Good morning, everyone, and welcome to the RadNet, Inc. First Quarter 2024 Financial Results Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Mark Stolper, Executive Vice President and Chief Financial Officer. Sir, please go ahead.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's first quarter 2024 financial results. Before we begin today, we'd like to remind everyone of the safe harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the safe harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed from the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2023. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our first quarter 2024 results, give you more insight into factors that 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 this morning. Let's begin. I am very pleased with our performance in the first quarter. It was the strongest first quarter in our company's history with record revenue, adjusted EBITDA, and adjusted earnings. Relative to last year's first quarter, total company revenue increased 10.5%, Imaging Centers revenue increased 9.9%, and the new Digital Health revenue segment increased 32.3%. Imaging Center revenue was driven by heavy demand in virtually all of our markets despite being adversely impacted in the quarter on the East Coast by several snowstorms and in California by unusual rainstorms and flooding. Nevertheless, we continue to benefit from the increasing utilization of diagnostic imaging within health care as well as the shift of procedural volumes away from the more expensive hospital alternatives to ambulatory freestanding centers like the ones we operate. Also contributing to the strong revenue performance was the positive impact of improved reimbursement from commercial and capitated payors who recognize the important role we are playing as a lower-priced alternative to hospital-based imaging. Lastly, our top line is benefiting from a continuing shift in modality mix towards advanced imaging, MRI, CT, and PET/CT, where the revenue per scan is substantially higher than routine imaging. This is both a function of an overall industry trend as well as the significant capital investment we have made in the last few years in advanced imaging equipment for growth and upgrades. Driving the revenue growth within Digital Health was the AI business, including our EBCD, enhanced breast care detection, breast cancer screening AI-powered initiative, which grew 118.8% quarter over last year's same quarter. Adjusted EBITDA was also a first quarter record. In conjunction with the strong revenue results, which I just discussed, our focus on operational efficiency, improved management and utilization of labor, investments in information technology, and effective cost control contributed to a total company adjusted EBITDA that increased 21.4% from last year's first quarter. Another contributing factor to adjusted EBITDA growth was a disproportionate growth in the higher profit margin Digital Health segment businesses. Cumulatively, these factors drove a 120-basis-point increase in our adjusted EBITDA margin as compared with last year's first quarter. While we are pleased with this margin expansion, I remain convinced we have further opportunity to improve margins. The strong operating results in the first quarter relative to our internal budget, combined with ongoing operating trends that have continued into the second quarter, resulted in our decision to increase 2024 full year guidance ranges for revenue, adjusted EBITDA, and free cash flow. Mark will discuss this in more detail in his prepared remarks. We continue our multifaceted approach to accelerate our growth. With respect to acquisitions, some of you may have seen our 2 recent announcements regarding our entry into the Houston, Texas market. Upon quarter end, we completed the acquisition of the 7 imaging centers of Houston Medical Imaging. In addition, we announced the second acquisition in April of 6 American Health imaging centers to be completed in June. Texas is the first new state we have entered since 2020. The Houston metropolitan marketplace encompassing about 7.3 million people is the fourth most populous city and the second fastest-growing metropolitan area in the United States. We are confident of the opportunity for our further acquisitions, de novo buildouts as desirable, health system partnerships, and other means of expansion, which include bringing our artificial intelligence and leading-edge clinical and operating digital health solutions to the patients and referring communities of Greater Houston. Also during the first quarter, we completed a tuck-in acquisition of 4 centers in the Antelope Valley north of Los Angeles. New market acquisitions like Houston and the in-market tuck-in acquisitions like that in Antelope Valley will be a continuing part of our growth strategy. 2024 will be a year of reinvestment in our business to accelerate future growth. We currently have 12 de novo facilities in various stages of development that will open for operations throughout the remainder of the year. These are on top of the 2 de novos that opened in the first quarter. These facilities are located in markets where we have patient backlogs, require additional capacity, or where we currently lack access points to serve particular patient populations. While these projects are requiring us to make capital investments above our normal spending, we are confident that these centers will be material contributors to our long-term performance and growth. We continue to grow our hospital and health system joint venture businesses. Currently, 137 of our 375 centers, or 36.5%, are held within health system partnerships. Our partners are some of the largest and most successful systems in our geographies. Partners include RWJBarnabas in New Jersey, MemorialCare, Dignity Health, Lifebridge, University of Maryland, Adventist, Cedars-Sinai, and others. These and other systems are seeking solutions for long-term strategy around outpatient imaging and have recognized that cost-effective and efficient freestanding centers will continue to capture share from hospitals as payors and patients alter their site of care towards lower-cost, high-quality