RadNet, Inc. (NASDAQ:RDNT) Q3 2023 Earnings Call Transcript November 9, 2023
RadNet, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.06.
Operator: Good day and welcome to the RadNet Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer. 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 third quarter 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 US 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, 2022. 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.
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 third quarter 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 our performance in the third quarter. Strong procedural volumes primarily contributed to the growth of revenue in the third quarter as compared with last year’s third quarter. Aggregate procedural volumes increased 8.6%, and same-center procedural volumes increased 4.2%.
These metrics drove an increase to consolidated revenue of 14.8% from last year’s third quarter. The consolidated revenue $2 million was the highest third quarter revenue in our company’s history. Though revenue in the third quarter was $1.7 million less than that of the second quarter of this year, we had one less workday in the third quarter as compared with the second quarter. However, the average revenue per day in the third quarter exceeded revenue per day in the second quarter, a trend that has continued into the fourth quarter. The challenge remains servicing the heavy demand we have experiencing — we have been experiencing in most of our local markets, many of which have significant scheduling backlogs. Adjusted EBITDA performance was also very strong in the third quarter.
In concert with strong revenue, this was a result of aggressive and active expense management despite a challenged labor market and inflationary pressures. Relative to the third quarter of last year, adjusted EBITDA from the Imaging Center reporting segment increased 20.3% to $60.4 million for the quarter. The continuation of these operating trends into the fourth quarter encourages us to raise 2023 adjusted EBITDA guidance for the third time this year. The artificial intelligence division continues to gain momentum. AI revenue has more than tripled from last year’s third quarter and sequentially relative to the second quarter, grew over 21% on roughly the same number of center offerings are enhanced breast cancer detection or EBCD service.
This is indicative of wider patient enthusiasm within our East Coast operations, where adoption rates are approaching 35%. Subsequent to the end of the quarter, we began implementing EBCD in Southern California and expect that we will be fully deployed in all centers by the end of the first quarter of 2024. We continue to receive very positive feedback from our patients, referring physicians and radiologists. Over 500 cancers have been diagnosed that otherwise would have gone undetected while at the same time, callback rates have been significantly lower and radiologist productivity and accuracy has been increased an immense amount of data has been collected, which we will be sharing with payers in support of eventually receiving third-party reimbursement for this service.
Aside from the clinical AI tools, we continue to advance efforts in generative AI focused on driving efficiency and cost saving in RadNet’s business processes, which will impact contact centers, patient scheduling, insurance verification and revenue cycle functions. The objective is to place into service some of these gene tools beginning in the second quarter of 2024. Currently, we rely on manual processes to perform functions that can be more accurately and officially completed with artificial intelligence. We see a future where patients and referring physicians will be able to schedule appointments, be able to verify patient insurance coverage, be able to request radiology reports and images, receive billing and payment information and pay outstanding balances amongst other things, with significant reduction in manual intervention.
The process of moving the eRAD radiology information and imaging management systems to the cloud has begun. A cloud system will provide our centers and other eRAD customers and ecosystem to host RadNet’s deep health and third-party AI solutions that can scale the capabilities and functionality of radiology operations. Additionally, a cloud-based solution will provide customers better third-party support, system updates and improve security. As we continue to advance the eRAD platform and the suite of products and migrate them to the cloud, there is a natural convergence between our radiology, informatics and AI solutions. We see a time when customers, including radiology practices, imaging centers and hospitals will use this platform in a seamless environment to host the clinical AI, generative AI and business tools to manage and further their clinical and operational workflow requirements.
In the new year, we look forward to discussing more on how we plan to position RadNet’s AI and on informatics solutions into an industry-leading digital health platform. During the third quarter, we expanded our relationship with the Cedars -Sinai Medical System, one of the premier health systems in Southern California. As part of the expanded relationship, we established a new joint venture called Los Angeles Imaging Group, initially with three locations, as well as broadened our existing two center joint venture, Santa Monica Imaging Group to include the contribution of seven additional centers, five of which were contributed by Cedars -Sinai and two from RadNet. The expanded relationship with Cedars-Sinai is designed to increase patient access to outpatient radiology by broadening the ambulatory network of imaging centers throughout Los Angeles, including certain underserved communities.
The ventures will streamline and improve patient care by improving workflow, providing better access to records and producing more timely and accurate results for patients and referring physicians. We now have three joint ventures with Cedars-Sinai, encompassing 16 locations in the West Side, Downtown and San Fernando Valley areas of Los Angeles. As an increasing amount of patient volumes are being directed away from expensive hospital based imaging procedures towards more cost-effective ambulatory outpatient settings, hospitals and health systems are seeking viable long-term strategies for outpatient imaging. This is leading to increased interest among hospitals and health systems to engage with us in partnerships, discussions and outpatient strategies.
