Butterfly Network (BFLY) Q1 2025: Gross Margin Rises to 63% as Medical School Flywheel Accelerates
Butterfly Network’s Q1 2025 results underscore a multi-pronged strategy yielding higher gross margins and recurring demand signals from medical schools and hospitals. The company’s open platform, AI, and chip licensing bets are moving from vision to revenue, with operational leverage emerging as a key theme. Investors should monitor the durability of education and enterprise adoption as funding and macro headwinds linger, but the business model’s diversification is now showing tangible results.
Summary
- Medical School Adoption Drives Recurring Growth: Direct-to-student probe programs are converting one-time sales into annuity-like demand.
- Enterprise Pipeline Strengthens: Hospital network wins and software integration are fueling Butterfly’s transition to a platform solution.
- Platform Monetization Broadens: AI marketplace and chip licensing initiatives are poised to add incremental revenue streams in 2025.
Performance Analysis
Butterfly Network delivered 20% revenue growth in Q1 2025, driven by US channel strength, higher IQ3 probe sales, and initial chip licensing revenue. US revenue outpaced international growth, with the domestic channel up 24% year-over-year, reflecting robust demand from both medical schools and hospitals. International revenue grew 9%, primarily from higher prices rather than volume, as the company’s IQ3 launch gained traction abroad.
Product revenue (devices) rose 25% year-over-year, reflecting the shift toward higher-value probes and increased medical school penetration. Software and services, at 33% of total revenue, grew a more modest 11%, as product mix temporarily outpaced recurring software expansion. Gross margin improved to 63%, up from 58% last year, a function of improved pricing, software margin gains, and cost discipline. Adjusted EBITDA loss narrowed by 31%, with normalized cash burn at $6.7 million, underpinned by both revenue growth and tight expense control.
- Medical School Channel Momentum: Direct-to-student probe programs are shifting the education market from shared devices to individual ownership, locking in annual demand from 25,000 new students per year.
- Enterprise Hospital Upsell: The second major hospital system committed to full-network Compass software integration, signaling Butterfly’s move from device vendor to platform standard.
- AI and Licensing Revenue Emerging: Initial semiconductor chip deliveries and new AI marketplace partnerships are beginning to contribute, with further upside tied to upcoming FDA-cleared apps and Octave licensing deals.
Butterfly’s financial improvement is now being matched by operational diversification, setting the stage for multiple revenue vectors as the year progresses.
Executive Commentary
"Now today, our portfolio includes two generations of probes with different price points, which allows us to bring in more value for premium technology while keeping a lower-cost probe on the market for more price-sensitive customers. We've added an AI marketplace called Butterfly Garden, a chip licensing program called Octave, and now Butterfly Home Care…in 2025, we expect them to make headway and begin contributing revenue."
Joseph DeVivo, Chairman and Chief Executive Officer
"Gross margin percentage increased to 63% from 58% in the prior year. Gross margin percentage was positively impacted by higher average selling prices as well as improvements in our software and services margin due to a reduction in software amortization and lower hosting costs."
Heather Goetz, Chief Financial and Operations Officer
Strategic Positioning
1. Education Channel Flywheel
Butterfly’s direct-to-student probe model is creating a durable, annualized demand base. The company is shifting medical schools from shared lab devices to a one-probe-per-student standard, with schools integrating Butterfly purchases into tuition or campus stores. This model mirrors Apple’s campus strategy, aiming for brand loyalty and habitual use as students become practicing clinicians. With 25,000 new medical students annually, this is building a recurring, year-over-year hardware and software revenue stream.
2. Enterprise Hospital Penetration
Hospital networks are moving from fragmented device adoption to institutional platform commitments. The second major enterprise customer, a top-five global hospital, has selected Butterfly for network-wide deployment, integrating Compass software across all departments. The sales process leverages organic, bottom-up adoption by clinicians, which then compels C-suite buy-in for compliance, data integration, and workflow management. This “groundswell to enterprise” approach is driving both hardware and high-margin software sales, with additional pipeline momentum expected as peer institutions follow suit.
3. Platform and Ecosystem Expansion
AI marketplace (Butterfly Garden) and chip licensing (Octave) are evolving from early investment to revenue contributors. Two new AI partners were added in Q1, bringing the portfolio to 23, with the first FDA-cleared clinical app (Heart Focus) launching in Q3. Octave’s chip licensing pipeline includes a marquee generative AI partner and 25+ active prospects, spanning medical device, pharma, robotics, and even non-healthcare sectors. These initiatives position Butterfly to capture value from both device sales and embedded technology in third-party platforms.
