RDNT - NASDAQ

Good day, and welcome to the RadNet, Inc. Fourth Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Please go ahead. Thank you.

Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's fourth quarter and full year 2024 financial results. Before we begin today, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time including RadNet's annual report on Form 10-K for the year ended December 31, 2024, to be filed shortly. Undue reliance should not be placed on forward-looking statements especially guidance on future financial performance, which speaks only as of the date that it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date they were made, or to reflect the occurrence of unanticipated events. And with that, I would like to turn the call over to Dr. Berger. Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our fourth quarter and full year 2024 results, give you more insight into factors which affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I would like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. For that, let's begin. I am very pleased with the It was the strongest quarter in the company's history with record and revenue and adjusted EBITDA. Total company revenue increased 13.5% to $477.1 million and adjusted EBITDA increased 14% from last year's fourth quarter to $75 million. Digital health revenues increased 28.1% to $18.9 million and Digital Health's adjusted EBITDA increased 61.6% to $4.5 million from last year's fourth quarter. Imaging center revenue was driven by increased demand in virtually all of our markets, benefiting from the growing utilization of diagnostic imaging within health care as well as the continuing shift of procedural volumes away from the more expensive hospital alternatives to ambulatory freestanding imaging centers. As a result, we experienced 8% aggregate and 4% same center procedural volume growth in this year's fourth quarter relative to last year's same quarter. Also contributing to the strong revenue performance was the positive impact of improved reimbursement from commercial payers who recognize the important role we are playing as a lower-priced alternative to hospital-based imaging. Lastly, revenue benefited from the continuing shift in modality mix. Towards advanced imaging MRI, CT, and PET CT where revenue per scan is substantially higher than with routine imaging. During the fourth quarter, advanced imaging represented 26.8% of RadNet's procedural volume, an increase of 137 basis points from last year's same quarter. This is both a function of the overall industry trend of more of the PECT exams being ordered as a result of technology advances in these modalities as well as the significant capital investment we have made in the last few years in advanced imaging equipment for growth and replacement. 2024 was also a year of significant investment. During 2024, we opened nine de novo facilities in markets where our patient backlogs required additional capacity or we currently lack access points to service identified patient population. These centers should be material contributors to long-term performance and growth. We continue to grow the hospital and health system joint venture business. Currently, 153 of RadNet's 398 centers or 38.4% are held within system partnerships. This is an increase of 23 centers from year-end 2023. Health systems continue to seek long-term strategies around outpatient imaging and have recognized that cost-effective and efficient freestanding centers will continue to capture market share from hospitals as payors and patients migrate their side of care towards lower-cost high-quality solutions. Our hospital and health system partners have been instrumental in increasing our procedural volumes with their physician medical group relationships. Momentum continues with initiatives inside the digital health segment. In the fourth quarter, we commercially launched the OS operational and diagnostic software suites announced partnerships with GE and Siemens to bundle with or embed smart technologies into mammography and ultra equipment and commercialize the tech live remote scanning solution for MRI and other modalities. During 2024, we also continued to build executive management capabilities within digital health, culminating with Keith Wood Wipstorf joining as the CEO of the digital health division in September of 2023. Throughout 2025, we will be focused on implementing these detailed solutions within the RadNet network of centers, which is expected to drive operational efficiencies in many of the business processes performed on behalf of the imaging centers. Primarily through automation. Furthermore, these technologies will help create capacity that will enable the imaging centers to service increasing demand for diagnostic services. At the same time, we will be investing aggressively to build the necessary infrastructure within digital health to sell and support external customers. Embedded in our 2025 digital health guidance is approximately $20 million of investment primarily directed towards building sales marketing, customer support, and implementation capabilities. Requisite to support significant external growth in the coming years. We continue to focus on this on strengthening the balance sheet by managing liquidity and financial leverage. At year-end 2024, RadNet's cash balance was $740 million and the net debt to adjusted EBITDA leverage ratio was under one times. During 2024, we consummated a $230 million stock offering in March a debt refinancing transaction in April, which lowered our cost of capital and extended maturities through 2031 and a debt repricing transaction in November which further lowered the interest cost on RadNet's credit facility. At this time, I would like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full 2024 performance as well as discuss our 2025 guidance. When it is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 2024 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our fourth quarter and full year 2024 performance. I will also provide 2025 financial guidance levels which were released in last evening's financial results press release. In my discussion, I will use the term adjusted EBITDA which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest taxes depreciation and amortization and excludes losses or gains on the disposal of equipment other income or loss, loss on debt explained extinguishments, and non-cash equity compensation. Adjusted EBITDA includes equity and earnings of unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries. And is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation adjusted EBITDA to net income or loss attributable to RadNet Inc. Common shareholders is included in our earnings release. With that said, I'd now like to review our fourth quarter and full year 2024 results. As many of you may have seen in the financial results press release we made last night, we had a very strong fourth quarter. While I won't recap all the financial information that's contained in yesterday's earnings report, here are some highlights. Fourth quarter total company revenue and adjusted EBITDA were quarterly records. Revenue increased 13.5% and adjusted EBITDA increased 14% from last year's fourth quarter. The digital health segment also exhibited strong growth in the quarter with revenue growing 28.1% and adjusted EBITDA growing 61.6% from last year's fourth quarter. Fourth quarter adjusted earnings per share for RadNet grew to $0.22 per share versus $0.15 per share for last year's fourth quarter. Eight percent aggregate and 4% same center procedure volume growth drove much of the top-line performance. Also benefiting the fourth quarter was the continuing shift in business mix in favor of advanced imaging. Advanced imaging during the quarter represented 26.8% of our procedure volume, an increase of 137 basis points from last year's fourth quarter. Higher acuity advanced imaging drives more revenue per procedure and improved profitability. The strong ending to the year caused us to meet or exceed the principal 2024 guidance ranges of revenue, adjusted EBITDA, and free cash flow in both the imaging centers segment as well as digital health. We finished 2024 with a strong cash and liquidity position and at year-end, we had over $740 million of cash on the balance sheet. Full availability of a $282 million revolving credit facility and a term loan that is priced at SOFR plus 225 basis points reflective of the financial repricing transaction we completed refinancing transaction we completed in April and the repricing transaction we completed in November. Continued improvement in revenue cycle has capped our DSOs, our days sales outstanding, at 32.3 days Year, our record low. With regards to our financial leverage as of December 31, 2024, unadjusted for bond and term loan discounts we had $268.8 million of net debt which is our total debt at par value less our cash balance. Note that this debt balance includes RadNet's ownership percentage of New Jersey Imaging Network net debt of $41.4 million for which RadNet is neither a borrower nor guarantor. At year-end, our net debt to adjusted EBITDA leverage ratio was below one times. As some of you may have seen, we released 2025 guidance financial guidance ranges in conjunction with our financial results press release last night. While I'm not going to run through all the numbers on the on this call, I will emphasize some important points. In January and February of 2025, we experienced severe winter weather conditions. These winter weather conditions were significantly more severe than the first quarter of 2024, which experienced a relatively mild winter season. As a result, our operations in the northeast Mid Atlantic and in Houston, which together account for almost 60% of our revenues, impacted materially. Winter storms impact our business principally in two ways. First, the patient schedules on the days of the storm suffer from cancellations due to difficult travel conditions loss of powers at centers, center closures, and the inability of our own staff to come to work. Second, the patient flow of our referring physicians is similarly impacted causing a disruption in our scheduled appointments for days following the Unfortunately, one scanning slots go unused they are never made up. In addition to the winter storms on the East Coast and in Houston in January and February, we lost revenue and adjusted EBITDA as a result of the Southern California wildfires. Though RadNet suffered no property damage at any of our nearby centers, During and after the fires, all businesses, regardless of industry, lost revenue. Populations were displaced and the utilization of health care was not a priority for those impacted by the wildfires. We estimate that the impact we suffered in January and February from the winter storms and the wildfires was approximately $22 million of revenue and $15 million of adjusted EBITDA. Fortunately, our business has bounced back in recent weeks and we are experiencing strong volumes in line with our original projections. We do not expect an impact from the severe weather conditions or the wildfires to go beyond the first quarter of this year. As a result of these weather and wildfire impacts in January and February, we we modified our full year 2025 budget and the guidance ranges for the loss of this revenue and adjusted EBITDA. Our original projections for the second, third, and fourth quarters of 2025 remain unchanged from the original budget. In regards to the digital health reported, reportable segment, we are anticipating 2025 revenue growth in the neighborhood of 30%. This growth will continue will come from a combination of revenue increases in our clinical AI solutions as well as sales and licensing from the Deep Health OS smart technologies, and tech live portfolios. The growth in digital health adjusted EBITDA is expected to lag revenue growth due to approximately $20 million of planned investments throughout 2025 in the infrastructure, which is necessary to support external customers. Areas of investment include sales, Marketing customer support, implementation. I'd now like to turn the call back over to Dr. Berger who'll make some closing remarks.

