RadNet, Inc.

Good day and welcome to the RadNet Inc. First Quarter 2025 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Mark Spoolper, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's First Quarter 2025 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 make RadNet's actual results 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 10K for the year ended December 31, 2024. 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 and to reflect new information, events or circumstances after they are made, or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

Thank you, Mark. Good

morning, everyone. Thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our first quarter, 2025, 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 joining us today, and your interest in RadNet, and for dedicating a portion of your day to participate in the conference call. Let's begin. As we indicated at the end of February, in conjunction with releasing our fourth quarter, 2024, financial results, and 2025 guidance ranges, the first quarter of 2025, specifically January and February, were significantly and negatively impacted by severe weather conditions in the Northeast, in Houston, Texas, as well as wildfires in Southern California. At the end of February, we estimated this negative impact to be approximately $22 million of revenue and $15 million of EBITDA. This impact was embedded into our 2025 full-year guidance levels released at that time. While the impact of severe weather conditions and wildfires, and southland fires were as expected, material to the financial results of the first quarter, I was very pleased that the business recovered to levels in March, April, and the early part of May that are consistent with the strong growth trends. I am pleased to report that these issues are behind us, and that our business is now demonstrating the strong procedural and revenue growth trends consistent with recent performance. There were a number of items in the quarter worth noting. First, we continue to see a gradual shift towards advanced imaging. During this year's first quarter, .9% of procedural volume was from advanced imaging compared with .7% in last year's first quarter, a difference of 126 basis points. This is both a reflection of 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 replacement. Also, despite the weather and fire impacts aggregate, PET-CT volumes increased .9% driven by the continued growth of the newer prostate and brain procedures. Because PET-CT typically is performed to identify and stage cancer, or in the case of brain studies to detect plaques correlated with Alzheimer's or dementia, these studies tend to be less selective in nature and were less effective than the rest of our business by the severe winter weather and wildfires. As a result of the operating strength we saw in March, April, and the first part of May, we have adjusted upwards our 2025 revenue and adjusted even to our guidance ranges. Despite the challenges presented by the severe weather and fires, we have been in some important operating and digital health initiatives in the first quarter. First, we continue to implement the TechLive Remote Technologies solution. Radiology technologies comprise almost 40% of our total employee base. Due to the continuing growth of industry-wide procedural volume, radiology technologies are in high demand and short supply, challenging our ability to expand hours necessary to meet this strong demand in RadNet's local markets and has resulted in rising labor costs. DeepHealth TechLive Remote Scanning technology enables technologists to control equipment remotely, enabling them to cover shifts that would otherwise go unstaffed, and in a growing number of cases, enabling technologists to control multiple scanners simultaneously. We have installed TechLive on 255 of our almost 400 MLI scanners are in the process of testing TechLive on ultrasound scanners, whose effectiveness are highly dependent on the training levels and experience of technologists. We continue to believe this technology will positively impact revenue and lower operating costs.

