RadNet, Inc. (NASDAQ:RDNT) Q4 2023 Earnings Call Transcript
RadNet, Inc. (NASDAQ:RDNT) Q4 2023 Earnings Call Transcript March 1, 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 day, and welcome to the RadNet, Inc. Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions] 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 at RadNet. 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 fourth quarter and full year 2023 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 filed yesterday. 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 now to turn the call over to Dr. Berger.
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 fourth quarter and full year 2023 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 the strong performance in the fourth quarter. The Imaging Center segment revenue increased 8.6% and adjusted EBITDA increased 11% from last year's fourth quarter, resulting in RadNet's quarterly records for both revenue and adjusted EBITDA.
The performance was the result of a continuation of strong industry trends and execution on a multi-pronged growth strategy focused on driving same-center performance, the expansion of existing and establishment of new health system partnerships and investments made in de novo imaging centers and newer technologies of equipment, software and AI solutions. We experienced a 7.9% in aggregate and 5.5% and same-center procedural volume growth in this year's fourth quarter relative to last year's same quarter. Demand for RadNet's services remains robust in virtually all core markets as outpatient imaging continues to be shifted for more expensive hospital settings towards more cost-efficient ambulatory sites like the ones RadNet operates. Contributing to the record adjusted EBITDA performance was also a labor market that while still challenging to attract and retain talent has stabilized and improved since its most challenging post COVID periods.
We continue to focus on strengthening the balance sheet by managing liquidity and financial leverage. At the year-end 2023, RadNet's cash balance was over $342 million, and the net leverage ratio was under 2x adjusted EBITDA. Our days sales outstanding, DSOs, at December 31, 2023, was 32 days, RadNet's historic low and we believe among the lowest in the industry. The improvement in revenue cycle operations and collections has contributed to the ability to make important investments in the future of RadNet, particularly in the area of de novo facility development. We began a significant de novo expansion strategy in 2022, which continued throughout 2023. We are making extraordinary capital investments in developing facilities which should improve our capacity and patient access.
RadNet should begin benefiting from the financial contribution of these facility openings in 2024, during which we expect to see our first patients in about a dozen of these new centers. These de novo centers are located in markets where we are experiencing patient backlogs require additional capacity or in locations where we currently lack access points to service identified patient populations. A second area of investment in focus has been in expanding joint venture and health system initiatives. We currently have 24 system joint ventures representing over 35% of our 366 centers. We continue to believe that we could have more than half of our centers in health system partnerships within three years. As an example, in September of 2023, we announced a significant expansion of our relationship with Cedars-Sinai Medical Health System in the Los Angeles area, establishing a new joint venture called Los Angeles Imaging Group as well as broadening an existing three center joint venture, Santa Monica Imaging Group, to include the contribution of seven additional centers from both RadNet and Cedars-Sinai forward thinking and entrepreneurial health systems like Cedars-Sinai are increasingly seeking a long-term viable strategy for diagnostic imaging, and RadNet represents an attractive strategic direction for these organizations.
As we look ahead to 2024, we anticipate the expansion of several health system relationships and the establishment of new joint venture relationships. Tuck-in acquisitions will also remain an active part of RadNet's growth, strategy and investment. The diagnostic imaging industry remains fragmented and smaller operators are unable to provide the patient access and level of care that can be facilitated today with investments in newer hardware, software and artificial intelligence technologies. Furthermore, the rising cost of capital, increased interest rates, reimbursement pressure from Medicare and other private payers and the necessity of scale drive efficiencies and profitability, made joining the RadNet network more attractive than ever.
In 2023, we completed several tuck-in acquisitions in Southern California, New York and Delaware. Earlier this week, some of you may have seen the announcement that we signed a definitive agreement to purchase the assets of seven imaging centers in the Greater Houston, Texas metropolitan area from Houston Medical Imaging. Houston represents the first new geographical market, RadNet will 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. Houston Medical Imaging with its seven well-recognized facilities, approximately 140 team members and over 20 radiologists has been a stable factor in the radiology market in used for over 30 years.
And we believe HMI is a platform for which to grow a new core network for RadNet. We are confident of the opportunity for further acquisitions, de novo build-outs, health system partnerships and other means of expansion which include bringing our AI and leading-edge clinical and operating digital health solutions to the patients and referring communities of the Greater Houston area. As we move further in 2024 and beyond, we will continue to have a disciplined approach to evaluating opportunities to expand outside of our core markets. We continue to invest and pursue growth opportunities in artificial intelligence and radiology software solutions. The implementation of our enhanced breast cancer detection, EBCD screening mammography service is continuing on the West Coast.
