Yahoo Finance RadNet, Inc. (NASDAQ:RDNT) Q1 2024 Earnings Call Transcript
RadNet, Inc. (NASDAQ:RDNT) Q1 2024 Earnings Call Transcript May 9, 2024
RadNet, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and welcome to the RadNet, Inc. First Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Mark Stolper, Executive Vice President and Chief Financial Officer. Sir, please go ahead.
Mark Stolper: Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's first quarter 2024 financial results. Before we begin today, we'd 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, 2023. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date 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'd like to turn the call over to Dr. Berger.
Dr. Howard 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 first quarter 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'd 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. Let's begin. I am very pleased with our performance in the first quarter. It was the strongest first quarter in our company's history with record revenue, adjusted EBITDA and adjusted earnings. Relative to last year's first quarter, total company revenue increased 10.5%, Imaging Centers revenue increased 9.9% and the new Digital Health revenue segment increased 32.3%.
Imaging Center revenue was driven by heavy demand in virtually all of our markets despite being adversely impacted in the quarter on the East Coast by several snowstorms and in California by unusual rainstorms and flooding. Nevertheless, we continue to benefit from the increasing utilization of diagnostic imaging within health care as well as the shift of procedural volumes away from the more expensive hospital alternatives to ambulatory freestanding centers like the ones we operate. Also contributing to the strong revenue performance was the positive impact of improved reimbursement from commercial and capitated payors who recognize the important role we are playing as a lower-priced alternative to hospital-based imaging. Lastly, our top line is benefiting from a continuing shift in modality mix towards advanced imaging, MRI, CT and PET/CT, where the revenue per scan is substantially higher than the routine imaging.
This is both a function of an overall industry trend as well as the significant capital investment we have made in the last few years in advanced imaging equipment for growth and upgrades. Driving the revenue growth within the Digital Health was the AI business, including our EBCD, Enhanced Breast Care Detection, breast cancer screening AI-powered initiative, which grew 118.8% quarter over last year's same quarter. Adjusted EBITDA was also a first quarter record. In conjunction with the strong revenue results, which I just discussed, our focus on operational efficiency, improved management and utilization of labor, investments in information technology and effective cost control contributed to a total company adjusted EBITDA, which increased 21.4% from last year's first quarter.
Another contributing factor to adjusted EBITDA growth was a disproportionate growth in the higher profit margin Digital Health segment businesses. Cumulatively, these factors drove a 120-basis-point increase in our adjusted EBITDA margin as compared with last year's first quarter. While we are pleased with this margin expansion, I remain convinced we have further opportunity to improve margins. The strong operating results in the first quarter relative to our internal budget, combined with ongoing operating trends that have continued into the second quarter, resulted in our decision to increase 2024 full year guidance ranges for revenue, adjusted EBITDA and free cash flow Mark will discuss this in more detail in his prepared remarks. We continue our multifaceted approach to accelerate our growth.
With respect to acquisitions, some of you may have seen our two recent announcements regarding our entry into the Houston, Texas market. Upon quarter end, we completed the acquisition of the seven imaging centers of Houston Medical Imaging. In addition, we announced the second acquisition in April of 6 American Health imaging centers to be completed in June. Texas is the first new state we have entered since 2020. The Houston metropolitan marketplace encompassing about 7.3 million people is the fourth most populous city and the second fastest-growing metropolitan area in the United States. We are confident of the opportunity for our further acquisitions, de novo buildouts as desirable, health system partnerships and other means of expansion, which include bringing our artificial intelligence and leading-edge clinical and operating Digital Health solutions to the patients and referring communities of Greater Houston.
Also during the first quarter, we completed a tuck-in acquisition of four centers in the Antelope Valley north of Los Angeles. New market acquisitions like Houston and the in-market tuck-in acquisitions like that in Antelope Valley will be a continuing part of our growth strategy. 2024 will be a year of reinvestment in our business to accelerate future growth. We currently have 12 de novo facilities in various stages of development which will open for operations throughout the remainder of the year. These are on top of the two de novos, which opened in the first quarter. These facilities are located in markets where we have patient backlogs, require additional capacity or where we currently lack access points to serve particular patient populations.
While these projects are requiring us to make capital investments above our normal spending, we are confident that these centers will be material contributors to our long-term performance and growth. We continue to grow our hospital and health system joint venture businesses. Currently, 137 of our 375 centers, or 36.5%, are held within health system partnerships. Our partners are some of the largest and most successful systems in our geographies. Partners include RWJBarnabas in New Jersey, MemorialCare, Dignity Health, Lifebridge, University of Maryland, Adventist, Cedars-Sinai and others. These and other systems are seeking solutions for long-term strategy around outpatient imaging and have recognized that cost-effective and efficient freestanding centers will continue to capture share from hospitals as payors and patients alter their site of care towards lower-cost, high-quality facilities.