Second, the EVCD

digital DeepHealth AI-powered breast cancer screening program continues to grow. Notably, despite the weather and fire impacts, EVCD adoption increased from almost $3 million in the first quarter of 2024 to slightly over $4 million in the first quarter of 2025, a 33% increase. Currently, we are experiencing a blended adoption rate nationally of over 40%. More cancers are being found earlier across our centers that might otherwise have gone undetected, and at the same time we are making our radiologists more productive. During the first quarter, we enabled our first third-party EVCD customer, OB-GYN specialist of the Palm Beaches, with the technology and interpretive services to offer AI enhanced breast screening to its patients. OB-GYN specialist services nearly 6,000 women across 10 locations in southeast Florida and is now offering -the-art mammography and breast cancer screening, inclusive of EVCD and expert radiologist interpretation. At the current time, over 50% of the OB-GYN specialist patients are adopting EVCD as part of their mammography screening. As part of the collaboration, RADMIT's contracted board-certified breast imaging radiologists are providing interpretation of all mammography and diagnostic screening exams conducted across OB-GYN specialist locations. This -of-care model is a new growth opportunity for RADMIT and DeepHealth offerings, not just in mammography but also in the areas of x-ray and ultrasound. DeepHealth is working closely with various equipment manufacturers to develop technology that can further enable routine imaging more accessible to patients. Subsequent to the quarter end, on April 15th, we announced the acquisition and signing of a definitive agreement of ICAD, Inc., a global leader in providing clinically proven AI-powered breast health solutions. ICAD's profound breast health suite and RADMIT's DeepHealth AI-powered breast-getting solutions together have the ability to materially expand and improve patient diagnosis and outcomes on a global basis through further enabling accuracy and early detection. With over 1,500 healthcare provider locations and facilitating over 8 million annual mammograms in 50 countries, ICAD's installed base and strong sales, engineering, and marketing capabilities will provide us with immediate broad and valuable customer relationships and commercialization capabilities that can celebrate existing DeepHealth opportunities. With this business combination, we hope to accelerate our global leadership in commitment to AI-powered breast cancer screening and position us to further advance population health. The transaction, expected to close in the second quarter or early part of the third quarter of 2025, is subject to approval by ICAD shareholders and other customary closing conditions. We continue to grow our hospital and health system joint venture business. Currently, 154 of our centers are held within system partnerships. This includes two de novo facilities, which we opened in the first quarter inside of the New Jersey Imaging Network joint venture with the RWJ-Barnabas Health System. We anticipate both establishing new joint ventures with other health systems, as well as expanding existing partnerships during the remainder of 2025. Health systems continue to seek solutions for long-term strategies around outpatient imaging and have recognized that cost-effective freestanding centers will continue to capture market share from hospitals as payers and patients migrate to a site of care to lower cost, high quality solutions. Finally, we continue to have strong liquidity and modest financial leverage. We ended the first quarter with a cash balance of $717 million and a net -to-adjusted EBITDA ratio of slightly more than one. We have an active pipeline of acquisitions, which we are evaluating both for our core imaging center division, as well as for the digital health division. And we are confident we will be able to invest our cash balance over time in opportunities that advance red-bent strategic objectives. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our first quarter 2025 performance. When he's finished, I will make some closing remarks.

Thank you, Howard.

I'm now going to briefly review our first quarter 2025 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 insight into some of the metrics that drove our first quarter performance. I will also provide an update to 2025 financial guidance levels, which were released in conjunction with our 2024 year-end results in February. 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 non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries and is adjusted for non-cash or extraordinary and one-time 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 first quarter 2025 results. As Dr. Berger highlighted in his prepared remarks, the first quarter was marred by the severe winter weather conditions in the Northeast and the California wildfires, significantly distorting any meaningful comparison to last year's first quarter results. These extraordinary events were fortunately confined to January and February as our business bounced back nicely in March and revenue and procedure volumes have been strong since. While I won't recap all the financial information that's contained in yesterday's earnings report, here are some of the highlights. For the first quarter of 2025, Radnet reported total company revenue of $471.4 million and adjusted EBITDA of $46.4 million. Revenue increased $39.7 million or .2% and adjusted EBITDA decreased $12.1 million or .6% as compared with the first quarter of 2024. Adding back the estimated $22 million impact from the weather and fires to revenue in the first quarter of 2025, revenue would have increased .3% from last year's first quarter. And adding back the estimated $15 million impact from the weather and fires on adjusted EBITDA for the first quarter of 2025, adjusted EBITDA would have increased 5% from last year's first quarter. As a reminder in general, the first quarter from a seasonality perspective is always our most challenged quarter. Among other things, this is due to increased payroll taxes, the expensing of employee bonuses, the front loading of our capital expenditure budget, and lower healthcare utilization in general as a result of the annual reset of deductibles. The digital health segment reported revenue of $19.2 million and adjusted EBITDA of $3.7 million in the first quarter. Revenue increased $3.6 million or .1% and adjusted EBITDA increased $191,000 or .4% as compared with the first quarter of 2024. Digital health growth was driven by .3% growth in AI revenue, mainly as a result of the improved adoption of EBCD and .1% growth in radiology software, mainly from more intercompany revenue driven by aggregate procedural volume growth in Radnet's core imaging centers. We finished the first quarter of 2025 with a strong cash and liquidity position. At quarter end, we had $717 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 refinancing transaction we completed last April and the repricing transaction we completed in November. Continued improvement in revenue cycle has kept our DSOs, our day's sales outstanding, at 33.3 days, slightly lower than where we were at this time last year. With regards to our financial leverage, as of March 31, 2025, unadjusted for bond and term loan discounts, we had $285.5 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's net debt of $39.9 million, for which Radnet is neither a borrower nor guarantor. At quarter end, our net debt to adjusted EBITDA leverage ratio was slightly more than one time. Given the positive trends we experienced in March, April, and the first part of May, we elected to increase revenue and adjusted EBITDA guidance ranges for our imaging center business. We increased revenue by $10 million at the low and high ends of the guidance ranges and increased adjusted EBITDA by $3 million at both the low and high ends of the range. We also increased our capital expenditure budget guidance ranges by $5 million. Otherwise, all guidance ranges for both the imaging center and the digital health segments remained unchanged. With respect to Medicare reimbursement for 2026, there is 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's proposal and our industry's associations and lobbying groups will provide CMS our industry's feedback. At the time of our second quarter financial results call in August, we will be in a position to comment on CMS's proposal and its impact, if any, upon RadNet's future results. I'd now like to turn the call back over to Dr. Berger, who will make some closing remarks.

