Butterfly Network's record quarter ran on milestone money, and its own Q4 guide says so

Butterfly Network▼−1.98% — Butterfly Network, down 1.98 percent today, the NYSE-listed maker of the handheld iQ3 ultrasound, printed the best quarter in its history this morning and beat the high end of its own guidance↗ ¹. Revenue grew 52% from a year ago ¹. Gross margin hit a record 73%, and the adjusted EBITDA loss narrowed to essentially breakeven ¹. The decomposition in the filings matters more than the beat: the growth came from chip licensing, not from the probe business ¹.

The growth came from licensing partners, not the probe business

US revenue rose 71%, which management attributes primarily to Embedded chip-licensing partnerships, including the co-development deal with Midjourney ¹. International hardware sales went the other way, down 5% ¹. Software and other services revenue, the line that carries Embedded-style licensing, more than tripled year over year while hardware product revenue barely moved ¹.

Embedded is the bet a decade of semiconductor R&D was building toward. One Ultrasound-on-Chip platform now serves as the input layer for other companies' products: Merge Labs, the brain-computer-interface startup co-founded by Sam Altman, chose Butterfly as its exclusive partner for chip-based ultrasound↗ in pursuit of "less-invasive ways to interface with the human brain," and partner Mendaera put the first commercial device built on Butterfly technology on the market on October 1 ⁴¹. Each partner pays to build on the chip ⁴.

The Q4 guide concedes the boost does not repeat

Management guided the fourth quarter to a range implying about 3% growth at the midpoint, alongside a full-year raise ¹. Q3 revenue was also flat against the June quarter ². So the record quarter is a mix improvement, not an acceleration: a one-quarter licensing payment sitting on a flat base ¹².

The market is paying subscription prices for milestone money

The stock has roughly doubled this year and now trades at 17.6 times sales↗, near triple its historical median ⁵³. GuruFocus's model pegs fair value at $2.50, about a third of the current share price ³. Insiders were net sellers, unloading $122 million of stock over the past year ³.

The terms of the flagship deal explain why the distinction matters. The Merge Labs agreement pays Butterfly upfront and milestone-based license fees plus hardware purchase commitments, with royalties only expected on future commercial sales ⁴. The durable layer, royalties that arrive when partner products actually sell, starts now and starts small ⁴.

The strategy is right; the clock is mispriced

I think the strategy is the right one, and I would not bet against the platform: Butterfly pioneered semiconductor ultrasound, and Merge Labs just made it its exclusive chip-based ultrasound partner ⁴. But a licensing business priced like a subscription while it is paid in milestones is optionality, not a run-rate ³⁴.

The honest test is quarters where Embedded revenue repeats without a new deal announcement, and where partner sales show up as royalties rather than license fees ⁴. Until then, the $122.3 million cash pile and near-breakeven EBITDA buy management time to prove the recurring layer exists ¹. The multiple does not buy that time for shareholders.