facilities. Our hospital and health system partners have been instrumental in increasing our procedural volumes with their physician relationships. During the first quarter, we added 7 additional centers to our joint venture with Dignity Health in Arizona through the acquisition of facilities that were previously owned by Cigna's Evernorth Care Group. And upon quarter close, we formed a new 7-center joint venture with Providence Health System in the northern and eastern San Fernando Valley of Los Angeles. Furthermore, our Dignity joint venture in Ventura County recently acquired 4 imaging centers in Oxnard and Ventura. Including these joint venture expansion and others that we are working on, we expect to have close to 40% of our centers held within health system partnerships by year-end 2024. We continue to make progress in the Digital Health segment. As some of you remember, we announced earlier this year the formation of the RadNet Digital Health financial reporting segment effective January 1, 2024, which combines the eRAD and DeepHealth operating system software businesses into what was our clinical AI reporting segment in 2023. The financial impact of these digital health businesses has great potential for RadNet both as a customer of the DeepHealth OS and AI solutions, and of course, as the owner of these businesses that sell their solutions to customers outside of RadNet. Software businesses, and in particular SaaS-based models can operate at significantly higher margins than RadNet's core imaging center segment and will require less capital investment. Within Dignity Health, we continue to sell, service, and support eRAD solutions to new and existing customers while we focus on the ongoing developments of the next-generation DeepHealth OS cloud-based operating system and generative AI modules. We continue to believe that DeepHealth OS can have a major impact in lowering costs and increasing efficiency in the areas of patient scheduling, pre-authorization, insurance verification, reporting, revenue cycle management, and analytics. We will begin testing some of the AI-enabled automation tools of the DeepHealth OS in the third and fourth quarters of this year and aim to have commercially available solutions in the first half of 2025. Our Enhanced Breast Cancer diagnostic mammography offering continues its rollout in Central and Northern California. We expect implementation to be substantially complete as early as the end of the second quarter. Adoption rates continue to rise on the East Coast and are now approaching 40%. While the implementation in Southern California is more recent, we are encouraged by initial adoption rates, which are significantly higher than those experienced at the beginning of the East Coast rollout. Aidence's lung and Quantib prostate and neuro AI solutions are also expanding their customer base predominantly in Europe. This has been highlighted in the United Kingdom, where Aidence is the partner of choice for the 4-country rollout of the NHS targeted lung health check lung cancer screening program. Finally, we continue to improve liquidity and financial leverage. We ended the first quarter with a cash balance of $527 million and a net debt to adjusted ratio of slightly more than one time. Included in the net cash balance were approximately $219 million of net proceeds from a successful stock offering we completed in March. Additionally, subsequent to the end of the first quarter and completed on April 18, we opportunistically refinanced our debt facilities. With this financing, we were able to reduce our cost of capital, extend maturities, and add approximately $168 million to RadNet's cash balance. With all of this, RadNet is in the best financial condition in its history and is poised for accelerated growth. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our first quarter 2024 performance. When he is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our first quarter 2024 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our first quarter performance. I will also provide an update to 2024 financial guidance levels, which were released in conjunction with our 2023 year-end results in March. In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, and noncash equity compensation. Adjusted EBITDA includes earnings, equity earnings, and unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and 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 stockholders is included in our earnings release. With that said, I'd now like to review our first quarter 2024 results. For the first quarter of 2024, RadNet reported total company revenue of $431.7 million and adjusted EBITDA of $58.5 million. Revenue increased $41.1 million or 10.5%, and adjusted EBITDA increased $10.3 million or 21.4% as compared with the first quarter of 2023. Breaking this performance down to the individual operating segments, our Imaging Centers segment reported revenue of $417 million and adjusted EBITDA of $54.9 million. This was an increase of $37.6 million or 9.9% in revenue and an increase of $6.8 million or 14.1% in adjusted EBITDA as compared with last year's first quarter. Driving this performance were strong aggregate and same-center procedure volumes, the impact of higher reimbursement we are receiving from commercial and capitated payors, the gradual movement towards advanced imaging, and tight expense control. The Digital Health segment reported revenue of $14.7 million and adjusted EBITDA of $3.5 million during the quarter. Revenue increased $3.6 million or 32.3%, and adjusted EBITDA increased $3.5 million or 17,500% as compared with the first quarter of 2023. Digital Health's significant growth was due in part from a $2.5 million or a 118.8% increase in AI revenue, which climbed to $4.7 million during the first quarter of 2024. Total company net loss for the first quarter of 2024 was $2.8 million as compared with a total company net loss of $21 million for the first quarter of 2023. Net loss per share for the first quarter of 2024 was negative $0.04 compared with a net loss per share of negative $0.36 in the first quarter of 2023, based upon a weighted average number of diluted shares outstanding