Thank you,

Mark.

I'd like to take a moment and read an excerpt of a letter we received from a patient who recently visited one of our New York Lenox Hill Radiology locations for her annual screening mammography exam. It reads as follows. A few weeks ago, I had a routine mammogram and sonogram as part of my regular health checkup. I was advised to have AI software assist with the exam. The results revealed something that had not been detectable previously. Following the findings, I completed a biopsy at another of the RadNet facilities in New York, and the results confirmed a diagnosis of stage zero breast cancer. Without this software, the cancer might have gone detected until much later. Yesterday, I underwent surgery, and I'm relieved to share that the procedure went well, and I am now on the road to recovery. While this journey has been unexpected and challenging, I am incredibly grateful for the power of EBCD technology. Without it, my diagnosis may have been delayed, possibly leading to more complex treatment. I share my story as a testament to the importance of medical screening. Early detection saves lives, and I am living proof of that. To anyone reading this, if you have the opportunity to get enhanced detection, take it. It could make a difference. This patient's letter highlights several points that I would like to emphasize. First, in the coming years, diagnostic imaging will shift towards earlier detection, preventative maintenance, and population health management. Currently, the vast majority of diagnostic imaging is performed on patients who present with symptoms, illness, or injury. While there is tremendous value proposition in servicing these individuals, healthcare can be dramatically improved by screening non-symptomatic patient populations cost-effectively for some of the most common diseases, which are responsible for the rising costs of healthcare delivery. Breast cancer exemplifies the potential for population health management, where annual screenings for women starting at the age of 40 has greatly improved women's health. The same could be true for prostate cancer, lung cancer, colorectal cancer, cardiovascular disease, and other metabolic conditions, if and when widespread diagnostic imaging screening is adopted. Radnip is committed to leading radiology and healthcare in this direction. Radnip's Deep Health, in addition to powering the EBCD program, is already offering AI-intuitive solutions for prostate and lung cancer screening. Furthermore, we have been expanding the use of cardiac screening in a growing number of Radnip centers through offering coronary CT angiography, which often includes AI-powered blood flow and plaque analyses. Second, technology advances and specifically AI will have a transformational impact on the creation and effectiveness of diagnostic imaging-based programs. As AI becomes more widely adopted, improvements in diagnosis and operational efficiencies will help address labor challenges and make screening programs more affordable and accessible to patients and payors. AI will also be instrumental in making radiologists more productive and accurate, while helping to ease the shortage of radiologists in an industry where the procedural growth will continue to accelerate. Lastly, we believe third-party payers will begin to offer reimbursements for radiology AI. Hundreds of thousands of Radnip patients, like the woman whose letter I just read, have recognized the value of AI and early detection. These patients are passionate and often outspoken. Payers have begun to take notice, and based upon constructive conversations with them, we are confident that one or more national carriers, other insurers, and self-insured employers will offer reimbursement for EBCD programs as early as year end. This reimbursement event and others like it could mark the expansion of a new era where radiology becomes more utilized in population health screening programs. I would also be remiss if I didn't mention the continued investment to facilitate these kinds of programs that we make in opening de novo centers throughout Radnet. In 2024, we opened up nine centers. By the end of 2025, we will have opened up 11 more new centers and are scheduled to open up an additional 11 centers in 2026.