RadNet’s current partners are some of the largest and most successful systems in our geographies, including RWJ Barnabas, MemorialCare, Dignity Health, Lifebridge, University of Maryland Medical System, Adventist, Cedars-Sinai and others. Our hospital and health system partners have been instrumental in increasing our procedural volumes through their relationships with physician partners. Additionally, the joint venture partners are helpful in providing support, if needed, in establishing long-term equitable outpatient reimbursement rates for our services. After giving effect to the expanded Cedars-Sinai relationship, 130 of our 366 centers, or 36% are now held within health system partnerships. We continue to execute on our de novo development strategy, which we launched almost two years ago.
These development projects are located in markets where we have patient backlogs, require additional capacity or where we currently lack access points to service patient populations in need of RadNet services. While these projects require 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. Approximately a dozen additional centers are scheduled to open throughout 2024 in various markets. Finally, I would like to comment on RadNet’s liquidity position and financial leverage. On June 16th, we completed an equity offering where we raised $246 million of net proceeds to deleverage our balance sheet and position us to accelerate growth.
This offering along with strong operating performance resulted in a net debt to adjusted EBITDA ratio of approximately two times at the end of the third quarter. We currently have the lowest leverage and strongest liquidity position in our company’s history. As of September 30th, we had $338 million of cash on our balance sheet. And we’re undrawn on our $195 million revolving line of credit. Our Days Sales Outstanding, DSOs at June 2023 was 33.6 days, which we believe to be one of the best in the industry. While we are committed to growing and expanding our business, we will also continue to follow a disciplined approach to managing our financial leverage. To this end, on October 30, subsequent to the third quarter end, we made a $30 million voluntary prepayment of our term loan, demonstrating our commitment to managing our debt balance and cost of capital within an economic environment that has experienced rising interest rates, inflation and other macroeconomic challenges.
The lower leverage and cost of capital and stronger liquidity relative to many other industry operators position us to capitalize on acquisition opportunities and other business opportunities. We remain patient and disciplined in our approach to acquisition, focused first on our core markets where we bring unique synergies and cost savings. At this time, I’d like to turn the call back over to Mark, to discuss some of the highlights of our third quarter 2023 performance. When his finished. I will make some closing remarks.
Mark Stolper: Thank you, Howard. I’m now going to briefly review our third quarter 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 third quarter performance. I will also provide an update to 2023 guidance levels, which were released in conjunction with our 2022 year-end results in March and which we amended in May upon releasing our first quarter financial results and again in August, on releasing our second quarter financial results. 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 and earnings of unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation 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 third quarter 2023 results. For the third quarter of 2023, we reported revenue from our imaging centers reporting segment of $399.1 million and adjusted EBITDA of $60.4 million. As compared with last year’s third quarter, revenue increased $49.9 million or 14.3% and adjusted EBITDA increased $10.2 million or 20.3%.
Including revenue from our AI reporting segment of $2.9 million consolidated revenue was $402 million in the third quarter of 2023, an increase of 14.8% from $350 million in last year’s third quarter. Including a $2.5 million adjusted EBITDA loss from the AI reporting segment, consolidated adjusted EBITDA was $57.9 million in the third quarter of 2023 and $45.8 million in the third quarter of 2022, an increase of 26.5%. For the third quarter of 2023, and RadNet reported net income of $17.5 million as compared with $668,000 for the third quarter of 2022. Diluted net income per share for the third quarter of 2023 was $0.25 compared with a diluted net income per share of $0.01 in the third quarter of 2022. Based upon a weighted average number of diluted shares outstanding of 68.8 million shares in 2023 and 57.7 million shares in 2022.
There were a number of unusual or onetime items impacting the third quarter, including the following: $2.3 million loss of noncash interest rate swaps, net of accumulation of the net of amortization of the accumulation of the changes in fair value in other comprehensive income, $1.2 million of severance paid in connection with headcount reductions related to cost savings initiatives. $16.8 million gain on the contribution of imaging centers into the Santa Monica Imaging Group joint venture with Cedars Sinai. $1 million expense related to leases for our de novo facilities under construction that have yet to open their operations. $1.3 million of pretax losses related to our AI reporting segment, net of noncash adjustments to contingent consideration and intangible AI assets and $915,000 loss from the revaluation of certain acquisition constant consideration.