of 69.3 million shares in 2024 and 57.7 million shares in 2023. There were a number of unusual or one-time items impacting the first quarter, including the following: $1.2 million of noncash gain from interest rate swaps; $1 million expense related to leases for our de novo facilities under construction that have not yet opened for operations; $2 million noncash increase to contingent consideration related to completed acquisitions; and $3.3 million of noncapitalized research and development expenses with respect to our new DeepHealth cloud OS and generative AI. Adjusting for the above items, total company adjusted earnings was $5 million for the quarter and diluted adjusted earnings per share was $0.07 per share during the first quarter of 2024. This compares with total company adjusted loss of $13 million and diluted adjusted loss per share of negative $0.22 during the first quarter of 2023. For the first quarter of 2024, as compared with the prior year's first quarter, MRI volume increased 11.7%, CT volume increased 9.1%, and PET/CT volume increased 17.5%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography, and all other exams, increased 5.7% over the prior year's first quarter. On a same-center basis, including only those centers which were part of RadNet for both the first quarters of 2024 and 2023, MRI volume increased 9.9%, CT volume increased 6.5%, and PET/CT volume increased 15.3%. Overall same-center volume, taking into account all routine imaging exams, increased 3.8% over the prior year same quarter. In the first quarter of 2024, we performed 2,646,951 total procedures. The procedures were consistent with our multi-modality approach whereby 74.3% of all the work we did by volume was from routine imaging. Since we now have a table of our aggregate procedure volumes broken down by modality in our earnings release, I won't go through the numbers, but I want to make the following points. In his remarks, Dr. Berger mentioned that we are experiencing a slow shift to higher-acuity procedures or what we call advanced imaging. In the first quarter of this year, 25.7% of our procedures were from MRI, CT, and PET/CT. In last year's first quarter, this metric was 24.5%, a shift of 1.2% of our procedure volumes towards advanced imaging. With higher pricing and better margins, more advanced imaging improves our financial results, including our operating margins. Overall GAAP interest expense for the first quarter of 2024 was $16.3 million as compared with $15.7 million during last year's first quarter. In the first quarter of 2024, cash interest expense, which includes payments to and from counterparties on our interest rate swaps and net interest income from our cash balance, was $10.5 million. This compares with $17.5 million in the first quarter of 2023. The lower cash interest expense this quarter is primarily the result of more interest income on larger cash balances as well as the timing of cash interest paid on our term loan. With regards to our balance sheet, as of March 31, 2024, unadjusted for bond and term loan discounts, we had $317.1 million of net debt, which is our total debt at par value less our cash balance. This compares with $789.2 million of net debt at March 31, 2023. Note that this debt balance includes New Jersey Imaging Network's debt of $142.5 million for which RadNet is neither a borrower nor a guarantor. As of March 31, 2024, we were undrawn on our $195 million line of credit and had a cash balance of $527 million. At March 31, 2024, our accounts receivable balance was $189.6 million, an increase of $25.9 million from year-end 2023. The increase in accounts receivable is primarily the result of some collection delays resulting from the cyberattack on Change Healthcare and the normal first quarter effect of cash collections from the resetting of patient deductibles each year in January. Despite the impact from the Change Healthcare breach, our DSOs, or days sales outstanding, was 34.9 days at March 31, 2024, near our historic low. Through March 31, 2024, we had total capital expenditures net of proceeds from the sale of imaging equipment of $64.4 million. This total includes $6.9 million spent under equipment notes and the remainder spent in cash. Note that each year, we front-load the majority of our capital decisions into the first part of the year and have been spending extraordinarily on growth CapEx to fund the 12 de novo facilities in construction, which are scheduled to open before year-end. At this time, I'd like to update and revise our 2024 financial year guidance levels, which we released in conjunction with our fourth quarter and year-end 2023 results. Given the positive trends we are experiencing in virtually all aspects of our business and the strong financial performance of the first quarter, which is continuing into the second quarter, we are revising upwards certain guidance levels in anticipation of financial results that we believe will exceed our original expectations for 2024. For revenue, we increased our guidance level for the Imaging Centers segment by $25 million, both at the low end and the top end of the range. Also for the Imaging Center segment, we've increased our EBITDA guidance by $5 million at the low end and the high end of our range. Our guidance level is now $255 million to $265 million. For capital expenditures for the Imaging Centers segment, we increased our guidance both at the low end and the high end of the range by $5 million. For cash paid for interest, due to the refinancing transaction and our much larger cash balance, we've decreased our cash paid for interest this year by $3 million, both at the low end and high end of the range, and anticipate our cash interest expense to be $37 million to $42 million, and we increased our free cash flow generation guidance level by $3 million to $68 million to $78 million. For the Digital Health segment, we increased our EBITDA guidance by $1 million, both at the low end and the high end of the range to $13 million to $15 million. We increased our noncapitalized R&D expenditures by $1 million to $12 million to $14 million and all other guidance ranges remain the same for the Digital Health platform.