To sum up, Radnet is

well situated at the intersection of healthcare services and technology. Radnet has both, number one, the largest scale and most advanced network of national imaging centers in the United States, as well as, number two, a digital health division that is advancing operational and critical software to transform workflow at the center, centers, and corporate levels, as well as radiologist interpretation. This tech-enabled and integrated approach is unique in the diagnostic imaging industry. As we solve operational and clinical challenges in our core imaging center business, through which we have already been deploying deep health technology, in turn we are addressing the industry's core problems. As a result, Radnet is in a position to benefit both from the efficiencies and cost reductions enabled by deep health solutions, as well as from selling and licensing these transformational solutions to others. Operator, we are now ready for the question and answer portion of the call.

Thank you, sir. If you'd like to ask a question, please press star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Today's first question comes from Brian Tankwoye with Jeffreese. Please go ahead.

Hey, good morning, guys, and congrats on the quarter. Howard, maybe just on your comment earlier on just the strength you're seeing across advanced imaging, as we think about, you know, if you look out to the next three to five years, I mean, how do you think the growth in advanced imaging will hold? And what do you think the drivers would be for that? I mean, I guess in just the broader context of utilization, growth and the sustainability of current volume trends for your business.

Thank you, Brian. Good morning. We certainly expect these trends to continue. The way that we are addressing the need for greater capacity is to basically utilize tools that are either AI developed or recognizing better ways to manage our business with the new equipment that we've invested in. Both of these tools have had substantial impact in staffing the centers to accommodate the demand that we have. In most of our regions, we have backlogs that are very difficult given staffing shortages. But as we put the newer equipment in, which has shorter time slots and as AI itself becomes more efficient, for example, with our tech live, we expect to capture a lot of that backlog and drive revenue through that. Additionally, AI itself will continue to increase demand. As I mentioned in my remarks, things like our EBCD program, which grew by a third comparing last year's results in the first quarter to this year's, will continue not only inside RadNet, but outside RadNet as we make this incredibly important tool available to others. That will help be facilitated by our ICAT acquisition and other AI products that we intend to offer for screening. But it's not limited just to breast AI. Advanced imaging will continue to grow as newer and newer techniques such as in cardiac imaging and CT and geography can maintain an enormously beneficial position for managing health. Cardiovascular disease is the greatest cause of death in the United States and newer tools for treating this with medications once risks are noticed in a patient have changed the entire cardiology business dramatically. So when you add to that the enormous growth that we're seeing in PET-CT, which grew by, I think it was 23% in a challenging first quarter of last year to this year, we expect that growth to continue. I think we are uniquely capable of doing that because of the numerous PET-CT systems that we have across all of our markets and for which we get very specialized reading capabilities to help the referring physicians have confidence in the value of these tools. So I see imaging, particularly for advanced imaging, being growing at this probably an accelerated rate. But I don't want to lose sight of the fact that routine imaging is growing rapidly also, and that will be a major focus for RADnet in the near future here to help facilitate managing that growth from an operational standpoint and improving the quality of what's done not only in outpatient imaging centers, but the other imaging providers that are not necessarily steeped in the radiology as part of their provider responsibilities.

That makes sense. Maybe Mark, you're shifting gears a little bit here as I think about JVs and M&A. Just curious what you can share with us in terms of your pipeline and where you think you could take M&A deal flow over the next 12 to 18 months.

I'm going to hijack that question, Brian, from Mark since I'm a little bit closer to it than Mark is. The pipeline is very robust. We don't go out looking necessarily for customers. We need customers or clients, potential clients that recognize the need that they have for radiology solutions. And that includes both operating the opportunities for the demand that they have as well as giving them an education to know how the impact of AI and IT solutions can positively improve the delivery of health care. We have gotten a number of calls, which we are having discussions with hospitals that we currently have joint visits with. I'm happy to say several that we do not that recognize the value proposition that RedNet has in transforming their radiology delivery. And I really want to emphasize that because hospitals are having the same kind of problems inside their four walls with radiology staffing both on the physician side as well as the technologist side. So what we're experiencing and other of the outpatient imaging centers are experiencing the way of challenging labor demands is the same thing the hospitals are having despite the fact that they offer substantially higher compensation to their employees. So these kind of solutions are the future and I believe every hospital system at some point will be adopting some form of IT and AI solutions as a part of their strict strategy that not only is a necessity for them, but probably existential if they're going to continue to try to capture all of the downward downstream opportunities that screening technologies and AI are capable of delivering. So I think I've said before in the past, Brian, that I'd like to have all 400 of our centers in joint ventures with hospitals. I think the currently 40% of our centers that we have almost 160 are performing exceptionally well and I believe indicate how strong that model is. And when other systems see that and talk to our partners, they quickly determine that RedNet has the tools to help make this heavy lift and transformational requirement.