We are now fully implemented in Southern California and Arizona and will begin rolling out the program in approximately 18 Central and Northern California mammography locations in March. We are pleased to report that we are experiencing higher initial adoption rates on the West Coast as a result of the learnings from our East Coast experience. We continue to work with our partners in the United Kingdom and the expansion of the targeted lung health check lung cancer screening program, where DeepHealth's agents division is providing the principal AI solution in the four country rollout. We expect to see continued growth in ADs from this program and other similar lung stream programs during 2024. In 2023, our AI segment revenue grew 278% from these initiatives and AI revenue in 2024 is anticipated to grow over 65% with continued adoption of artificial intelligence solutions.
We further believe that RadNet's AI business will reach adjusted EBITDA breakeven by year-end 2024. In 2023, we announced the development of our DeepHealth OS AI-powered health informatics portfolio designed to dramatically drive efficiency and transform the role of radiology in health care. At the heart of that offering is a cloud native operating system, which leverages both clinical AI that improves disease detection and generates degenerative AI to efficiently orchestrate patient engagement and care delivery. We will begin internal implementation during 2024 and expect that many of the DeepHealth OS tools will be incorporated into our -- into the RadNet workflow by year-end. The expectation is that external customers, including the over 200 current customers of eRAD could begin licensing the commercialized DeepHealth OS solutions beginning early in 2025.
This brings me to the final point I would like to make before turning the call back to Mark. In last meeting's financial results press release, we announced the formation of the RadNet Digital Health financial reporting segment effective January 1, 2024, which combines the current eRAD and DeepHealth OS software businesses into what was our clinical AI reporting segment throughout 2023. As we have been growing our eRAD software solutions and AI businesses separately, we have increasingly recognized that these businesses are quite different than our core imaging center business in terms of their operational and financial profile and that they require a different level of focus and expertise to manage. Over the past year, we have been able to attract an executive team with experience in managing digital health businesses.
The financial impact of this 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, which 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 require less capital investment. The Digital Health segment is projected to be profitable in 2024 and grow in the range of approximately 20% to 40% in 2024 over 2023. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full year 2023 performance as well as discuss our 2024 guidance.
When he is finished, I will make some closing remarks.
Mark Stolper: Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 2023 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 2023 performance. I will also provide 2024 financial guidance levels, which were released in this morning's -- I should say, night's financial 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 extinguishments and noncash equity compensation.
Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling 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 shareholders is included in our earnings release. With that said, I'd now like to review our fourth quarter and full year 2023 results. For the fourth quarter of 2023, RadNet reported revenue from its Imaging Center reporting segment of $415.3 million and adjusted EBITDA of $68.3 million. This excludes AI revenue of $5.1 million and AI adjusted EBITDA losses of $2.5 million during the quarter.
As compared with the last year's fourth quarter, Imaging Center segment revenue increased $32.8 million or 8.6% and adjusted EBITDA increased $6.7 million or 11%. Including our AI reporting segment, total company revenue was $420.4 million in the fourth quarter of 2023, an increase of 9.5% and from $383.9 million in last year's fourth quarter. Including the adjusted EBITDA losses of the AI reporting segment of $2.5 million in the fourth quarter of 2023 and $4.3 million in the fourth quarter of 2022, total company adjusted EBITDA was $65.8 million in the fourth quarter of 2023 and $57.2 million in the fourth quarter of 2022. And a growth rate of 15%. For the fourth quarter of 2023 as compared with the prior year's fourth quarter, MRI volume increased 13.2% and CT volume increased 11.3% and PET/CT volume increased 18.5%.
Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and all other exams, increased 7.9% over the prior year's fourth quarter. On a same-center basis, including only those centers which were part of RadNet for both the fourth quarters of 2023 and 2022, MRI volume increased 10.8%, CT volume increased 8.2% and PET/CT volume increased 17.4%. Overall same-center volume, taking into account all routine imaging exams, increased 5.5% over the prior year same quarter. Adjusting for a number of unusual or onetime items impacting the fourth quarter of 2023, adjusted earnings from the Imaging Center reporting segment was $13.7 million and diluted adjusted earnings per share was $0.20 during the fourth quarter of 2023 as compared with $0.11 during the fourth quarter of 2022.