I'll now discuss reimbursement with respect to Medicare. With respect to Medicare reimbursement for 2025, there's nothing to report at this time. As is typical each year, we are expecting CMS to release a preliminary rate schedule sometime in June or July, at which time we will analyze CMS's proposal and our industry's lobbying groups will provide CMS our industry's feedback. At the time of our second quarter financial results call, we will be in a position to comment on CMS's proposal and its impact, if any, upon RadNet's future results. However, we did receive some good news in March regarding 2024 Medicare rates. Effective March 9 of this year, as part of the Consolidated Appropriations Act, 1.72% of the 3.4% scheduled reduction in the conversion factor of the 2024 Medicare fee schedule was eliminated on a prospective basis. The reduction of the cut applies to all of our Medicare buildings from March 9 through the end of this year. As some of you may remember, the original proposed cut was going to reduce our 2024 revenue by an estimated $7 million to $8 million. Thus, the mitigation gives back almost half of this amount, thereby increasing our 2024 revenue by $3.4 million relative to our original expectations and budget. At this point, I'd like to turn the call back to Dr. Berger, who will make some closing remarks. Thank you, Mark. As we move towards the half-year point of 2024, we are excited about the initiatives we have for the remainder of the year. We are particularly encouraged by the progress we are making in Digital Health. As we continue to improve and accelerate growth in the core imaging center business, our digital health initiatives are poised to help us drive more revenue, reduce costs, and increase margins. We remain convinced that the successful future of any imaging business will be heavily dependent upon the automation and efficiency by which patients and clinical data is managed, analyzed, and processed. This is the driver for our development of the new DeepHealth OS, which will be the delivery platform for solutions that automate business processes and more effectively manage patient and clinical data. We expect DeepHealth OS to further automate processes that today principally rely on human labor in the areas of patient scheduling, clinical reporting, medical coding, sales and marketing, workflow improvement, and analytics. In this vein, we are currently making investments in foundation generative AI models. It is faster and less expensive for data scientists to use pretrained foundation models to develop new machine learning applications rather than train unique machine learning models from the ground up. When trained on broad datasets, these models can support a diverse range of use cases. Tests that foundation models can perform, including language processing, visual comprehension, code generation, and human decision-making. Advances in available foundation models will enable us to design and test AI solutions more quickly and at a lower cost, giving us a distinct advantage when applied to the enormous database of clinical and business information we own. While we develop DeepHealth OS, we continue to grow revenue from our clinical AI solutions for breast, lung, and prostate cancer screening. Our objective is to design and deploy these tools and others that lower the cost and increase the accuracy of cancer diagnosis in a form that can be packaged to create widespread population health initiatives and screening. Our breast cancer AI and the EBCD program exemplifies this opportunity. Our breast AI is improving the productivity and accuracy of our radiologists while providing a valuable benefit to our patients for which they are willing to self-pay. We are formulating similar screening programs for prostate, lung, and other chronic diseases for both domestic and international markets, as we firmly believe that health care needs to shift towards prevention and early detection and not just focus on treating patients who are already sick. We look forward to updating you further on the progress of our digital health initiatives in the coming quarters. Operator, we are now ready for the question-and-answer portion of the call.

