Butterfly Network (BFLY) Q3 2026 earnings review
Butterfly Network's licensing sales double, but fourth-quarter growth slows
Butterfly Network, the maker of handheld ultrasound scanners, is riding a surge in semiconductor licensing while its device sales grow slowly. Third-quarter revenue rose 52% to $33 million, lifting gross margin to a record 73% and shrinking cash operating losses. Chief executive Joseph DeVivo raised the full-year outlook, but the fourth-quarter plan points to 3% sales growth as the company laps last year's big licensing deal.
| Revenue | $32.6M +52% from a year ago |
|---|---|
| Gross margin, excluding one-offs | 73.0% +9.1 percentage points from a year ago |
| Adjusted EBITDA loss | $(1.2)M $(8.1)M a year ago |
| Full-year revenue outlook | Raised $3.5M middle of the range: 28% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because chip licensing is turning into real products and federal clearance opened government hospital sales. Partner Mendaera launched its first commercial device in October, three brain-interface companies joined the platform, and deferred revenue stopped falling after two quarters of drawdowns. One caution: the fourth-quarter revenue outlook sits $1.4 million below what the prior full-year plan implied by our math.
The question now is whether new licensing partners and hospital software contracts can replace the prepaid Midjourney milestones as they wind down. If they add new revenue, contracted backlog will climb and growth will reaccelerate in 2027; if they merely replace old milestones, sales will stall near $33 million a quarter. The quarterly filing's backlog footnote will provide the first test.
🐂 Bull Case
Chip Licensing Lifts Revenue and Gross Margin
Butterfly Embedded is the division that licenses the company's ultrasound semiconductor chips and software to other device makers. Chief executive Joseph DeVivo wants this platform to carry Butterfly Network into new markets such as brain-computer interfaces. In the third quarter, software and services revenue — where the company books these licensing and co-development deals, including its partnership with AI lab Midjourney — more than doubled from a year ago to $17.0 million.
- Software and other services revenue: $17.0 million, up 144.8% from a year ago by our math
- Gross margin, excluding one-offs: 73.0%, up 9.1 percentage points from a year ago
- Depreciation and amortization in cost of sales: 2.0% of revenue, down 2.0 percentage points from a year ago
- New Embedded partners: three brain-computer interface companies, including Merge Labs and Bridge Neurotech
This shift matters because licensing work carries much less direct cost than building handheld probes. Butterfly Network credited "the relatively higher margin return on our Butterfly Embedded™ licensing revenue, as compared to our core business offerings" for lifting gross margin to a record 73.0%. Meanwhile, partner Mendaera launched the first commercial product built on the platform on October 1, moving the program beyond research milestones.
What to watch: the exact Embedded revenue figure in the quarterly filing's footnote. A third straight quarter above $10 million would show that new partners are adding to the Midjourney contract.
Enterprise Deals and Federal Clearance Expand Pipeline
"The enterprise pipeline is turning into signed deals, and achieving FedRAMP authorization puts larger federal opportunities on the table," DeVivo said. Compass AI is the ultrasound maker's workflow software for hospitals, and FedRAMP is the US government security clearance needed to sell cloud software to federal agencies. During the quarter, Butterfly Network achieved full FedRAMP authorization on schedule and closed five seven-figure and ten six-figure hospital contracts.
The medical device group also added five partners to Butterfly Garden, its marketplace for third-party artificial intelligence apps, where maternal health app DeepEcho went live on October 23. In medical schools, it launched the Lighthouse program with VCOM to equip every student with a handheld scanner. These wins matter because hospital and government contracts bring multi-year software revenue, while Home and Community Care will begin patient scanning in November.
What to watch: initial Home and Community Care revenue in the fourth quarter. DeVivo said "Home & Community Care has also moved from building the program to executing it, with first revenue expected this November," which is a one-month slip from the October start planned last quarter.