I appreciate that. Thank you, Howard.

Thanks,

Brian.

And our next question today comes from David McDonald with Truis Securities. Please go ahead.

Hey, guys. This is actually Grayson McAllister on for Dave this morning. Just wanted to follow up on the labor front. I know you guys talked about some improvement in the first quarter, but wanted to check specifically on technologists hiring trends. And last quarter, I think you talked about a $45 million headwind from SWMB. Just wanted to see if we're still on track for that. Thanks.

Okay. Yeah,

there's about $45 million of additional kind of same center labor costs increases built into our 2005 guidance. Grayson, that's still on track. Yeah, I think this, you know, in terms of, you know, it's still built into our budget. We are seeing some improvements on the hiring side, the availability of technologists, which is our biggest pain point, which is alleviating some of the financial burden that we've been expending with outside staffing companies. So I think at this point, we're still comfortable with the $45 million of additional labor expenses that we built into the budget.

Okay, awesome. Then just sticking with labor, obviously still early in the TechLive rollout, but I just wanted to see if you could talk about how the rollout has went so far and then just seeing nursing leverage that you've seen, you know, through the rollout thus far. Thanks.

Yes, as I mentioned, we have 255 of our, sorry, over 400 MRI centers on TechLive on both the East and West Coast. And the reception of this by the technologists, as well as the managers in all of these centers has been overwhelmingly positive. There's two reasons for that. Number one, the oversight by technologists, MRI technologists in particular, that can allow faster and more accurate scanning has already been seen. And so in some of the centers where the TechLive is operational, we've been able to manage the local MRI from a staffing standpoint. You may not have enough technologists to open for the hours that we want. And a tech aide who has been trained on safety and other tools to manage these patients, along with the remote tech using TechLive, has been instrumental in helping drive the revenue opportunities that MRI somewhat uniquely has for us, given the high demand and the need to open for more and more capacity. So what we expect is over a period of time, between now and the end of the year, to have all 400 centers on our TechLive. And that will allow us to reduce some of the outside staffing that we have been forced to use now for the last year and a half, since this trend has become really ingrained in the imaging world. If you will, not just for us, but everybody. So that part of it might help mitigate some of that $45 million, but we may not see that until late this year or more likely in 2026. That aside, we are now seeing, I believe, a better environment for hiring. Our hiring has been facilitated both by some educational programs that we use to train for our non-technologist staff that we've been doing in conjunction with local organizations for the last year or so. And we are expanding that to include technologists, first in areas like for DEXA scanning, but we're also looking to do that in radiology and MRI. And so the people are gravitating towards programs that will allow us to bring newer employees into the RadNet operations, but also, I believe, with AI and other technology tools that we're using, some of the available technologies out there are starting to prefer job opportunities inside of the RadNet. So I believe on both the East and West Coast, we're starting to see somewhat of a loosening of the difficulty that we've had in staffing, and I expect that to improve throughout the year, but be a little bit more something that we can quantify as we get past the fourth quarter of this year. So for the current time, I'm very comfortable that we have that built into our 2025 performance, but expect all of the tools and methods that we're using for staffing and operating our centers will be highly effective in the second half of this year and certainly into 2025. I should also say that we're beginning to implement virtually all of the modules for our Deep Health operating system inside of RadNet centers on a pilot basis, and it will affect everything that we do from our contact centers, scheduling, reimbursement operations, kiosks at our centers for faster and more accurate presentation of the patients for their scans, insurance verification, and we expect to have large parts of this operational by year end and look forward to giving you more specifics on the impact that that will have. But again, this is all part of a transformational effort that we are making that I believe will be something that virtually anybody who performs diagnostic imaging procedures will need to have or want to have in one form or another.

Great. Thanks, Howard. Thanks, Richard.

Thank you. The next question today comes from Andrew Mock at Barclays. Please go ahead.