Our first question today comes from Brian Tanquilut from Jefferies.

Congratulations on an exceptionally strong quarter. For my first question, considering the strength we're observing, I am curious to know, Mark or Howard, what insights you can share regarding the continued strength as we move into the next quarter. Mark, you mentioned this briefly, but I’m also interested in hearing about the pricing, which appears to be robust. Could you provide any additional details on the pricing strength?

In regards to pricing, we have, over the past several years, tried to transform at least RadNet from being what we have traditionally called ourselves price takers to at least the opportunity to sit down and negotiate pricing with the various payers, other than Medicare, of course, and Medicaid. But this past year and starting out in 2024, we've taken a position, particularly given the enormous demand that we have in backlogs, that contracts, as they come up for renewal, need to be at pricing levels that we think are appropriate, not only for maintaining and sustaining the health of our company and for the benefit of our patients and referring physicians but take into account increasing costs, primarily for labor that we have been incurring now for the past couple of years. When we're not able to reach an agreement as to what we believe are fair and sustainable rates with a particular example that I can give you with our capitation contracts, we're prepared to go to fee-for-service, which effectively did happen over the latter part of last year and beginning of this year, where at least 2 of our contracts have moved to fee-for-service at rates substantially higher than what we were able to agree for renewing the contracts if we stayed with capitation. So I think this is really a function of finally being in a position where we're not just going to accept pricing from any payor that isn't consistent with the appropriate business models and need for us not only to cover increasing costs, but as you can see from our investment through our CapEx and building of de novo centers, a significant commitment that we have to improving access and improving the state-of-the-art technology by which we pride ourselves as being top of the industry. So I think both of those have resonated well. We are successful virtually in all of our negotiations, and I think that has contributed in part to the improved margins that Mark discussed in his remarks. I think this will be a continuing effort on our part to continually monitor not only what the appropriate rates are but also the tools by which we and everybody else in health care are burdened by once we do a procedure collecting those procedures.

And then, Howard, maybe just on the volume, just your expectation for the continuation of the strength you're seeing there.

Yes. Well, I think that's perhaps one of the hidden milestones in our reporting here, Brian. There is clearly a trend towards using more advanced imaging as both the technology improves and as the marketplace realizes the benefits and begins to adopt these. A 1.2% increase in our overall procedural volume shifting from routine imaging to advanced imaging has been a remarkable achievement to demonstrate this. In particular, I would like to point out the enormous increase that we've seen in which we will continue to accelerate is PET/CT. As I've discussed on previous remarks and close calls, we are the largest providers now of what they call PSMA PET/CT scanning, which has been transformative for the diagnosis and treatment of prostate cancer and is a substantial component of the almost I believe it was a 15% same-store increase in PET/CT scanning between 2023 and our first quarter of 2024. So that, we think, will continue to accelerate as this becomes more and more adopted by not only the urologic community but others who oversee the treatment of prostate cancer. I also think that we may eventually in the latter part of this year, seen similar increases in PET/CT scanning as well as MR scanning from the new Alzheimer's drugs that have now been approved, but which require both PET/CT scanning and ongoing MRI scanning for monitoring. At this point, I think in the first quarter, we've done about 300 of these exams on a national scale with backlogs and demand for far more than that as more and more people not only become aware of this but as the criteria for doing these become more adopted and accessible to make certain that the patients get reimbursed adequately or appropriately, I should say, from the various payors. So the trends that I think we're seeing in imaging, particularly in advanced imaging, will continue. We hope to also continue a shift into cardiac imaging and preventative cardiovascular disease that we will be investing more time and human resources in to building up for a procedure for screening for cardiac disease, which I believe will be a standard as far as population health and cardiovascular screening, probably in the very near future and for which imaging is the poster child to managing good care and good outcomes. So I expect advanced imaging to also benefit from the technology improvements, which are allowing us to do better throughput on our existing systems, which we can upgrade or new systems where the processing time or scanning time has been reduced significantly and which allows us to facilitate and handle some of our backlog, which is another reason why we're increasing our advanced imaging business. So I think we will be very happy to update you on our progress in all these regards in our second and the subsequent quarters of this year.

Awesome. And then maybe just a follow-up question for Mark. How are you thinking about balancing the spend on CapEx between maintenance CapEx and growth CapEx? Just curious what your philosophy is there at this point.

Yes. Yes. Thanks for the question, Brian. That philosophy changes year-by-year depending upon what's on our plate. But what I would tell you is that this year, we're projecting upwards of about $130 million worth of CapEx spend. More than half of that is going to be earmarked for the construction and development of the de novo facilities. As Dr. Berger mentioned, we opened up 2 facilities in the first quarter, 1 in Maryland, 1 in California, and we've got 12 other facilities that are in various stages of construction and completion that should open up by year-end. Most of these centers cost, on average, $5 million to $6 million to build. So if you're talking about 12 centers at $6 million, we're talking about $70 million of CapEx spend just on those de novo facilities, which is more than half of our spend this year. So we have shifted a fair bit of our CapEx, and we are spending extraordinarily right now to accelerate growth, which we expect to start seeing some contribution from these centers in the latter half of this year and into 2025. So we have had a strategic change or a strategic shift in our thinking around CapEx because of the opportunity that exists to accelerate growth due to the fact that there's just significant volumes out there, heavy volumes that today, we're not able to avail ourselves either because we've got capacity constraints in some of these markets or we just simply don't have access points that can service patient populations that currently today we're not servicing.