Operating Leverage Narrows Loss and Lifts Plan
Butterfly Network is shrinking its operating losses because revenue is growing much faster than overhead. In the third quarter, the ultrasound company narrowed its adjusted EBITDA loss — a cash profit measure that excludes stock-based pay and one-time charges — by 85% from a year ago to $1.2 million. That beat its own plan for a $6 million to $9 million loss by $6.3 million at the middle of the range.
- Sales and marketing expense: 35.6% of revenue, down 13.8 percentage points from a year ago by our math
- Research and development expense: 31.2% of revenue, down 9.3 percentage points from a year ago by our math
- General and administrative expense: 35.5% of revenue, down 7.8 percentage points from a year ago by our math
Because of the smaller third-quarter loss, management raised its full-year adjusted EBITDA outlook by $7.5 million at the middle of the range, now projecting a $12 million to $15 million loss. What to watch: operating expenses excluding stock-based pay and other items in the fourth quarter, after they rose 12% from a year ago to $26.6 million on higher staffing.
🐻 Bear Case
Fourth-Quarter Outlook Points to a Sharp Slowdown
DeVivo said that progress is compounding across the business, and the ultrasound maker beat its third-quarter revenue plan by 16.4% at the middle of the range. Yet management's fourth-quarter outlook calls for $31 million to $34 million in sales, or about 3% growth from a year ago at the middle of the range. By our math, that is slightly below the $32.6 million it just recorded in the third quarter.
The slowdown happens because Butterfly Network is now comparing against the fourth quarter of 2025, which was the first period to include $6.8 million from the Midjourney co-development deal. In addition, the fourth-quarter outlook of $32.5 million at the middle of the range sits $1.4 million below the $33.9 million that the previous full-year plan pointed to. Meanwhile, the fourth-quarter adjusted EBITDA loss will widen to between $3 million and $6 million.
What to watch: fourth-quarter revenue against the $34 million top of the range. A result inside the range would show that licensing revenue has leveled off once the initial Midjourney milestone wave is lapped.
Core Ultrasound Hardware Lags the Licensing Boom
Butterfly Network's original business is selling handheld ultrasound probes like the iQ3 and iQ+ to doctors and hospitals. While software and licensing revenue more than doubled, product revenue rose 7.4% from a year ago to $15.6 million, and dropped 0.6% from the second quarter by our math. International sales fell 5% from a year ago to $5.1 million because of "decreased probe sales to our global health partners".
This gap matters because the company's strategy relies on putting more handheld scanners in the field to generate recurring software renewals. Furthermore, the balance sheet still holds $59.6 million of inventory. By our math, that equals 8.7 quarters of third-quarter product cost of sales ($6.8 million), one year after the device maker wrote off $17.5 million of excess older chips. A next-generation probe using the P5.1 chip will not launch until early 2027.
What to watch: core business revenue growth in the quarterly filing's segment table. Last quarter, core revenue grew 2% from a year ago while discounted medical school deals lowered the average probe price by 12%.
Cash Burn and Dilution Outpace Profit Gains
Even though nine-month adjusted EBITDA losses narrowed from $23.3 million to $8.7 million, Butterfly Network burned more cash than it did last year. Operating cash outflow over the first nine months widened to $32.4 million from $21.7 million a year earlier. Cash flow lagged earnings because the company recognized revenue from upfront customer payments collected in prior periods while waiting on cash from new bills.
- Nine-month operating cash outflow: $32.4 million, compared with $21.7 million a year ago
- Nine-month receivables cash drain: $12.0 million, as net receivables climbed 39.8% this year to $37.4 million
- Other operating expenses in Q3: $4.0 million, up 46.6% from a year ago and excluded from adjusted EBITDA
- Weighted-average diluted shares: 266.5 million, up 5.7% from a year ago by our math
Third-quarter operating cash burn slowed to $2.3 million by our math, as deferred revenue ticked up $1.4 million from June. What to watch: fourth-quarter operating cash flow and whether the allowance for credit losses, now $2.0 million against $1.4 million in December, keeps rising.