Thank you, Mark. As we begin 2025, diagnostic imaging is rapidly transitioning into a tech-enabled specialty. Fundamentally, in order to service the growing demand for diagnostic imaging, which is expected to steadily rise over the next decade and is challenged by labor shortages, which appear to unlikely be abated in the near future. Our industry needs to embrace technology solutions that will enhance operational efficiency, streamline workflow, improve the patient experience and provide better clinical outcomes. It is RadNet's mission to lead the industry down this path through providing digital health solutions which address the most critical industry needs. The announcement that was made earlier this week with OBE GYNING Specialists of Palm Beaches is a case study of how RadNet can be a solution provider to enable leading-edge diagnostic imaging at the point of care. Enabling physician offices, multi-specialty medical groups, urgent care centers in addition to OB GYNIO offices with tools to provide high quality, cost-effective diagnostic imaging which will increase access to imaging services, particularly for mammography, ultrasonography, and X-ray. These routine imaging procedures represent a Paul. Outpatient imaging services. Furthermore, tech-enabled point of care imaging will create better compliance for routine screening such as mammography, and will reduce cost to the health care system by providing additional sites that are more convenient and cost-effective. In order to effectively and safely provide these imaging services, alternative sites of care will need Tech-enabled turnkey solutions to manage workflow, Professional interpretive services powered by clinical artificial intelligence and solutions to improve the effectiveness of on-site or remote technologies. RadNet is uniquely positioned to lead radiology in this direction because of its 35 plus year experience in building the industry's largest and most successful outpatient provider, Its significant financial and managerial resources its industry relationships, including those with radiology's largest equipment manufacturers, and more recently, its newly developed array of digital health solutions, including the Depel OS, smart mammography, smart sonography, TechLive, and its ability to develop and commercialize clinical clinical AI tools such as what we have already accomplished in breast, lung, prostate, and brain. Focus and investment These essential solutions are driving our continued into digital health. 2025 will be an important year for onboarding digital health team members in sales, marketing, customer support, and implementation both internally and externally. Lastly, we will be opportunistically evaluating acquisitions that serve to either add new products and services and clinical AI solutions and or provide us with a customer base to which we can market and sell our portfolio of solutions. Operator, we are now ready for the question and answer portion of the call.