Hi. Good morning. Despite the weather and volume headwinds, revenue still finished six and a half percent above consensus. How did revenue perform against your own internal expectations in the quarter, and can you comment on why there wasn't a higher earnings conversion on that perceived revenue beat?

Sure. So if

you add back the $22 million of revenue we lost due to the fires and due to the severe winter weather conditions in the Northeast and the Mid-Atlantic, our revenue was strong and was in line with our internal guidance or budget. We did see that these impacts really were felt in January and February, March. The business bounced back very nicely. We didn't have any weather issues. The displaced populations in Southern California, both in the west side of LA and in the Pasadena, Altadena area, that stabilized. People began using health care services and utilization looked more normal after that. And we've had a strong April and strong May. So that's what's given us the confidence to increase our budget both on the revenue and the EBITDA side for the rest of the year. We're seeing really the continuation of the strong trends that we've had up to this first quarter and feel good about the rest of the year. In terms of the profitability of the first quarter, first quarter is always our most challenged quarter for a number of reasons. First, like other health care services companies, we suffer from the fact that deductibles reset, annual deductibles reset, and there's just less utilization here in the first quarter or the beginning parts of every year in terms of health care. Second is that we've got some expenses in the first quarter that typically we don't have in the rest of the year. The acceleration of the payroll taxes that we pay until the highly compensated folks max out. We have challenges related to paying with the way we expense our bonuses from the prior year hit the first quarter. And then in general, we front load our capex budget. So our DSOs lengthen slightly in the first quarter due to the reset of deductibles.

Let me add to Mark's comments. I think some of the growth also is coming from the nine new centers that we opened in 2024. Those de novo centers take some time to ramp up. And by 2025, since they were open throughout the year, I believe we're seeing some of that impact. The reason I'm mentioning that is that we're developing 11 more centers here in 2025, of which I believe less than five of them have opened so far. Maybe only three have opened so far in 2025. So we have eight more centers that will continue or contribute to revenue growth slated for this year and then 11 more for next year, which are in the early stages of development. So that along with I think things like TechLive now being up to 255 locations, whereas I think perhaps last year we were just in the testing phase of this and maybe only half a dozen. So we're really on TechLive. So we have ramped that up and I think that that has helped significantly to improve our MRI revenue despite the weather conditions and fires that we face. And also, again, I'm going to mention the enormous growth and how proud we are about our whole PET CT program. So I think those are the main drivers for the increased revenue side of this, which should translate into improved performance in the third quarter and then particularly in the excuse me, second quarter and then particularly in the third and fourth quarters.

Right. Maybe just to follow up on the profitability. I think the revised guidance implies that margins for the balance of the year would be about .4% or up about 60 basis points year over year. Can you help us understand what's driving that stronger than normal progression and why EBITDA margins for the balance of the year would be up? Thanks.

Yeah, I think really it's two things. One, the growth of advanced imaging, which has higher margins. Also, although we don't talk about it as much, we have very good margins in our mammography program, which is about if you take a look at all of the breast work that's done, breast imaging work that's done for RadNet, it's about a third of our overall revenue. And it's good margin business, particularly as we improve the EBCD adoption. So that's one part of it. And the other part of it is continued implementation of our TechLive and AI programs, which clearly are done with a much lower cost. And those help drive volume and decrease the labor costs. So I think those two things are the primary drivers for improving margins. As we introduce or implement our AI tools to other parts of the business that I described earlier from an operational standpoint, I think that that will also improve margins, which we might start seeing towards the end of the year, but certainly into 2026.

Great. Maybe just one last one from me. I think the stock-based compensation number increased meaningfully to 28.5 million in the quarter. That's close to last year's full year number. Can you help us understand the significant increase there? Is this the new run rate to consider or are there non-recurring items within that? Thanks.

Yeah, part of it was stock that vested that was given in past years and given the increase in the stock price this year relative to last year's first quarter that that added to the expense this year. So we expect for the second, third and fourth quarters, the stock comp to be significantly lower than the first quarter. In addition, we brought on a whole bunch of new technology folks within our digital health division and gave them grants that best over time, some of which were for bonuses for last year's performance of which are retention programs for the future. And that hit also in the first quarter. So you'll see our stock comp go down. It'll be a fraction of where it was in the first quarter for the remainder of the year.

Great. Thanks for the call.

Thank you. And a nice question from Larry with CJS securities. Please go ahead.

