would have liked to have seen that were bundled with hardware and software. It was a lot of software kind of allowing health systems to manage all the Butterfly's that have been put in the market, but now it's different because now iQ3 meets so many of the needs of the subspecialists. We've done very well in cardiology. We've done very well in other specialties, critical care, and of course in the emergency room. So now to make sure that we can tap to those and capture that reimbursement, we can now walk in the hospital with a desire to standardize. Why have four different handheld probes, that's so counterintuitive. A handheld probe should walk with a doctor, not all of a sudden have 25% of what they could do. Now they got to go run to get another handheld. And all those four handhelds cost the same amount as a multipurpose cart. It just makes no sense. So we think Butterfly brings true efficiency in point of care. We believe in our sales force is actively advocating for every doctor to get their probe and you only need one probe in order to perform that point of care. And then everything gets integrated into a middleware and the data gets captured. And right now we see private [to our] [ph] middleware going in hospitals on average are only getting around 30% to 40% of the scans that they take are actually make it all the way to being claimed for reimbursement. And that's because so many of the individual ultrasound devices that have are not tied into their EMR and are properly documented. We've seen that when people implement Compass and implement our middleware, that our middleware is not just Butterfly. It works for all the other devices as well. So it's not just a proprietary thing for Butterfly. When we put our middleware in the hospital, we see the amount of scans that they file for reimbursement go up. They go up because they feel more comfortable, they go up because it's easy, it's integrated into the phone where they're looking at the image, and the whole process allows hospitals to grow their revenue. So as we go into 24, our salesforce is out now talking to all these accounts, saying we have this middleware, we have this killer all-in-one probe that now has this awesome image quality that can live inside the hospital. Let's talk about a larger deal. Let's talk about standardization. Let's talk about converting out your existing products because this is the true way to new point-of-care ultrasound.

And Joe, can I just add to that, to Josh's question? So Josh, around, we added people mostly in the second half of the year. So when one of the data points that we talked about was the increase in revenue related to our direct sales force and we saw a nice bump both in the fourth quarter, in the full year, around 10% and 11% respectively for those areas and that's the place that we've invested and they're the ones who are calling directly on these hospitals and systems. So as we go into 2024 and those [soaps] [ph] become fully efficient and ramped, we expect to see a benefit from that. And as the year progresses, we plan to look at each of these areas and territories and add resources where appropriate. We just don't want to get ahead of ourselves and we wanted to be efficient with our use of capital as we're investing.

The next question is from the line of Shaymus Contorno with Oppenheimer.

Hey Joe, Heather, it's Siraj. Can you hear me all right?

Yes. Hi, Suraj.

We hear you just fine, Suraj.

Sorry, I was having technical difficulties. So Joe, on RoHS, how would you gauge the probability of various outcomes? Can the goalposts be changed now to require some comparative assessments between analog and digital devices, eventually with a roadmap to phase out analog? I guess rather than having a puristic view of lead versus non-lead, can the goalpost now be changed? How are you all looking at the various outcomes and when do you think we would know more about what's next on the horizon?

Well, thank you for that question, Suraj. I just don't know. What I do know is, they have received two sets of exemptions. What I do know is that they are up for an exemption now, and we are trying to intervene. If you look, I think, we can debate numbers, but handheld ultrasound in Europe has to be a fraction of the overall, [Technical Difficulty] ultrasound and overall revenue, the political blow back for the European Commission, I believe would be very low. If they said we are taking Piezo handhelds off the market and we are going to only allow those who meet real house standards to be on the market, or else what's the purpose of having a standard? If there's equivalence in a device and it meets the standard, then why have a standard in the first place? But truthfully, we are actively in retaining lobbyists. We don't have the resources to fight big ultrasound, but I think there is not going to be a very good argument on why a Piezo-based handheld device that's compatible to our device. There's not going to be a good scientific or clinical reason why they should. So if it stays on, it'll purely be political. If it stays on, it won't be based upon, I mean, we'll go through whatever evaluation and assessment, but I would love to see that the standards upheld, of course, it's in our favor. And it's consistent with what we believe. But honestly, I don't have a read on the politics. If you read the regulations, if you read the intention to preserve the environment, if you read the desire to hold all types of electronics who use raw earth materials or who have either manufacturing toxicity or disposal toxicity. You know, the legacy piezo crystals, you know, they have not proven to scientifically meet the threshold of that directive. All we do. So I guess the question really is how serious are they on the directive? And we look forward to educating them and advocating our position.

And the other thing too Suraj is, let's say they do a phase in. If you're buying devices, are you going to want to buy a device that meets the standards now? Or are you going to be willing to buy a device that doesn't meet the standards and potentially have to remove that from the market? Right. So I think it regardless of, if they do a phase in or if they do an absolute renewal, exemption it benefits Butterfly.

Fair points. Joe, in your prepared remarks, you mentioned -- you highlighted the results of the survey on iQ3. So Joe, admittedly, it's just been two weeks since you all have commercially launched it. So I don't want to go into how many sold and accounts and whatnot. Joe, at what point in the, how many quarters down the line, would you say we would have enough visibility to quantify iQ3? Whether it's in terms of velocity of sales, systems per account, how are you thinking about, at this point in time, iQ3, this would give us a real good idea that what we are seeing qualitatively, now we are seeing quantitatively also. Thank you for taking my questions.

Yes. Thank you. It's a very good question. I personally, I believe by the end of the second quarter, when we have a full quarter, it'll give us the opportunity to see how much our pipeline has grown, how many of those deals we were actually able to convert into revenue. And it'll also be a full cycle. In the beginning, there's obviously a lot of noise. And it takes time. I think the difference with iQ3 is we're pricing it at $38.99. And so it is more of a hospital product. And it's a product that, as I had mentioned, is still far less expensive than any of the handheld platforms that are in the hospitals today with Piso crystals. But it is a higher price point. So it is a sale that we don't believe is as robust an online sale and one that will be a very robust hospital sale. But there are, we know how long those sales cycles are. I'm hopeful that we can see in -- through the second quarter how that ferrets out. We have already seen our pipeline grow a lot. We've seen a lot of deals come into the pipeline, a lot of opportunities that we didn't have before and so we're very excited about that. And so we'll see over time, how quickly do they convert? What is the process? And as you know, as you're getting into larger and larger numbers, there's more people who have to sign off and make that happen. But I think, by mid-year, we're going to know what we have.

Thank you. There are no further questions waiting in queue. [Operator Instructions] There are no further questions in queue. I'd like to turn the call back over to Joe DeVivo for concluding remarks.

So thank you very much everybody for joining. We're very excited about now having 20 -- we had a lot of accomplishments in '23. And '23 was the year where we went through a lot of changes and a lot of restructuring and we're just in such a good place right now. We have a leading team, we have a very clear strategy and our conversations on a daily basis, our execution, revenue, opportunity, not restructuring and all other types of things that are really a significant amount of effort. We have a great team, a great strategy, a market that's growing and a wonderful product that allows us to be very excited about our future. And then on March 18th, we're going to get together. We're going to unpack a little bit more of our roadmap. We're going to talk more about the longer-term strategy. And it's just a very exciting time. So thank you for your attention. And I hope you all come to our Investor Day. So thank you so much everybody.