If at any time your question has been addressed and you would like to withdraw your question, The first question comes from David McDonald with Truist. Please go ahead.

Hey, good morning, guys. So guys, just just one quick question. Just wanted to ask a quick follow-up on the weather impact piece. So it sounds like I just want to confirm more on the Wildfire Southern California piece. As you guys kinda look out at your scheduling and this and that, you expect to be kinda back to 100% in terms of scheduling. Either, you know, later in March or certainly by the end of the quarter. So, you know, no leakage into the second quarter.

Hi, Dave. Let me first put a little contextual contextual world. Okay. Context here. You know, the the firestorms and I wanna use the word storm, in Southern California, particularly in the Los Angeles area, Pasadena area, Riverside, and Ventura County. We're like almost a snowstorm. In the sense that it impacted virtually everybody throughout Southern California, having lived through that because of my location and the corporate headquarters here in Los Angeles, Everybody was impacted by this. I can tell you that I got it. Daily basis, people were glued to the television watching these fires, just to get some sense of when relief might occur and when we could start returning back to normal. In addition to that, the air quality was noticeably dangerous, and people would just reluctant to travel which was all hampered by the fires and the emergency vehicles that were given, obviously, first priority and being brought in from all over not only Southern California, but other states. So the impact of this is not just a simple fire, but something that effectively can almost be thought of as like a massive snowstorm that not only impacted the days and in this case about ten to weeks ten days to two weeks that this ongoing saga unfolded. But both the afterwards, both in terms of people who were uninfected directly, but indirectly, and new people that were impacted and we're reaching out to try to provide, you know, their own comfort and and age. So that being said, we have recovered, I believe, as as as back to normal, probably within the last ten days. And find ourselves slowly increasing back to or perhaps even exceeding in some areas the volumes that we had projected for the first quarter And if you add what we estimate our loss of business was the first unimpacted by both the firestorms here in Southern California and the severe winter weather conditions on the East Coast, we probably would have met or exceeded our first quarter budget. That being said, and more directly your answer question, Dave, We believe that March should be a very normal month for us. As indicated, as I mentioned, by the improved volumes we're seeing, throughout the company in over the last ten days. As well as March being a more normal month from a climb climate standpoint that we expect not to be impacted. By weather. So I think January and February were extraordinary circumstances. That affected not only RadNet, but Virtually, everybody in those markets and every business and is unfortunately something that we just have to absorb. But we're extremely confident in the rest of the year, and March going forward that the budget projections and expectations will be met and and hopefully exceeded. As we as we have done almost for every quarter in the last two to three years.

Okay. Great. I guess second question, just I realize it's early, but you know, any early learnings from the OS rollout as you guys start looking at, you know, some of your internal metrics or, you know, just some of the feedback from some of the clinical folks just any early learnings there, or is it a a a a bit too early to start asking for that?

Well, I think it's a little bit early, Dave, but We have a very close collaboration as you would in anticipate between the services side and the digital health side. In testing and rolling out the enormous changes that will occur as a result of the Deep Health operating system. And I think all of our physicians, as well as the tech staff and our admin more administrative staff, particularly in the scheduling, insurance verification, are all very enthusiastic about the opportunities for very substantial change in virtually everything that we do. And you would have you would think that this is a logical extension because we're not the first industry to kind of go through these changes, if you will. Things like remote you know, scheduling and contact centers, other kinds of insurance triaging through bots. Are all routine in a number of industries. We happen to be a little bit more complicated because the insurance industry itself is one difficult for people to navigate through in a live presentation, not to mention all of the thought that has to go into creating the So We believe that we're on target to implement most of the OS system here in internally through the three quarters remaining in this year. And as we present this, to the various constituents in in RADNet on the services side, they come up with very valuable recommendations on how we can continue to improve it. That, I believe, is a critical part of the value proposition that RadNet plays in creating these deep health solutions, if you will, that the services side of our business and the digital health side that really was born on from the services side, worked together very collaboratively, and we'll produce a product that is unlike anything in the industry from certainly a operational side, and I believe also from the clinical side. I I I believe that some of the efforts that we're working on and the digital health area will become a little bit clearer as to how we wanna be the leading operator and developer of these solutions in the industry, particularly as I mentioned in some of my closing remarks, into other point of care providers that will help drive the access for the increasing demand, particularly surrounding around routine imaging. That nobody else is is focused on. At all, including the OEMs in radiology.

And then, guys, just last one for me. Just just anything that you would with regards, I guess, two part question with regards to pipeline. Anything that you'd call out in terms of either side of the deal you're seeing, you know, anything happening with multiples etcetera? And then I guess the second part of the question is, can you provide a little bit more detail on the Palm Beach OB GYN deal? That something where they came to you, you guys reached out to them? Are you getting both incomings and, I assume, doing outreach is just any detail on how that kinda came together would be interesting. Thank you.