The unusual or onetime items impacting the fourth quarter of 2023 excluded in calculating adjusted earnings were as follows: $7.2 million of noncash loss from interest rate swaps, $621,000 of severance paid in connection with headcount reductions related to cost savings initiatives; $880,000 of expenses related to leases for de novo facilities under construction that have yet to open their operations, $222,000 a of acquisition transaction costs, $429,000 gain from the valuation adjustment for contingent consideration related to acquisitions, $1.3 million of non-capitalized research and development investments in the DeepHealth cloud-based OS and generative AI solutions, $5.1 million loss on lease abandonment and a $5 million of pretax losses related to our AI reporting segment.
On an unadjusted basis for the fourth quarter of 2023, RadNet reported a net loss of $1.9 million as compared with a net loss of $934,000 for the fourth quarter of 2022. Net loss per share for the fourth quarter of '23 unadjusted was negative $0.03 compared with a net loss per share of negative $0.02 in the fourth quarter of 2022, based upon a weighted average number of diluted shares outstanding of 67.9 million shares in 2023 and 57 million shares in 2022. With regards to some specific income statement accounts, overall GAAP interest expense for the fourth quarter of 2022 was $16.6 million. This compares with GAAP interest expense in the fourth quarter of 2022 of $15.4 million. Cash paid for interest during the period, which excludes non-cash deferred financing expense, accrued interest and payments to and from swap counterparties was $5.6 million as compared with $8.9 million in the fourth quarter of last year.
The lower cash paid for interest in this year's fourth quarter was a function of the timing of our SOFR elections on our term loan, despite higher interest rates in the fourth quarter of 2023 relative to last year's fourth quarter. For full year 2023, we reported revenue from our Imaging Center reporting segment of $1.604 billion and adjusted EBITDA, excluding losses from the AI reporting segment of $245.1 million. In 2023, revenue increased $178.5 million or 12.5% and adjusted EBITDA increased $36.1 million or 17.2% as compared with 2022. For 2023, adjusted EBITDA margin for the Imaging Center segment was 15.3%, an increase of 60 basis points from 2022, which had a 14.7% adjusted EBITDA margin. Including our AI segment, total company revenue of $12.5 million.
Total company revenue was $1 billion $67 million for full year 2023, an increase of 13% from $1.430 billion in 2022. Including adjusted EBITDA losses from the AI segment of $12.8 million, total company adjusted EBITDA for 2023 was $232.3 million as compared with $192.5 million in 2022, an increase of 20.7%. For the year ended December 31, 2023, as compared with 2022, MRI volume increased 13.3%, CT volume increased 11.3% and PET/CT volume increased 18.5%. Overall volume taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and all other exams increased 7.9% for the 12 months of 2023 over 2022. For 2023, RadNet reported net income of $3 million, a decrease of approximately $7.6 million over 2022. Per share diluted net income for the full year of 2023 was $0.05 compared to a diluted net income per share of $0.17 in 2022 based upon a weighted average number of diluted shares outstanding of $64.7 million in 2023 and $57.3 million in 2022.
With regards to some specific income statement accounts, overall GAAP interest expense in 2023 was $64.5 million. Adjusting for the impacts from items such as amortization of deferred financing fees, accrued interest and payments to and from swap counterparties on interest rate swaps and and net of interest earned on our cash balance, cash interest -- net cash interest expense was $38.3 million in 2023. With regards to our balance sheet, as of December 31, 2023, unadjusted for bond and term loan discounts, we had $465.3 million of net debt, which is our total debt at par value, that's our cash balance. Note that this debt balance includes RadNet's ownership percentage of New Jersey Imaging Network's net debt of $63.2 million for which RadNet is neither a borrower nor a guarantor.
As of year-end 2023, we were undrawn on our $195 million revolving line of credit and had a cash balance of $342.6 million. At December 31, 2023, our accounts receivable balance was $163.7 million, a decrease of $2.7 million from year-end 2022 and despite revenue being up 13% during 2023. This was the result of improved revenue cycle performance and collections efforts. These improved efforts caused our DSO to decrease from 38.8 days at December 31, 2022, to 32 days at December 31, 2023, which is our all-time low. Throughout 2023, we had total capital expenditures net of asset dispositions and the sale of imaging center assets and joint venture interest of $153 million. This amount excludes $18.6 million of capital expenditures of New Jersey Imaging Network a onetime $19.8 million purchase on a promissory note of equipment previously leased under operating leases and a $5 million purchase of software and other intellectual property from a vendor.