Our next question comes from John Ransom from Raymond James.

Just kind of an obvious question. But when you guys have a 100-basis-point mix shift to higher-cost scans, is that pretty much dropped to the bottom line?

Yes, it does, John. When are you referring to our margin improvement, John?

Yes.

Yes, yes. It was 120 basis points, but okay. Yes, but...

Well, hypothetically, every 100 basis points is an additional 100 basis points of this as well?

Yes. Yes. I think a substantial portion of that, probably 80% of it in that range, drops down to the bottom line, which is one of the reasons why we're very focused on reporting that this year more so than prior years.

It seems like there's a structural trend that will extend into the future with this mix shift given all...

I believe so. Yes. I think last year, I think it was contributed by the improvement in reimbursement and shift of higher profit margin business, the advanced imaging. I think in subsequent quarters and years, it will be impacted by the implementation of our new DeepHealth operating system and automation of what have been up to this point, largely manual processes.

Great. I have two additional questions. As we consider the progression throughout the year for AI and eRAD, is it still on track? Is there any increase in the profitability curve, or is it still primarily part of your $5 million? Or is most of that $5 million generated from the core imaging sector?

Yes. I think we expect some acceleration on two fronts. One is further implementation and adoption of our EBCD program, which we're very pleased with and I think has provided some outstanding results, one of which I'll mention, and that was released interestingly this morning from the Cancer Moonshot White House program is that we have detected 450 cancers so far with the use of this breast screening tool that might have otherwise gone undetected so that the notion of enhanced or earlier breast cancer detection is a reality. As we get further implementation on the West Coast, which is continuing to ramp up, and as we continue to improve, I think, the patient adoption of this, we could alter our guidance on that, perhaps later or in subsequent quarters. Also, some other initiatives that we're starting, one of which is what we're calling EPS, or enhanced prostate screening, is something that we're now rolling out as a self-pay opportunity for men to come in at a fairly nominal price, get an MRI scan with artificial intelligence even if they're asymptomatic and are just looking for greater confidence than routine blood tests that are used primarily for prostate screening. We expect that to be something that probably will become more apparent in our financial results towards the end of the year. But we've had some very good results and some test sampling that we've done on much like in breast screening, finding early cancers that are certainly going to lead to better outcomes for men who choose this pathway.

Great. And then the last one for me just on M&A. I know you don't put future M&A in your guide. But if we're spitballing and we're 6 months down the road, should we expect the probability of just more tuck-in deals in existing markets? Or what are the odds do you think you'll wrestle one of these elephants in the ground?

Okay. I think tuck-ins will be a continual part of our acquisition and growth opportunity. We find those to be very targeted in our existing markets, if you will, and both on the East Coast and West Coast, there's a constant pipeline of requests that we're getting for further opportunities in our existing markets, much like we demonstrated in Houston when we entered that market just this quarter, April 1. If there's other markets where we can find a good platform company to build a longer-term presence in a market, we would look at those. Those may become a little bit more expensive than the tuck-in acquisitions but they do represent a longer-term platform to expand our reach. So I think you can continue to see those along with the de novos as being a very important component of this year's growth.

Our next question comes from Andrew Mok from Barclays.

Wanted to follow up on the Digital Health segment and the DeepHealth capability. One, can you help us understand what the adoption rate is for the EBCD AI option? And then I would love to hear more on the cost savings and throughput efficiencies that this could drive in imaging centers.