Adjusting for the above items, adjusted earnings from the Imaging Center reporting segment was $9.9 million and diluted adjusted earnings per share was $0.14 during the third quarter of 2023. Also affecting net income in the third quarter of 2023 were certain noncash expenses and unusual items, including $4.3 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock at $746,000 of non-cash amortization of deferred financing costs and loan discounts related to financing fees paid as part of our existing credit facilities For the third quarter of 2023, as compared with the prior year’s third quarter, MRI volume increased 11.7%. CT volume increased 10.9% and PET/CT volume increased 17.7%.
Overall volume taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography and all other exams increased 8.6% over the prior year’s third quarter. On a same-center basis, including only those centers which were part of RadNet for both the second quarters of 2023 and 2022, MRI volume increased 6.9%, CT volume increased 6% and PET-CT volume increased 15.2%. Overall same-center volume, taking into account all routine imaging exams increased 4.2% over the prior year’s same quarter. In the third quarter of 2023, we performed 2,511,19 total procedures. The procedures were consistent with our multi-modality approach, whereby 74.7% of all the work we did by volume was strong routine imaging. Our procedures in the third quarter of 2023 were as follows.
389,566 MRIs as compared with 348,912 MRIs in the third quarter of 2022. 230,276 CTs as compared with 207,554 CTs in the third quarter of 2022. 15,216 PET-CTs as compared with 12,932 PET-CTs in the third quarter of 2022. And 1,875,961 routine imaging exams as compared with 1,742,050 of all these exams in the third quarter of 2022. Overall GAAP interest expense for the third quarter of 2023 was $16.1 million. This compares with GAAP interest expense in the third quarter of 2022 of $12.4 million. The higher interest rate — the higher interest cost is predominantly the result of the upsized New Jersey Imaging Network credit facility completed in October of last year in conjunction with NJIN’s acquisition of Montclair Radiology and a higher SOFR rate on our unswapped floating rate debt Cash paid for interest during the quarter, which excludes noncash deferred financing expense and accrued interest, was $19.5 million.
Cash paid for interest net of interest earned on our cash balance and interest rate swap payments received from our swap counterparties was $11.7 million for the three-month period ended September 30, 2023, and $41.7 million for the first nine months of 2023. With regards to our balance sheet, as of September 30, 2023, unadjusted for bond and term loan discounts, we had $532.7 million of net debt which is our total debt at par value less our cash balance. Note that this debt balance includes New Jersey Imaging Network debt of $144.4 million for which RadNet is neither a borrower nor a guarantor. This compares with $662.9 million of bad debt at September 30, 2022. Our net debt balance is substantially lower than last year, primarily as a result of the stock offering we completed in June of this year.
As of September 30, 2023, we were undrawn on our $195 million revolving line of credit and had a cash balance of $338 million. At September 30, 2023, our accounts receivable balance was $167.7 million, an increase of $1.4 million from year-end 2022. Our days sales outstanding, or DSO, remains near the lowest levels in our company’s history at 33.6 days at September 30, 2023. The flat accounts receivable and low DSO despite our increased revenue are the result of improvements in cash collections from patients at the time of service and better performance with respect to avoiding insurance denials, submitting clean claims and obtaining necessary preauthorizations and insurance verification. Through September 30, 2023, we had cash capital expenditures net of asset dispositions and sale of imaging center assets and joint venture interest of $117.9 million.
This excludes $13.6 million of cash capital expenditures at our New Jersey Imaging Network joint venture, $19.8 million of equipment purchased operating leases with a promissory note and a $5 million payment to purchase certain software and intellectual property from a vendor. At this time, I’d like to update and revise our 2023 financial guidance levels, which we released in conjunction with our fourth quarter and year-end 2020 results and amended after reporting both our first and second quarter 2023 financial results. For total net revenue, our revised guidance range is unchanged at $1.575 billion to $1.610 billion. For adjusted EBITDA, we’ve increased our guidance range by $3 million, both at the low end and the high end of the range. Our new guidance range for adjusted EBITDA is between $235 million and $245 million.
For capital expenditures, we increased our guidance range both at the low end and the high end by $5 million to $115 million to $125 million to reflect additional capital investments in our de novo facility openings. For cash interest expense, our guidance remains unchanged at between $45 million and $50 million for the year. And our free cash flow guidance range also was unchanged at between $65 million and $75 million. For our AI segment, our guidance for both revenue and adjusted EBITDA remains unchanged for revenue. We anticipate $11 million to $13 million of revenue for the year. And for adjusted EBITDA, our guidance range is between negative $11 million and negative $13 million for the year. I’ll now take a few minutes to give you an update on 2024 reimbursement and discuss what we know with regards to 2024 Medicare rates.