Let's see, Dave. Yes, yes, and yes.

They reached out to us because of their own concern and dissatisfaction with some of the professional and operational relationships that they had. It was a very what you say, expeditious conference not conference, but call and then ultimately arranging a a new solution for this group, which is quite large. It's the largest provider of OB GYN services in the Southern Florida marketplace, with ten offices, five of which provide mammography services. And when we went in, while their focus was primarily on professional services, we could quickly were able to have them adopt some of the digital health solutions surrounding schedule, scheduling, noticing the patients visits with both scheduling as as well as their annual visits, And sometime in the first part of March, they'll actually be adopt program which we'd expect to have very substantial endorsement and adoption for. So what we what their inquiry originally came from was to provide better quality professional and interpretive services and we were very quickly able to add the other operational capabilities as well as artificial intelligence that They had not ever seriously considered. So this is a case study for us, and one where I believe there will be a lot of other opportunities As I mentioned in my remarks, in the Obieghani area that we want to aggressively pursue both to improve access for mammography to help more of the women that aren't getting you know, their annual screening done, as well as elevating the quality of the service to take what we believe is now the standard of care with artificial intelligence. And I'm I'm I'm proud to say that on on the East Coast and in our in our Florida market, well over 50% of our patients are opting in for our early breast cancer detection. So we expect that to even be greater where there's better control of the patient particularly for the woman to get that, service with their wellness visits. And so, this collaboration, I believe, once and it won't take us that long to ramp this up. Once we're able to statistically demonstrate to the marketplace the value proposition that RadNet brings through its various lines of service, not only as a company, but bringing in professional services also really is looking at the turnkey solutions that I was talking about in my last part of my remarks that I think are really critical to help decompress also some of the demand for routine imaging that Yes. More and more difficult for outpatient imaging centers as well as hospitals to absorb.

Okay. Very much, guys. Appreciate it.

Thanks, Dave. Thanks, Dave.

The next question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Maybe, Mark, I'll start with you. As we think about, you know, your comment that volume has bounced back, after the impact of the snorkeling storms you can give us some color on, you know, kinda, like, what kind of growth rates are you thinking about or contemplating in the guidance prior to this and then kinda like just any observation that there's, like, the demand dynamics in the market? Sure.

So if you were to take the guidance that we released last night and you add back the revenue which we estimated that we lost, meaning the $22 million, And you look at sort of the midpoint of that guidance range, it it it it implies about a 7% Gross. There and which we think is we're very, very confident in and and highly achievable, and and we're know, hoping to exceed that as we have in in the past few years and and adjust our guidance throughout the year. Within that we're assuming that that is being driven by procedure volume growth and implied in in procedure volume growth is about a 3% same store sales growth year over year, which is more in line with our historical same center performance. It's less than what we've been achieving over the last several years. And so I think that there's, you know, some some potential conservatism built into that. But, you know, given that you know, we started off the year with January and February and all the impacts of the wildfires and and the the winter weather conditions on the East Coast, we didn't have a very good view or a lot on on, you know, the the trends in the business you know, because of those impacts. And so we wanted to be, what we felt was conservative the remainder of the year.

Totally understand. Then maybe, Howard, as I think about the comments on the $20 million of infrastructure investments in the digital health side. If you can walk me through, number one, is this gonna gonna be the run rate, or do you think you'll have to add to that over time as the business keeps growing? And then second, you know, what are you seeing in the market that for for digital health that has prompted you to make these investments today. I mean, you have visibility to, like, contracts whether it's hospitals for digital health or just other areas of the health care space that requires you to put that level of investment to the business today.

Hi. Good morning, Brian. Thanks for the question. One thing I just before I respond to your question to me, just to add a little color to Marsh, remarks. Is that there is no built in benefit from deploying internally the Deep Health operating system into the rad net centers. So additional opportunity both on the revenue side as we create capacity and better through better workflow and efficiency as well as reducing costs which we expect to see predominantly in 2026 when we're fully implemented Some of that may occur. We just can't be certain as to how it will result in in cost that may give us some benefits, but may be duplicate for some period of time as we transition. So I wanna emphasize that point that we we've put no built in benefit from what we know we'll see in 2026 into our 2025 forecasting. But more more to the point here, I I think a lot of the $20 million that we talked about will be one time cost. Because they'll be b primarily in building sales team, marketing teams, implementation teams, and and other aspects of taking on this enormous responsibility both seriously for Remdes benefit as well as the industry? I I would tell you that every system that we are partnered with, every opportunities that comes to us for potential acquisition from imaging center providers every hospital that we talk to that are that we have currently joint ventures with or new ones that we're talking to with which are rather extensive. All have the same two fundamental problems. Number one, as we mentioned from you know, repeatedly in our quarterly remarks. The shift of business away from hospitals for outpatient imaging into the outpatient centers. And that's a trend that has accelerated particularly after COVID. The other thing is that they're all being challenged by the labor shortage pools. And that's not gonna go away whether it's the, shortage that we have for radiologists or the shortage for technologists and other personnel So what we're building is something that arguably anybody could use to help better drive performance, efficiency, and improve quality of care. And when you look at the potential impact just in the US, you know, of this. And one of the examples that I gave there's about 350 million outpatient imaging procedures done annually. That number continues to grow. Probably at a 3 to 4% rate just based on population growth, aging, and newer applications for this the technology that's that's being developed both in the AI space, as well as from the equipment manufacturers themselves. So this increasing demand is something that everybody has to be sensitive to and which the current systems are just not capable of managing not only in a cost effective way, but really at a level of clinical efficiency and quality that the new technology allows us to do. So know, the investment of this could be justified simply to build this for RadNet. But whatever is good for RadNet will be good for anybody else in the outpatient imaging space. It doesn't mean that everybody's gonna run to RadNet. But certainly nobody else In the space, whether it's the OEMs or other developers of artificial intelligence or other tools, is taking on the magnitude of what we're talking about and potentially creating the impact which will be beneficial not only for health care, excuse me, for health for imaging providers, hospital or other or outpatient, but also for health care in lowering costs by detecting disease earlier. And that's what these systems ultimately are capable of doing and that's where the biggest benefit will be to society as a whole, health care, in general and radiology in in particular. And I think that's very important social responsibility that at RadNet, we take seriously because I'm not certain who could do it at the scale that we're talking about, and at rapidity with I wanna emphasize to all of our stakeholders lenders, analysts. We've only been in this business practically a year and a half. We're not even at the two year mark since we assembled this team and officially launched at the beginning of 2024, the digital health division. And I think what we've done in that relatively short period of time. Rivals people that have been in this industry and creating products for for ten to fifteen years sometimes. So I applaud the efforts of my entire team, both in the services division as well as the digital health division, And I k. Very seriously the responsibility that I believe we have to improve and lead radiology and diagnostic imaging into the future. And that future is here today. Not something that we have to wait for us to hit us like a bolt of lightning.