Great. Thank you. Good morning, guys. Thanks for all the call on this call so far. Just a couple of follow ups on the Medicare reimbursement. Just a couple there. So the, I guess, EBCD that in the cards for you mentioned, kind of national coverage is inevitably forgetting a Medicare code on the EBCD. So we're moving in that direction. And then the second question just on Medicare would be in terms of the general position fee schedule and CMS for 2026 mark. Obviously, you never know with the government, but current belief, I believe, is that rates at least to be held flat or were at least through the division fee schedule where we were shifting to general practitioners. I'm not mistaken. Is that correct?

Yeah, so let me answer the second question first on the Medicare fee schedule. Obviously, we don't know what it's going to look like in 2026. Typically, Medicare comes out in the June or July timeframe with a proposal and then the industry lobbying groups and associations, you know, negotiate that with CMS and the final rule comes out in November. We have been facing some small cuts over the last five years, and that goes back to when CMS substantially increased reimbursement for primary care practices by increasing these codes called the E&M codes, evaluation and management codes. They did it on a budget neutral basis, meaning that they're taking reimbursement out of all the other specialties to pay for that that large reimbursement that occurred almost five years ago. We believe that 2025 is the last year of the phase in of the pay for of that major reimbursement change five years ago. And so we think that the outlook for Medicare reimbursement, you know, in the coming years is stable, if not positive. We hope that we can advocate for reimbursement increases given the fact that the imaging is becoming a bigger part of the health care delivery system, number one and number two. The cost of doing business, you know, has changed dramatically over the last, you know, half a decade, and hopefully that CMS recognizes that. But we don't we honestly won't really know or have a really good feeling about it until they come out with a proposal.

I'm going to amplify

a little

bit on that. I think part of your question might have been about whether or not there's still any opportunity in 2025 for mitigation of the cuts that went into place January 1st. I'll make two comments on that. Number one, nothing in our forecast includes any changes in Medicare reimbursement for this year. Whether it would be up or down. I don't see it going down, obviously, because that fee schedule has already been adopted. But in January, there were supposed to be some changes put forth to the Congress to either mitigate the cuts or potentially bring them down to zero or maybe even increase them, like you said. But that's the second part of my comment is, is that prognosticating anything that this government will do on almost any level is a real crap shoot. So I guess, yeah, if there's a benefit that will come this year, that'll be a positive and help us continue to meet or beat our guidance. But there's no expectation that that's going to happen. And I'll keep my fingers crossed. As far as EDCD adoption for reimbursement by Medicare, I think this is going to be the reverse of what happened when we went from 2D to 3D scanning mammography. And there was a very early adoption by Medicare of the increase for people to providers to implement it because it was such a good technology. Medicare CMS led that and then the adoption was by payors begrudgingly after that. I see this as a reverse situation. Number one, getting CMS to issue a new code for breast AI is difficult and problematic. While they have issued new codes for other AI tools in the area of cardiac imaging, thyroid imaging, which you'll hear more about from us next quarter, and some other tools. But breast, because of the consequences of this and the ubiquity of it, I believe is going to be a difficult lift. So this may be a situation because of very positive conversations that we're having with commercial payors and other type of payors and self-insurers who see this value. I believe they will adopt it. And we have, I think, been very instrumental in establishing a price point which is comfortable for our patients and probably will translate into something that sets a standard for the industry. But I believe it will come from the non-governmental side of it this time as opposed to in the past.

Gotcha. And just a couple on the deep health side. So I appreciate all the updates on the tech lot. It sounds like that implementation is advancing. And I think you mentioned on the deep health operating system, you have a pilot in place and it sounds like implementation across your centers has begun. I'm just trying to get a feel for that and sort of targets and timelines for that. A timeline

for

deep health OS integration. For the implementation of the deep health. Yeah. It's

all about the implementation of the full deep health system.

Yes.

Yeah, we've begun pilot programs in our contact centers and in scheduling and phone call bots to help our patients. The early results are very promising, but I am confident that by year end, most of all of the tools that we have will be in place. While we do that, we obviously have expenses related to the implementation of it and continuing the older systems until we're ready to turn over. So I think the benefits from that, which I mentioned in some of my other remarks, particularly as they might be reflected in improved margins, are more likely to be seen in 2026 than they are in 2025. But I can only mention that we've got 400 centers to implement this in and it's a heavy lift, but we're up to the task.