Our hospital and health system partners have been instrumental in increasing our procedural volumes with their physician relationships. During the first quarter, we added seven additional centers to our joint venture with Dignity Health in Arizona through the acquisition of facilities, which were previously owned by Cigna's Evernorth Care Group. And upon quarter close, we formed a new seven-center joint venture with Providence Health System in the northern and eastern San Fernando Valley of Los Angeles. Furthermore, our Dignity joint venture in Ventura County recently acquired four imaging centers in Oxnard and Ventura. Including these joint venture expansion and others, upon which we are working, we expect to have close to 40% of our centers held within health system partnerships by year-end 2024.
We continue to make progress in the Digital Health segment. As some of you remember, we announced earlier this year the formation of the RadNet Digital Health financial reporting segment effective January 1, 2024, which combines the eRAD and DeepHealth operating system software businesses into what was our clinical AI reporting segment in 2023. The financial impact of these digital health businesses has great potential for RadNet both as a customer of the DeepHealth OS and AI solutions, and of course, as the owner of these businesses would sell their solutions to customers outside of RadNet. Software businesses and in particular SaaS-based models can operate at significantly higher margin than RadNet's core imaging center segment and will require less capital investment.
Within Dignity Health, we continue to sell service -- excuse me, within Digital Health, we continue to sell, service and support eRAD solutions to new and existing customers, while we focus on the ongoing developments of the next-generation DeepHealth OS cloud-based operating system and generative AI modules. We continue to believe that DeepHealth OS can have a major impact in lowering costs and increasing efficiency in the areas of patient scheduling, pre-authorization, insurance verification, reporting, revenue cycle management and analytics. We will begin testing some of the AI-enabled automation tools of the DeepHealth OS in the third and fourth quarters of this year and aim to have commercially available solutions in the first half of 2025.
Our Enhanced Breast Cancer diagnostic mammography offering continues its rollout in Central and Northern California. We expect implementation to be substantially complete as early as the end of the second quarter. Adoption rates continue to rise on the East Coast and are now approaching 40%. While the implementation in Southern California is more recent, we are encouraged from initial adoption rates, which are significantly higher than those experienced at the beginning of the East Coast rollout. Aidence's lung and Quantib prostate and neuro AI solutions are also expanding their customer base predominantly in Europe. This has been highlighted in the United Kingdom, where Aidence is the partner of choice for the four-country rollout of the NHS targeted lung health check lung cancer screening program.
Finally, we continue to improve liquidity and financial leverage. We ended the first quarter with a cash balance of $527 million and a net debt to adjusted ratio of slightly more than one time. Included in the net cash balance were approximately $219 million of net proceeds from a successful stock offering we completed in March. Additionally, subsequent to the end of the first quarter and completed on April 18, we opportunistically refinanced our debt facilities. With this financing, we were able to reduce our cost of capital, extend maturities and add an additional approximately $168 million to RadNet's cash balance. With all of this, RadNet is in the best financial condition in its history and is poised for accelerated growth. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our first quarter 2024 performance.
When he is finished, I will make some closing remarks.
Mark Stolper: Thank you, Howard. I'm now going to briefly review our first quarter 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 first quarter performance. I will also provide an update to 2024 financial guidance levels, which were released in conjunction with our 2023 year-end results in March. 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 extinguishments and noncash equity compensation.
Adjusted EBITDA includes earnings, equity earnings and unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and onetime events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common stockholders is included in our earnings release. With that said, I'd now like to review our first quarter 2024 results. For the first quarter of 2024, RadNet reported total company revenue of $431.7 million and adjusted EBITDA of $58.5 million. Revenue increased $41.1 million or 10.5% and adjusted EBITDA increased $10.3 million or 21.4% as compared with the first quarter of 2023.
Breaking this performance down to the individual operating segments, our Imaging Centers segment reported revenue of $417 million and adjusted EBITDA of $54.9 million. This was an increase of $37.6 million or 9.9% in revenue and an increase of $6.8 million or 14.1% in adjusted EBITDA as compared with last year's first quarter. Driving this performance were strong aggregate and same-center procedure volumes, the impact of higher reimbursement we are receiving from commercial and capitated payors, the gradual movement towards advanced imaging and tight expense control. The Digital Health segment reported revenue of $14.7 million and adjusted EBITDA of $3.5 million during the quarter. Revenue increased $3.6 million or 32.3% and adjusted EBITDA increased $3.5 million or 17,500% as compared with the first quarter of 2023.