I appreciate that. Maybe, Mark, just two quick follow ups. Just on Howard's point. Right? So as I think about your guidance today, if not for the the storms, and the step up in an investment here, you would have guided to roughly $320 million of EBIT So fifteen percentage growth. Is that the right growth rate as we think about 2026 and beyond? And then my second quick follow-up is just the the clinical AI revenues, if you could share that with us for the quarter for q four. Thanks.

Yeah. So so just on the first part of your question, if if you add the $15 million of EBITDA to our guidance levels for both digital health and and imaging services together, we're about $300 million of EBITDA, which is for this which is where we were which which is where our original budget was this particular year. And then what was the second part of your oh, just clinical AI revenue. AI revenues of of The digital health division for q four was about six and a half Hold on. Let me just look at a report that I've got here. We we can take it offline, Mark. If Yeah. I think it's about six it's either six and a half or six point seven. Million of of the digital health and and fourth quarter. Awesome. Thank you. Congrats again.

Okay. Thanks.

Thanks, Brian.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey. Good morning, everybody. Few for me here. It Mark, if we think about the Deep Health I'm sorry. Not the the digital health revenue guide for 2025. Can you kinda help us think about the the different components of that? Deep Health OS.

Yeah. Like, what what's coming from Deep Health versus what's coming from all the other stuff? Yeah. Sure. So, you know, total revenue, you know, we you of eighty to she asks about eighty to ninety million dollars. And then, you know, of that, we're expecting that the AI component will be in the range of twenty five to thirty million dollars and then the remainder will be, you know, software. As well as our other technologies such as smart MAMO and Five.

So do you expect to convert all of your legacy software clients to detail over time?

Hi, John. Yeah. Yes. We do. Okay. We we will sunset and the older platform for two reasons. Number one, it's an on prem service that we're still doing, and we will be migrating the entire company to the cloud and not only for storage, but it will be cloud native so that all of our applications will be in our cloud network. And we hope to have that entire all the four hundred centers on that cloud platform, including our legacy system by the end of this year. So all of our legacy customers Oh, will be transitioned over to this new service. This the second part of this is that we're when we're when we talk about the digital health division we really have to focus on three things. One is clinical AI, The second is the generative AI, which are the processes that we're gonna use to change the way our centers operate almost from very beginning of calling in for an appointment to the final bill and and scheduling excuse me, and reporting. But the the other piece of this are ways that we believe uniquely that we can potentially accelerate this growth through the efforts of perhaps looking at other companies that we could acquire. So as opposed to what we've done, you know, in the past, where much of our capital has been invested in the imaging services side and will continue to be that. We will look for opportunistic businesses that are synergistic with our platform Two. Further develop, those tools that we think clinically will help drive not only new revenue, but efficiencies in running our business and allow us to become the leader in the development of our artificial intelligence for mammography ultrasound, and x-ray. So I think the example that I gave and the importance of that was in the example with our latest efforts with the in the OBGYN space, And I mentioned other areas that we will pursue where all of these tools will be transformative and as opposed to perhaps, a lot of the focus, which is of the of the OEMs in their development of the more advanced imaging tools Meaning MRI, CT, PETCT, areas in mammography and ultrasound and x-ray, have been much slower to adopt a lot of the artificial intelligence that now almost all of the OEMs that we're talking to are looking for us to take our clinical expertise and help lead the development of some newer tools in that area, because they all see the opportunities now and the need to be transformative in the use of this technology. Throughout the entire range of clinical services that we provide.

So I just wanna clarify something with or or reiterate with something. I I got the numbers in front of me with what Brian asked with revenue. So the digital health revenue in the quarter was $18.9 million and indeed the AI piece was $6.7 million of that $18.9 million and that was a 31.9% growth in just the AI piece from last year's fourth quarter. I think we I think we lost you, John. We can't hear you.

Hear me now?