Capital expenditures in 2023 were higher than we originally budgeted as a result of the construction of certain de novo facilities that became operational towards the end of 2023 or expected to become operational within 2024. As some of you may have seen in the financial results press release we made last night after market close, and as discussed by Dr. Berger in his earlier remarks, starting with our fiscal 2024, we are changing our operating and financial reporting segments. Specifically, the eRAD software businesses and related health informatics businesses that were reported as part of our imaging center segment throughout 2023. And will now be combined with our artificial intelligence segment to form a new digital health financial reportable segment, starting with the first quarter of 2024.
The eRAD and informatics business embedded within the Imaging Center segment in 2023 were highly profitable. These businesses produced $37.1 million of revenue, had $16.4 million of operating expenses and earned $20.7 million of adjusted EBITDA. For the purpose of understanding and evaluating our 2024 guidance and last night's financial press release, we restated our 2023 operating segment results to be presented as if the two new operating segments, meaning the Imaging Center segment and the Digital Health segment existed as of January 1, 2023. While I'm not going to run through all the numbers on this call, I will emphasize some important points. First, on the core imaging center segment, we are anticipating revenue growth in 2024 to be as much as 8.5%, and we expect adjusted EBITDA growth in 2024 from the Imaging Center segment to be 11.4% to 15.8%.
While we continue to make elevated capital expenditures in 2024, the aggregate amount is anticipated to be approximately 10% to 15% less than what we spent in 2023. We are also expecting free cash flow in the Imaging Center segment to approximately double in 2024. On the new digital health reportable segment, we are anticipating revenue growth in 2024 of between 21% and 41% and adjusted EBITDA growth of between 51% and 77%. The majority of the revenue growth is anticipated from both the continued Enhanced Breast Cancer Detection or EBCD implementation and from our lung and prostate AI licensing businesses particularly in Europe. The AI portion of our digital health business is projected to grow by over 65% and is anticipated to reach breakeven by year-end 2024 from an adjusted EBITDA standpoint.
Finally, our Digital Health segment guidance reflects the substantial investment we are making in the development of our DeepHealth OS cloud-based operating system and the generative AI modules that could lower our costs and increase efficiency in the areas of patient scheduling, preauthorization, insurance verification and revenue cycle. We believe this research and development investment will pay dividends both in our core imaging center business and for the current and future customers outside of RadNet. I'd now like to turn the call back over to Dr. Berger, who will make some closing remarks.
Howard Berger: Thank you, Mark. As we look to 2024, we have reasons to remain enthusiastic about our future. The core imaging business is healthy and growing. Procedural volumes and patient demand are strong. Payers and patients are increasingly moving procedural volumes to our centers and away from hospital-based imaging operations that charge prices that are unsustainable in a health care system attempting to manage cost. In addition to the site of care shift taking place, the overall industry continues to grow, driven in part by advances in technology, which drives more medical indications for ordering diagnostic imaging procedures. Additionally, the population is aging and growing and continues to see non-basic preventive and cost effective.
All these sectors [indiscernible] continue to see patient [indiscernible]. RadNet is ideally positioned for long-term growth and success in this dynamic marketplace. In a period where the cost of capital has risen significantly we remain modestly leveraged and have more liquidity and capital resources as compared with virtually all of our other scale operators in the industry. This places us in the best position to pursue growth opportunities both organic and inorganic in a time period where many others do not have the financial capacity or flexibility. But perhaps the most important aspect of this report, is the formation of the RadNet Digital Health position. The future of health care will be substantially driven by artificial intelligence and radiology can lead the way.
A successful AI initiative relies on scale operations and access to large data sets. RadNet has accumulated both of these components over several decades of existence. The newly created digital health division will allow our stakeholders to better recognize the growth and success of this essential component of the RadNet family of services. In conclusion, we have never been more excited than we are today about what lies ahead for RadNet. We feel as if we are better positioned today than any other time in our history to execute on the multifaceted strategy that we have created. We look forward to updating our stakeholders throughout the rest of 2024 on our progress. Operator, we are now ready for the question-and-answer portion of the call.
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