Digital Health's significant growth was due in part from a $2.5 million or a 118.8% increase in AI revenue, which climbed to $4.7 million during the first quarter of 2024. Total company net loss for the first quarter of 2024 was $2.8 million as compared with a total company net loss of $21 million for the first quarter of 2023. Net loss per share for the first quarter of 2024 was negative $0.04 compared with a net loss per share of negative $0.36 in the first quarter of 2023, based upon a weighted average number of diluted shares outstanding of 69.3 million shares in 2024 and 57.7 million shares in 2023. There were a number of unusual or onetime items impacting the first quarter, including the following: $1.2 million of noncash gain from interest rate swaps; $1 million expense related to leases for our de novo facilities under construction that have not yet opened for operations; $2 million noncash increase to contingent consideration related to completed acquisitions; and $3.3 million of noncapitalized research and development expenses with respect to our new DeepHealth cloud OS and generative AI.
Adjusting for the above items, total company adjusted earnings was $5 million for the quarter and diluted adjusted earnings per share was $0.07 per share during the first quarter of 2024. This compares with total company adjusted loss of $13 million and diluted adjusted loss per share of negative $0.22 during the first quarter of 2023. For the first quarter of 2024, as compared with the prior year's first quarter, MRI volume increased 11.7%, CT volume increased 9.1% and PET/CT volume increased 17.5%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and all other exams, increased 5.7% over the prior year's first quarter. On a same-center basis, including only those centers which were part of RadNet for both the first quarters of 2024 and 2023, MRI volume increased 9.9%, CT volume increased 6.5% and PET/CT volume increased 15.3%.
Overall, same-center volume, taking into account all routine imaging exams, increased 3.8% over the prior year same quarter. In the first quarter of 2024, we performed 2,646,951 total procedures. The procedures were consistent with our multi-modality approach whereby 74.3% of all the work we did by volume was from routine imaging. Since we now have a table of our aggregate procedure volumes broken down by modality in our earnings release, I won't go through the numbers, but I want to make the following points. In his remarks, Dr. Berger mentioned that we are experiencing a slow shift to higher-acuity procedures or what we call advanced imaging. In the first quarter of this year, 25.7% of our procedures were from MRI, CT and PET/CT. In last year's first quarter, this metric was 24.5%, a shift of 1.2% of our procedure volumes towards advanced imaging.
With higher pricing and better margins, more advanced imaging improves our financial results, including our operating margins. Overall GAAP interest expense for the first quarter of 2024 was $16.3 million as compared with $15.7 million during last year's first quarter. In the first quarter of 2024, cash interest expense, which includes payments to and from counterparties on our interest rate swaps and net interest income from our cash balance, was $10.5 million. This compares with $17.5 million in the first quarter of 2023. The lower cash interest expense this quarter is primarily the result of more interest income on larger cash balances as well as the timing of cash interest paid on our term loan. With regards to our balance sheet, as of March 31, 2024, unadjusted for bond and term loan discounts, we had $317.1 million of net debt, which is our total debt at par value less our cash balance.
This compares with $789.2 million of net debt at March 31, 2023. Note that this debt balance includes New Jersey Imaging Network's debt of $142.5 million for which RadNet is neither a borrower nor a guarantor. As of March 31, 2024, we were undrawn on our $195 million line of credit and had a cash balance of $527 million. At March 31, 2024, our accounts receivable balance was $189.6 million, an increase of $25.9 million from year-end 2023. The increase in accounts receivable is primarily the result of some collection delays resulting from the cyberattack on Change Healthcare and the normal first quarter effect of cash collections from the resetting of patient deductibles each year in January. Despite the impact from the Change Healthcare breach, our DSOs, or day sales outstanding, was 34.9 days at March 31, 2024, near our historic low.
Through March 31, 2024, we had total capital expenditures net of proceeds from the sale of imaging equipment of $64.4 million. This total includes $6.9 million spent under equipment notes and the remainder spent in cash. Note that each year, we front-load the majority of our capital decisions into the first part of the year and have been spending extraordinarily on growth CapEx to fund the 12 de novo facilities in construction, which are scheduled to open before year-end. At this time, I'd like to update and revise our 2024 financial year guidance levels, which we released in conjunction with our fourth quarter and year-end 2023 results. Given the positive trends we are experiencing in virtually all aspects of our business and the strong financial performance of the first quarter, which is continuing into the second quarter, we are revising upwards certain guidance levels in anticipation of financial results that we believe will exceed our original expectations for 2024.