Yes. I know we can hear you. Don't ever get Apple AirPods, by the way. You guys have done a couple of nice capital raises, but obviously the money has been kinda sitting there. What what are the odds that, you know, you write a check out of that cash this year? Do you think

Well, I think the odds are very, very high that we will be using some of that capital within two 2025. And and as Howard said in his closing remarks, that some of that capital could be used within the digital health segment, you know, for acquisitions that could either bring us new products and services or new a new clinical AI tools that will be important not only for our own business, but for external customer customers or for acquiring businesses that already have a significant customer base that we could then further penetrate by selling our portfolio of deep health products and services. Into. And then you will be you will I'm sorry, John. There will be also acquisitions on, of course, As the normal course of business on the imaging center side.

Have you been a little surprised that nothing really has materialized in the core imaging business that has been of interest to you in terms of mid esque or or size or multiple or what have you

Yeah. I I your your communication here is, oh, I'm sometimes, John. So I think I understand. We're we're not it not not your communication, but the nouns. Yeah. Sound communication. I don't I don't think we're surprised as as you are aware a number of the larger consolidators our private equity backed, and I dare I dare say they're all for sale at the right price. The question is, what's the right price? And if it doesn't fit in with the with the metrics that we think are important to maintain, know, the appropriate leverage and and synergies that we traditionally expect from our acquisitions We just passed on them. So but we're actively working on a number of opportunities both in the digital health and in the imaging services division, which I believe we'll be able to talk about later in the year. And we wanna be very strategic and we wanna be good stewards of how we use this cash. And it's better for us keep a good cash balance and ready to move on those deals that we think are accretive, not only from a financial standpoint, but from a long term future and growth standpoint. And I I think you'll be hearing more about that from us in the coming quarters.

Alright. Thanks so much.

Alright. Thanks, John. Take care.

And the next question comes from Andrew Mok with Barclays. Please go ahead.

Hi. Good morning. Wanted to follow-up on the labor remarks that you've made. I think you said it was unlikely to abate in the future. You provide a bit more color on inflation trends you're seeing in the market? When did you see the acceleration inflation? How far far along are do you think we are in this cycle? Thanks.

Thanks, Andrew. I think we started seeing this two years ago. I mean, it was really the big right. Really in COVID or or right after COVID? After COVID. So this is not something that we're That's unexpected. I think what what happened in COVID though to drive Some of the challenges that that we and everybody are facing in health care, but particularly imaging, is the fact that some people are just throwing in the towel. They're either retiring earlier or they're being very, more specific about where they wanna work and how much work that they wanna do. It's really created a different mindset altogether here. And it was probably something that was already simmering and brewing, Right. The challenges that we've had from the labor market are really reflected because of the demand that we have for imaging. And so that's where the the problem has manifested itself, because As we've have come out of the COVID period the demand has accelerated either because of delayed services like has been reported so much particularly for know, routine screening, procedures, or just the continuing demand that the technology that we are providing has created in the way of better quality medicine. And the driver for that is something that I think has caught everybody by surprise. So it's a combination of supply and demand, the the supply of the labor force not growing and maybe shrinking and the demand accelerating. I I think our recognition of this two plus years ago was really what drove us into the digital health opportunity. We may not have gotten there, were it not for this is our solution and for that matter, everybody's solution to deal with the labor issue from a cost standpoint, we are analyzing this, and Although the industry as a whole probably is low single digits over the last couple years in growth of salaries. Maybe even more than that. I'm getting a sign from Mark. He should better but our internal numbers are that we're managing control of that into the board. No. We're we're in the low single digits We've seen industry, you know, in the mid to higher single single digits, particularly within the hospitals who tend to be sometimes a little less economically focused, particularly the the non for profit community based off hospitals, which are the majority of the health systems out there. So I think we've had a better experience around labor than most in the industries overall in the industry partly because I think RadNet is we we've done a a concerted effort or towards making RadNet a place where people wanna work, particularly radiologists who come here because the lifestyle is, you know, significantly better than in the hospital. The hours are more predictable. They're not on call. And we have a tremendous amount of pathology that allows our radiologists to sub specialize in the types of of scans and modalities that not only they're best equipped to handle, but also that they that they most enjoy practicing with. So I think we've had a better experience than most, but, you know, within having said that, within our guidance, we've we we're in 2025, we're gonna be absorbing about $45 million of of salary benefits and wage increase you know, within our guidance. So, you know, we're projecting you know, twenty five that that this you know, trend that we've been facing over the last several years will continue, but I think the real opportunity for us in the entire industry is adopting the types of solutions, the digital solutions that, you know, we're we're developing and have developed, and and that's gonna have an impact in our business really in twenty six and beyond once we get that fully implemented with inside of RadNet. And that's and that's also what's giving us such great confidence that we're gonna be successful in selling and license licensing these digital solutions to others because we're all facing the same the same issues around labor. Got it. And is the radiology labor pressure at all current rate in the market, or do you also have exposure to physician subsidies that are you know, common in in hospital systems?