Right. I appreciate all that call. Thank you. Thank you.

Thank you. And our next question today comes from you on Z with the rally. Please go ahead.

Good morning. This is a Brandon Crayon for you on. Thanks for taking our questions. First, you previously talked about the recent trends in capitation. Have you gotten any more visibility on the cadence of that trend for the remainder of the year?

Well, the capitation

for us has been pretty stable. We're actually probably decreasing the relative to our revenue capitation as a percentage of this. Part of it is because the rest of our business in other markets than Southern California is all free for service. But also there are capitation contracts where we have at the term elected to go to fee for service because the demand that we have is such that we cannot and will not take reimbursement that doesn't allow us to continue to invest in our business, both on the equipment and services side as well now as the AI. So we have lost real business from the transition away from capitation because those patients are still coming to us, but at better reimbursement rates under a fee for service program. That being said, we do have more accommodating large capitation groups that have chosen to stay with capitation, but which were benefiting from some significant increases in their capitation rate to make their overall utilization on a fee for service basis more consistent with the rest of our business. So I think capitation is still a very good business, the one that does not necessarily fit into the bigger red net model and is more of really a Southern California phenomenon.

Yeah, we benchmark each quarter all of our contracts against the other payer classes or the other books of business that we have. And if we fall behind where we need to be from a reimbursement standpoint relative to other books of business, we go back to the contracts, particularly when they're at the renewal process. And we've had some challenging discussions over the past couple of years, which has led us to cancel a number of those capitation relationships. And as Dr. Berger said, flip them to fee for service, where we get significantly higher rates. It doesn't guarantee us that we do 100% of that patient volume anymore because now the risk is put back on the medical groups and they have the ability to refer that out to anyone that they want. But in the markets in California, obviously, we're the biggest player by far in the state. There are markets where we do the lion's share of the outpatient or the non-hospital based imaging, and we're still capturing a lot of that patient volume just at fee for service higher rates. And so, you know, my belief is that a number of these contracts will end up coming back to us in a year or two from now when they recognize that they were probably financially better off accepting higher capitation rates and shifting the risk and the burden of the utilization to RadNet than to keeping that risk themselves and sending out the business at higher fee for service rates. So we've been through a number of these cycles before. And as you can see, it's not impacting our overall revenue. It's just shifting revenue from the capitation portion to the fee for service portion.

Got it. That's helpful. Thanks. And then on the PET business, can you help us understand the impact of pricing of the radiochemistutical imaging agents? If the unit prices of the imaging agents get lower, does it have an overall benefit to RadNet's operation?

Yeah, I'll take that. Yeah, what you're really asking about is some of the newer esoteric tracers as opposed to FDG, which was, you know, the commoditized agent that we use in most of the oncological study. The new tracers for Alzheimer's and prostate imaging are very expensive. Essentially, the reimbursement for that is on a pass-through basis. So we don't make much money, if at all, in terms of marking up the radioactive tracer in that exam. So to the extent that the prices go down, and they should go down over time, because as the industry does more and more of prostate and these Alzheimer's imaging, we use this tracer more and more, and more competition on the manufacturing side comes into play. So we do expect these tracers, the pricing to come down over time. But for us, there's really no profitability in these tracers.

Got it. Just to follow up on that a bit, for the growth in the PET-CT business, can you give us any detail on the contribution of the newer scans like PSMA or A-Beta versus the FDG scans that you mentioned? Any color there would be appreciated.

Yeah, so in the first quarter of 2025, the prostate and the Alzheimer's studies, the amyloid studies, represented about 19% of all of our PET-CT business. And that's been growing significantly year over year, particularly in the amyloid studies where we're doing over 500 studies now a month. And those studies really started about a year, year and a half ago as the Medicare regional administrators started more frequently allowing for those studies to take place, to qualify these patients on some of these newer drug therapies. So it's been a big, and of course prostate imaging has really been a big driver for us on the PET-CT side. And the two of those combined being about 19% of our business today is really responsible for the more than 20% growth that we've been seeing quarter over quarter in our PET-CT business.

Great. Thanks for taking our questions.

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.

Thank you, operator. Again, I'd like to

take this opportunity to thank all of our shareholders for their continued support and the employees of Rednet for their dedication and hard work. Management will continue its endeavor to be a 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.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.