Sure. In my earlier comments, I noted that on the East Coast, where we have the most experience with EBCD, our current adoption rate is approximately 40% of patients offered the EBCD actually enroll and pay $40 for the procedure. This aligns well with our expectations, and we believe we can increase that figure. By the second half of this year, we hope to see that number approach 50%. On the West Coast, the adoption rate is around 32% to 33%, which is encouraging as it is higher than our initial rate on the East Coast. The West Coast has benefited from learning certain tools, but I must emphasize that this is a process of education. We do not simply ask individuals to enroll without providing substantial background and benefits related to these tools. As we gain more insights into the issues and questions our patients face regarding these procedures, our communication of the benefits becomes more effective, making patients more receptive. I firmly believe that artificial intelligence in breast screening and mammography represents the latest in technology and will become standard practice in the future, with some form of reimbursement expected. During this transition, we want our patients to reap the benefits of our investments and available opportunities. Additionally, we are not only identifying breast cancers more accurately and earlier, but we are also positively affecting recall rates, meaning fewer patients require further diagnostic work-up. With artificial intelligence, we can confidently suggest that many callbacks simply require monitoring rather than additional invasive procedures like biopsies. The benefits are significant in both areas. Regarding our radiologists, we believe they are becoming more accurate and confident as they gain experience with artificial intelligence. We expect to see a productivity improvement of around 15% to 20%, especially since a large portion of the breast screenings are normal scans. With artificial intelligence validating their initial assessments of mammograms being normal, radiologists have increased confidence. This represents a mutually beneficial situation for all stakeholders involved in this impressive advancement. We are also expanding our efforts in cardiovascular screening with newly approved artificial intelligence tools for reimbursement, which offer additional benefits for our patients beyond just conducting CT scans. All of these developments will be part of our DeepHealth operating platform, and we anticipate discussing more AI tools that will enhance both diagnostic accuracy and productivity for our radiologists.

Great. And then secondly, I think your other category in your payer mix ticked up about 100 basis points sequentially. Just want to clarify what that other category is and what's behind that uptick. Is that tied to the higher EBCD volumes as well?

Yes. It's everything that isn't just patient scanning. So it's management fees, it's the category that doesn't fit into MRI, CT, x-ray, or some mammography procedures such as certain interventional procedures. And part of it had to do with when we rejiggered our operating segments between the Imaging Centers and the Digital Health segment and moving that eRAD business out of the Imaging Centers segment changed the proportions of those exams. But nothing fundamentally has changed with our business.

I was actually talking about the other category, the payer mix, not the procedure mix.

Oh, I'm sorry, I thought you talked about the procedure mix.

Yes, that would be from EBCD because it's self-pay, so it's in the other category.

Yes, that's likely the case, Andrew. I'll double-check the reports and follow up with you.

Yes, that makes sense. And then are there any metrics you can share to give us a sense of the backlog or unmet demand? I think it's clear that there's strong demand backdrop and you have this patient backlog, but just curious if there's anything you can share with us to give us a sense of that unmet demand.

I think that the backlogs are a function of, number one, more use of imaging and greater adoption of it, aging population, growing population, all of which require more and more imaging. And I think greater than previously determined shift away from hospitals. I think there is more effort on the part of payors to direct the business away from hospitals, again, by education and giving the patients an alternative that they might not have previously realized were available to them. And I think this is important and has become more important as deductibles have risen with some of the newer products. When you stop to think about how much if a patient goes to a hospital, they have to pay for their co-pay segment of the scan. These numbers are rather substantial, and yes, through their deductible very quickly and their effective use of that cash could go further for more health services if they elect to go to an outpatient facility where, as we've talked about in the past, scanning differential can be 3 to 5 or even more times in a hospital. So I think all of these are coming together. And I think perhaps the other reason is that things that were more esoteric in the past are now becoming more familiar and patients more comfortable with things like PET/CT scanning may be in the past people thought were only done at veterinary clinics, but particularly as things like prostate screening and now for Alzheimer's screening as well as the general use of it in cancer for diagnostic staging are now just being recognized by everybody of the enormous value that these tools are. So there's greater adoption and greater demand for this coming from all sectors. I would say that also our experience for increased demand is not unique to RadNet. I think almost all of the people that we talk to in the industry, other large chain operators as well as acquisitions when we talk to our various opportunities here, are all experiencing an increase in demand. So what makes RadNet a little bit different is that our ability to take advantage of this by deploying capital either by doing acquisitions or building de novo centers allows us to address these kinds of opportunities, which benefit not only our patients and referring physicians but our communities as a whole. So I just think that right now, imaging is enjoying a very important role in the delivery of health care. And as I've said previously, I believe it is the gateway for population health. And I believe more and more people are coming to agree with that statement.