4. Home Care and Clinical Services
Butterfly Home Care pilots are demonstrating early clinical and economic impact, particularly in congestive heart failure monitoring. The company’s AI tools enable nurses without ultrasound expertise to perform pulmonary scans at the bedside, reducing costly hospital readmissions. Commercial agreements are targeted for late 2025, with national expansion potential if pilots continue to show positive outcomes.
5. Product Portfolio and Roadmap
The two-tier probe strategy (IQ3 and IQ+) addresses both premium and value segments, with IQ3 adoption strongest in hospitals and IQ+ maintaining traction in education and e-commerce. Next-generation chips and form factors are in development, with P5 expected to reach production by late 2025, reinforcing Butterfly’s technology moat and cost advantage.
Key Considerations
This quarter’s results highlight Butterfly’s evolution from a single-product company to a diversified digital health platform with multiple monetization levers. The education channel, in particular, is emerging as a structural growth engine, while enterprise and platform bets are beginning to convert pipeline into revenue.
Key Considerations:
- Recurring Demand from Education: The shift to individual student probes is creating an annuity-like hardware and software revenue stream, with multi-year lock-in as new classes enter annually.
- Enterprise Upsell Leverage: Institutional software integration is unlocking larger, multi-year deals and driving higher-margin revenue from existing device penetration.
- Platform Monetization Optionality: AI marketplace and chip licensing initiatives (Octave) offer upside beyond core device sales, with early signs of traction in both healthcare and adjacent industries.
- Operational Discipline and Cash Position: Improved gross margin and reduced cash burn provide Butterfly with flexibility to invest in growth while managing macro and funding headwinds.
- Macro and Policy Uncertainty: Funding delays (e.g., USAID, NIH) and potential tariffs are being actively managed, with limited near-term financial impact but some risk to international and global health revenue pacing.
Risks
Butterfly faces several near-term risks: Delays in global health and NGO funding, US policy changes affecting healthcare budgets, and potential tariffs could impact sales cycles and cost structure. While the company’s inventory and supply chain mitigate immediate tariff exposure, a prolonged funding squeeze or economic slowdown could slow enterprise and international deal conversion. The business model’s diversification helps buffer these risks, but recurring education and enterprise adoption must hold up to sustain the current growth trajectory.
Forward Outlook
For Q2 2025, Butterfly guided to:
- Revenue of $23 million to $24.5 million
- Adjusted EBITDA loss of $9 million to $10 million
For full-year 2025, management reiterated guidance:
- Approximately 20% revenue growth
- Adjusted EBITDA loss of $37 million to $42 million
Management highlighted several factors that will shape results:
- Potential upside from Octave licensing and AI marketplace commercialization
- Uncertainty in global health funding and hospital budget cycles factored into Q2 guidance
Takeaways
Butterfly’s Q1 2025 results validate the company’s pivot from hardware-centric sales to a diversified digital health platform, supported by recurring education demand, expanding enterprise pipeline, and emerging platform monetization. Operational leverage and margin improvement are now evident, but execution in education and enterprise channels remains critical as macro and funding headwinds persist.
- Education Channel as Growth Engine: The move to one-probe-per-student programs is establishing a structural, recurring revenue base with high visibility, creating a defensible annuity for both device and software sales.
- Enterprise and Platform Expansion: Hospital network wins and the ramp-up of AI and chip licensing signal Butterfly’s transition toward a platform model, with multiple vectors for future growth and margin expansion.
- Execution Watchpoint: Investors should monitor the pace of enterprise deal closures, the durability of education adoption, and the conversion of platform pipeline into meaningful revenue as the year progresses.
Conclusion
Butterfly Network’s Q1 2025 performance reflects a maturing business model with improving operational leverage, recurring demand signals, and early signs of platform monetization. Sustained execution in education and enterprise channels, alongside prudent risk management, will be key to unlocking the company’s long-term digital health ambitions.
Industry Read-Through
Butterfly’s education flywheel and enterprise platform strategy offer a blueprint for medtech and digital health peers: Recurring, embedded demand in training and workflow integration can drive defensible growth and margin expansion. The rapid adoption of AI-enabled clinical tools and chip licensing models highlights the value of open, cloud-connected ecosystems in healthcare imaging. Competitors with legacy or closed architectures may face increasing pressure as hospitals and clinicians seek flexible, interoperable, and data-rich solutions. The ability to diversify revenue across hardware, software, and platform licensing is likely to become a key differentiator in the next phase of medtech digitization.