No. I mean, we're the the subsidies that you're hearing about are from hospital based radiology groups only agreeing to work for the hospitals if the hospitals subsidize them because they they simply can't make enough money by billing for the professional only components you know, with inside of the hospital. Because remember, the hospital is billing and collecting for the technical component. In our business, for the most part that the you know, we make our money on the technical component and the the The physicians are paid out of the global bill, but are receiving essentially the lion's share, if not all of the professional component of the global bill. So We're not. Subsidies really aren't applicable to the outpatient industry. Got it. That's helpful. Then maybe just finally, can you talk maybe about the the switching cost of tax and Riz as it relates to Deep Health I think a lot of attention is on the AI side and rightly so. But I just wanna understand how this part of the sales cycle works works. How much of a barrier is it to switch on to Deep Health's packs and wrist systems for a new customer even if that, you know, customer really likes those products. Thanks.

Well, I you know, the the the packs business like a lot of software businesses, if you will, goes through cycles, if you will. If you will. And The cycle that we're in now are that most people are using pack systems that are perhaps ten plus years old and Don't support the kind of productivity and other tools that can improve the efficiency of the radiologist. And so our systems are designed to actually be the next generation of packs. We we don't like using the term packs because I think that's an old term. And a lot of the benefit that we're talking about will be using newer software engineered tools that can reside in the cloud and therefore create better use of the radiologists time both to read this study as well as utilize artificial intelligence Two kind of aid, if you will, in the diagnostic work of what they do. Maybe with something as simple as triaging what artificial intelligence would call you know, normals to not normals. And allowing more time to be spent doing the work of those cases that need more evaluation, if you will, and less time for those at are normal. And remember, the majority of what we do is normal, so even a triaging tool where the radiologist can trust know, the AI to be very accurate in that. Will allow a lot of improvement. And that's what's perhaps a little bit different about the hospital space versus the outpatient space. We can bring these tools and truly make our radiologists more productive, and they will earn more by reading more Whereas in the hospital, Well, you would think some of this would be applicable, and it will be, The cases and and the pathology that they see in a hospital are far more complicated, and in terms of evaluating why person is in the hospital and a much greater percentage are abnormal than in the outpatient space. So I I think the the real opportunity here is for the new technology to utilize newer computer science to develop better and faster software for for doing these same functions, if you will, and then bringing it in the cloud to make that functionality for what they're looking at, for for looking at priors, comparing priors with more targeted software One of the best examples I can give is that the newer technology is generating in some cases hundreds of images that used to be know, just a handful of images, and it's very difficult for the average radiologist to be looking at that many images. A lot of the artificial intelligence and work that we'll do will comb down the relevant images by applying the artificial intelligence to that, which they were looking for, given why the patient was referred, but also perhaps looking at other things that weren't ordered that may be opportunistic in the way of evaluating early diseases. So That's why this whole evolution of PACS is not just about reading, it's about what you're providing for the read additionally that helps make it more efficient, more accurate, and more trustworthy than the prior PAC systems.

And one thing I wanna emphasize, Andrew, going back to your question about you know, how likely, you know, what are the, you know, the the impediments to switching, you know, PAC systems from from a radiologist standpoint. The when you look at the overall industry for PAX today, a very small percentage, I believe the last report I saw was about 15% of all the pack systems out there are are cloud based systems today. So the vast majority of people out there, radiologists, are using pre on premises software. And when you look at the benefits of cloud based in terms of the ability to, you know, compress datasets, the ability to do, you know, cloud based storage, cloud based retrieval, the speed at which you can look through prior images and call up prior studies. The viewer technology that's there today that allows you know, for visualization tool, it's so far superior, you know, in the cloud versus on premises software that as as doc as Howard said, you know, there's gonna be a cycle in this industry over the neck in the coming years where the radiologists are going to switch from these on premises you know, systems to cloud based solutions like they have within other industries and other areas of software development, and and that's, you know, the the cycle that, you know, that Deep Health know, is preparing for.

Great. Thanks for the color.

The next question comes from Larry Solow with CJS Securities.

Great. Good morning, guys. A lot of my questions have been answered. For a lot of call here. I just couple of follow ups, I guess, on the you mentioned, Mark, that the $45 million driver, but dollars increase or in wages and benefits. Is that it sounds like the biggest just overall, looks like EBITDA margin, you actually have even if you add back the the one time or the fifteen million impact, you have segment margin actually declining about forty, fifty bps year over year. I assume that that's just the impact of the higher wages or or what is what else is driving that? Because it seems like there are a lot more good guys than bad guys in the imaging piece. So what what else is, you know, driving that contraction?

Sure. We we when we built our guidance in just give you a little bit of color how we built our guidance, we when we're doing our internal budgeting, we're building it from the bottoms up. So we go to to every center level manager, every regional manager. We project projecting volumes by site based upon the opportunities, risks of, you know, that particular center. We build it up to a corporate level, and then we layer on all the, like, you know, the corporate functions. And then Embedded in that, then we'll we'll go back and say, well, does that assume what kind of growth does that assume and, you know, run the same performance basis. And and so from a from a labor standpoint, you know, when we go back and look it on a same center basis, we're assuming about a 4% increase in the the same center labor rates. Which is somewhat consistent with what we've what we faced in the in the last few years. And then also embedded then then the overall margin EBITDA margin flows out of that same, you know, budgeting process. And, you know, what what it showed this year is that we're expecting to have fairly stable margins relative to last year. It might be a little bit up, you know, or or or flat. The opportunity we think, for margin enhancement, is is going to occur once we put in, you know, the Deep Health OS platform and adopt a number of these automation tools throughout the year. So we could see some upside to that margin maybe in the second half of the year, but what we're really projecting and excited about is what this could mean for the profitability and margin enhancement in twenty six and beyond once we have it fully implemented. With inside of RadNet. And and is is there any, like, temporary clearly, there's a there's a little bit of a learning curve to to get some of the upside and some of the benefits. Is there any temporary actually negatives, you know, or, you know, on efficiency wise or as you implement some of these systems or maybe super short term and it should not matter, but does that actually actually potentially happen?