For revenue, we increased our guidance level for the Imaging Centers segment by $25 million, both at the low end and the top end of the range. Also, for the Imaging Center segment, we've increased our EBITDA guidance by $5 million at the low end and the high end of our range. Our guidance level is now $255 million to $265 million. For capital expenditures for the Imaging Centers segment, we increased our guidance both at the low end and the high end of the range by $5 million. For cash paid for interest, due to the refinancing transaction and our much larger cash balance, we've decreased our cash paid for interest this year by $3 million, both at the low end and high end of the range and anticipate our cash interest expense to be $37 million to $42 million, and we increased our free cash flow generation guidance level by $3 million to $68 million to $78 million.
For the Digital Health segment, we increased our EBITDA guidance by $1 million, both at the low end and the high end of the range to $13 million to $15 million. We increased our noncapitalized R&D expenditures by $1 million to $12 million to $14 million and all other guidance ranges remain the same for the Digital Health platform. I'll now discuss reimbursement with respect to Medicare. With respect to Medicare reimbursement for 2025, there's nothing to report at this time. As is typical each year, we are expecting CMS to release a preliminary rate schedule sometime in June or July, at which time, we will analyze CMS' proposal and our industry's lobbying groups will provide CMS our industry's feedback. At the time of our second quarter financial results call, we will be in a position to comment on CMS' proposal and its impact, if any, upon RadNet's future results.
However, we did receive some good news in March regarding 2024 Medicare rates. Effective March 9 of this year, as part of the Consolidated Appropriations Act, 1.72% of the 3.4% scheduled reduction in the conversion factor of the 2024 Medicare fee schedule was eliminated on a prospective basis. The reduction of the cut applies to all of our Medicare buildings from March 9 through the end of this year. As some of you may remember, the original proposed cut was going to reduce our 2024 revenue by an estimated $7 million to $8 million. Thus, the mitigation gives back almost half of this amount, thereby increasing our 2024 revenue by $3.4 million relative to our original expectations and budget. At this point, I'd like to turn the call back to Dr. Berger, who will make some closing remarks.
Dr. Howard Berger: Thank you, Mark. As we move towards the half year point of 2024, we are excited about the initiatives we have for the remainder of the year. We are particularly encouraged by the progress we are making in Digital Health. As we continue to improve and accelerate growth in the core imaging center business, our digital health initiatives are poised to help us drive more revenue, reduce costs and increase margins. We remain convinced that the successful future of any imaging business will be heavily dependent upon the automation and efficiency by which patients and clinical data is managed, analyzed and processed. This is the driver for our development of the new DeepHealth OS, which will be the delivery platform for solutions which automate business processes and more effectively manage patient and clinical data.
We expect DeepHealth OS to further automate processes that today principally rely on human labor in the areas of patient scheduling, clinical reporting, medical coding, sales and marketing, workflow improvement and analytics. In this vein, we are currently making investments in foundation generative AI models. It is faster and less expensive for data sciences to use pretrained foundation models to develop new machine learning applications rather than train unique machine learning models from the ground up. When trained on broad data sets, these models can support a diverse range of use cases. Tests that foundation models can perform, including language processing, visual comprehension, code generation and human decision-making. Advances in available foundation models will enable us to design and test AI solutions more quickly and at a lower cost, giving us a distinct advantage when applied to the enormous database of clinical and business information we own.
While we develop DeepHealth OS, we continue to grow revenue from our clinical AI solutions for breast, lung and prostate cancer screening. Our objective is to design and deploy these tools and others that lower the cost and increase the accuracy of cancer diagnosis in a form that can be packaged to create widespread population health initiatives and screening. Our breast cancer AI and the EBCD program exemplifies this opportunity. Our breast AI is improving the productivity and accuracy of our radiologists while providing a valuable benefit to our patients for which they are willing to self-pay. We are formulating similar screening programs for prostate, lung and other chronic diseases for both domestic and international markets, as we firmly believe that health care needs to shift towards prevention and early detection and not just focus on treating patients who are already sick.
We look forward to updating you further on the progress of our digital health initiatives in the coming quarters. Operator, we are now ready for the question-and-answer portion of the call.
Operator: [Operator Instructions] Our first question today comes from Brian Tanquilut from Jefferies. Please go ahead with your question.
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