Risks This Quarter Didn't Answer
Four standing concerns depend on footnote disclosures in the quarterly Form 10-Q filing, which was not included with the earnings release.
- Remaining performance obligations (contracted backlog): fell from $99.6 million in December to $85.8 million in June; the filing's Note 3 will show whether new hospital and BCI deals rebuilt the backlog.
- Core versus Embedded revenue split: introduced in the first quarter; Note 3 will show whether Embedded stayed above management's $7 million to $8 million quarterly target.
- Customer concentration: one partner exceeded 10% of revenue last quarter; the filing will show how much of the third-quarter beat came from Midjourney.
- Indemnification litigation contingency: stood at $10.0 million in June with a matching insurance recovery asset; the contingencies footnote will show any change.
💲 Other KPIs
Deferred revenue — cash customers have paid upfront for software and milestones not yet delivered — rose $1.4 million from the second quarter to $27.1 million by our math. Over the first nine months of 2026, the balance is still down 25.5% from $36.3 million, which drained $9.2 million from operating cash flow as prepaid work was recognized.
Money owed by customers climbed 39.8% over the first nine months of the year from $26.7 million in December, and rose 8.2% from the second quarter by our math. Uncollected bills consumed $12.0 million of operating cash flow in the first nine months, while the credit-loss allowance rose to $2.0 million from $1.4 million at year-end.
Cash on the balance sheet declined $2.4 million from the second quarter and $28.2 million from $150.5 million at the end of 2025. The third-quarter drop was smaller than in the first half because operating cash burn narrowed to $2.3 million by our math and employee stock option exercises brought in $1.1 million during the quarter.
🔮 Guidance
Raised. Management lifted the middle of its full-year sales plan by $3.5 million to $124.5 million, or about 28% growth from 2025. It is the second raise this year: +$2.0 million in the second quarter and +$3.5 million now. Because third-quarter revenue beat the prior plan by $4.6 million at the middle of the range, the raise passes through less than the third-quarter beat.
New. The fourth-quarter plan calls for about 3% growth from a year ago at the middle of the range ($32.5 million), down from 52% growth in the third quarter. The sharp slowdown reflects a tougher comparison against the fourth quarter of 2025 ($31.5 million), which included $6.8 million of initial Midjourney revenue. If its average 10% quarterly beat holds, fourth-quarter sales would reach $35.7 million by our math.
Raised. The ultrasound group narrowed its full-year cash operating loss outlook by $7.5 million at the middle of the range to $13.5 million, following a $2.0 million improvement last quarter. With the loss sitting at $8.7 million through the first nine months, the full-year range leaves a $3.3 million to $6.3 million loss for the fourth quarter by our math.
New. Management expects the fourth-quarter loss to widen to $4.5 million at the middle of the range, or -13.8% of sales by our math, compared with a $1.2 million loss (-3.6% of sales) in the third quarter. The wider loss reflects steady operating investments against flat sequential revenue.
❓ Key Questions
Did new contracts rebuild remaining performance obligations in Q3?
Contracted backlog fell from $99.6 million at year-end to $85.8 million in June as Midjourney milestones were recognized. With five seven-figure hospital deals and three BCI partners signed in Q3, did total backlog grow again?
How much did Embedded vs Core ultrasound grow in Q3?
The press release combines chip licensing and hospital software into one $17.0 million line. What were the exact revenue figures for Butterfly Embedded and the core ultrasound business, and how much came from Midjourney?
Why is accounts receivable growing alongside the credit-loss reserve?
Net accounts receivable climbed 39.8% over the first nine months to $37.4 million, while the allowance for credit losses rose from $1.4 million to $2.0 million. Are licensing partners or international distributors paying more slowly?
What are the contract terms for the November home care launch?
Home and Community Care scanning begins in its first state this November, one month after the prior October target. How many patients are covered, and is Butterfly paid per member or per scan?