As a reminder, Medicare represents about 23% of our business mix. With respect to Medicare reimbursement, in July, we received a matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal that is released about that time every year. At that time, we completed an initial analysis and compared those rates to 2023 rates. We volume-weighted our analysis using expected 2024 procedural volumes. As you may recall, three years ago, CMS moved forward with increased reimbursement for evaluation and management CPT codes, which favor certain physician specialties that regularly bill for these services, particularly primary care doctors. CMS proposed doing so with budget neutrality, meaning that it proposed to reallocate reimbursement from physicians who rarely bill for these E&M codes to physicians who regularly bill for these codes.
As a result, radiology and most other specialties experienced cuts in reimbursement during 2021, 2022 and 2023. Cuts meant to be phased in over a several year period. The cuts we faced in 2023 were substantially mitigated by legislation that was passed at the end of last year as part of the Consolidated Appropriations Act. In this year’s proposal in July, governing 2024 reimbursement Medicare appeared to effectively be phasing in the remainder of the E&M code related cut avoided last year as a result of the Consolidated Appropriations Act. The cut proposed for 2024 resulted from a decrease in the conversion factor in the Medicare fee schedule by about 3.4%, along with certain minor changes to the RVUs, the relative value units of certain radiology CPT codes.
Our initial analysis of the proposal implied that RadNet on roughly $1.6 billion in revenue would face an approximate $7 million to $9 million revenue hit in 2024 from its Medicare business. Last week, we received the CMS’ final rule governing 2024 reimbursement. Our analysis shows that the final rule is relatively consistent with the proposal in July and that our revenue will be impacted by the approximately $7 million to $9 million estimate that we had back in July. Because the final rules decrease in the conversion factor affects all physicians, not just radiologists, there are many lobbying groups from the various medical specialties aggressively opposing the cut. At this time, our experts believe there remains a reasonable likelihood that part of the scheduled cut will be mitigated through congressional action that could take place next month, similar to what happened last year.
While the $7 million to $9 million cut to RadNet’s revenue next year is not insignificant, we have reimbursement increases completed or scheduled capitated and commercial payers that will fully mitigate this Medicare reduction should it go into effect for CMS’ final rule. I’d now like to turn the call back over to Dr. Berger, who will make some closing remarks.
Howard Berger: Thank you, Mark. We have a lot to be optimistic about as we move into 2024. While we might face headwinds from the $7 million to $9 million Medicare cut and from increasing labor rates. We have numerous growth initiatives that not only should overcome these challenges but should provide us another year of accelerated growth. While we will not be issuing formal 2024 guidance until we announce fourth quarter and full end year end results in February, I’d like to end today’s prepared remarks by discussing why we are so excited about 2024 and the growth initiatives that will fuel 2024 performance. First, as Mark mentioned, we have scheduled rate increases with various commercial and capitated payers that will more than mitigate the anticipated Medicare rate cut.
Most payers recognize that we are their partners in moving imaging out of more expensive hospital settings and realize the importance RadNet provides in their outpatient network strategy. We are in the fortunate position that we have tremendous demand, which makes us steadfast in working only with payers that properly value our services. Second, we anticipate that strong same-center performance will continue throughout 2024, projecting low to mid-single-digit growth on the current base of $1.6 billion of revenue, we expect $50 million to $60 million of incremental revenue in 2024, which by its wealth towards the Medicare and labor headwinds. Third, we expect to open approximately a dozen de novo facilities throughout 2024, which are currently in various stages of construction.
These new center openings should contribute significantly to growth and profitability in 2024 and beyond as they have been focused in markets where we are experiencing patient backlogs or where there are identified patient populations that we are currently not servicing. While these centers will open throughout the year, we anticipate each center contributing an average of $3 million to $5 million of additional revenue once mature. Fourth, we anticipate further progress in the AI and digital health platform. We remain convinced that these technologies will transform both the clinical and operational aspects of all of radiology. By the end of 2024, we could see AI revenue on a run rate that is double our current performance, and it is a realistic objective that we will reach breakeven adjusted EBITDA for this segment.
Fifth, we anticipate that acquisition activity will accelerate in 2024. We currently have an active pipeline of opportunities, and we believe that the higher interest rates and labor challenges will create further consolidation. RadNet’s low leverage and strong liquidity favorably position us to be in an industry consolidator. Lastly, we expect to drive growth through new and expanded health system joint ventures. As we discussed today in conjunction with the expanded relationship with the Cedars-Sinai Medical System in Los Angeles, joint ventures are an increasingly important and attractive growth aspect of our business. We believe that in the next two to three years, over 50% of our centers could be held within health system partnerships.
We are currently in various stages of development of new and expanded partnerships, which we expect to announce during 2024. Operator, we are now ready for the question-and-answer portion of the call.
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