We we don't think so, Larry. The way we're implementing this is region by region, and we're starting with the implementation or have started with the implementation in some of our smaller regions. So that, you know, we can work out some of the kinks before we get to, you know, Maryland, New York, California, you know, where we have much force substantial and more much more complex operations and complex workflows. So, you know, we've done this before, you know, with our e rad products. You know, over the years, And I I think we're not concerned about this. You know, it's it's something that we've had experience within the past.

Got it. Okay. And just just segueing just into my last question. Obviously, you you mentioned the the internal potential benefits on the efficiencies from from, digital health. What about just on the digital health piece itself and and this year, obviously, it sounds like you're continuing that targeted 30% plus growth. As we look out five years and not looking for an exact number, I realize that. But this business, you know, is this sort of growth sustainable? Like, if you grow this business 30% for the next five years. Maybe it can grow faster. It feels like we're sort of in the infancy, but it could be a, you know, several hun three hundred million dollar business You know? Is that, like, Farfetch and, I guess, at that level, I would imagine margins would be probably over 30%, maybe even higher than that. So just any, you know, any way to kind of ballpark that as you look at maybe five years, you know, plus or minus Thanks.

Well, without giving multiyear guidance, because that think we're in a position to do that, I I don't think that what you're saying is Farfetch at all. In fact, you know, we're making substantial investments today at as doctor Berger mentioned, you know, over $20 million worth of investments in deep health to build the infrastructure to support you know, a much larger business with external customers. So you know, there the the opportunity that we see is that we're we're going out what today is about a $4.5 billion worldwide market in radiology software, which we believe will will continue to grow substantially and which will have that switch towards cloud based know, computing in the next decade. And so there is no one company out there that is the category killer. In other words, this is not like a an industry where you've got a couple of operating systems like, you know, Microsoft Windows and Apple OS. This is a this is an industry that is highly fragmented, that is mostly comprised of you know, small developers or even OEMs who have created point solutions, you know, that that Right. You know, are focused on a particular modality or particular problem or disease process. And what we're building here is something or an underlying technology that you know, that could be ubiquitous and that could be, you know, a a very substantial you know, business if we're if we're successful and, you know, which which would create a a kernel of technology that that could underlie know, a lot of these point solutions which can run on top of it, that will develop and and there will be other people in the industry that will develop those point solutions. But but, yeah, we think that this is a big opportunity and which is why we're spending, you know, a lot of resources, both financial and otherwise, to build the infrastructure to go after.

Great. Thanks, Mark. I appreciate all the color.

Thank you.

Again, if you have a question, please press star then one. Our next question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Hi. Good morning. Thanks for for taking the questions. Just two quick ones. One, you know, how long do you think it'll take for the sales and marketing team that you're bringing in for for for the AI business to to get trained and and to actually start to contribute to revenue.

Well, we we we hope to be able to complete that in this calendar year. There's more than one way to accomplish that. So we'll be looking at various alternatives that we have to scaling up quickly. For this. But the the process itself I I would hope, one way or the other, will be substantially complete by the end of the year.

K. And then just a modeling question. Do you have capitation revenue, it was down in the quarter and the year. Is that a trend going forward? Do you think that that people are are not Not opting for that model going forward or is there something specific in the back half of this year that drove that?

Yeah. No. Thanks thanks for the question and a good observation. Our our CapEx capitation revenue this quarter was about 6.6%. At the height of our capitation, we were north of of 10%. And this is intentional, As you can see, our overall revenue is going up. And what what we've done as as part of our efforts that we that we focused on several years ago in going back to our payors in general to get price increases We've been Highly successful with some commercial payers, some capitated payers, but others on the capitation side have you know, we haven't reached agreement with. And from our perspective, we're we benchmark each capitation contract relative to the other books of business, that we have, we need to be paid you know, fairly for the services that that we're providing. And in several cases over the last say, 24 months, we have flipped a number of these capitation contracts to fee for service arrangements where they're no longer obligated in sending us 100% of their patients, but that which they do send us know, we're now enjoying at significantly higher fee for service rates. And given the fact that our centers are so busy, many of them have backlogs, it doesn't make sense in us seeing capitation patients if if you know, the the rates are not on par with the other book of business that we have. So we've we've actually benefited From flipping these contracts to fee for service. So you'll see the capitation you know, revenue has declined, but our overall revenue has has gone up. I believe and and, you know, we've gone through some of these cycles before. I believe that know, some of these contracts will end up coming back to us. Yeah. You know, in the future, when they that, holding the risk themselves and and doling out the business on a fee for service basis to RadNet and others out there that might be able to to service them. Has cost them more money than if they would have initially agreed to the increases that that we're requesting. So we'll see how it plays out in the in the coming years.

Thank you for, for explaining that.

My pleasure.

This concludes our question and answer session. I would like to turn the conference back over to Doctor. Berger for any additional closing remarks.

Thank you, operator. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader or the market leader. That provides great services with an appropriate return on investment. For all stakeholders. Thank you for your time today, and I look forward to our next call. Good day.