Yes. To address your question, Andrew, we look at specific KPIs to assess the size of our backlogs and determine if we need to expand our centers or build new ones. We focus on advanced imaging and track how long it takes for a patient to schedule and complete their exam. If a patient needs an MRI or a PET/CT and is concerned about a serious condition, we risk losing business if we can't schedule them within 3 or 4 days. Patients won't wait a week or two to find out if they have cancer. We manage scheduling and try to balance workloads in our centralized scheduling departments, directing patients to centers with shorter waiting times. Currently, we are facing significant scheduling challenges, which is why we plan to build new centers and increase capacity. New MRI equipment offers faster throughput and improved software, allowing us to perform more scans within the same hours. Over the past couple of years, we have been upgrading our MRI scanners to newer technologies. While this is a positive challenge, it is still a problem because we want to retain patient volume and not lose it to competitors. Referral patterns and physician relationships are difficult to shift, so once we lose business, it's tough to regain it, which is why we're focused on quickly expanding our capacity.

And our next question comes from Lance from Yuan Zhi from B. Riley Securities.

Congrats on the great quarter. And thank you for the corrections. I have a couple of them. So first, if we take a step back, you have different market shares in different states. I'm curious what was the reason to have higher market share in some states and lower market share in others? In another way, was it because of a lack of good acquisition targets? Or do you think you've reached a certain critical mass in that state? Think here in Texas or even new state, if you are expanding further, what would be the criteria or goal there?

Sure, Yuan. When we examine a market, we don't specifically target a market share. Our experience has shown that operating at scale in local markets offers significant advantages, particularly by centralizing many business processes for our centers. For example, we centralize scheduling, pre-authorization, insurance verification, revenue cycle management, and marketing efforts, among other functions. Thus, our approach to building scale in a regional market is not about achieving a certain market share; it’s focused on growing the business profitably by leveraging the benefits of scale. In looking at all our markets, we aim to achieve these scale benefits, without targeting a specific magic number for market share. In Florida, for example, we currently lack scale, as all four of our centers are concentrated in the Treasure Coast area, specifically Port St. Lucie and Stuart. However, we see expansion opportunities in the state. In Arizona, we also believe we have not yet realized the potential scale in the Phoenix area, although we did acquire seven additional centers this quarter through our partnership with Dignity Health, as Dr. Berger mentioned. So, to answer your question concisely, we desire scale in all our markets to manage business processes more efficiently and enhance profitability from our assets.

Got it. That's very helpful. And maybe one additional housekeeping question here. Great to see the increase of PET/CT volumes related to PSMA. I'm curious. Did you guys see any update on Alzheimer-related procedures, both the PET/CT part as well as the MRI part, in 1Q or recently in April?

We are beginning to see an increase in volume in the Alzheimer's area, particularly with the initial PET/CT screens for amyloid plaques and ongoing MRI monitoring for patients on therapies. However, the volume is still limited as many patients are just starting these treatments. There has been a delay in qualifying patients for newer drug therapies and securing initial diagnostic imaging approvals. This decision is now in the hands of individual regional Medicare administrators, which has contributed to the delay. We are starting to see some improvement, but the numbers are in the hundreds rather than the thousands that we had anticipated. Nevertheless, we remain optimistic about future growth. Our clinical trials show that these therapies are effective, and their success will depend significantly on advanced imaging techniques, both for initial screening and for ongoing MRIs every 3 to 4 months for at least 18 months. This encourages our belief in the continued use of advanced imaging. Additionally, the popularity of cardiac imaging is increasing, along with the PSMA test in PET/CT. There are also new radioactive tracers in development for specific solid tumors. Overall, we believe this process will continue to evolve.

And our next question comes from Jim Sidoti from Sidoti & Company.

I know it's been a long call. Just 2 quick ones for me. Can you update us on how things are going in Texas? It's been a while since you entered a new market. How do you find this market? Is it easy to get paid? And is it easy to do business there?

It's a bit challenging to provide a clear answer at this moment. We completed our first acquisition of seven centers on April 1, so we don't have a significant amount of operational experience yet. The integration of this business and what we refer to as retinization is just starting. The other acquisition of the American Health Imaging centers in Houston is expected to close around June or July. We foresee further integration of these two operations, which will help us establish a platform for growth. I believe we will have a much better insight and will be able to address your questions more effectively in the upcoming quarters. However, initial signs indicate that this is a promising market with favorable demographics and good payor relationships. We believe we have teamed up with a fantastic group of radiologists who, along with our leadership, are eager to expand the platform through additional acquisitions and new centers. There are several hospital relationships in that market that could be beneficial as we continue to expand. Overall, we are very optimistic about what we have observed so far.

Okay. All right. And second one, can you just give us an updated share count what we need to be using for Q2 and Q3 this year?

We have approximately 73 million to 74 million outstanding shares. Unless we make any acquisitions using our stock for the rest of the year, we don’t expect this share count to increase significantly. Typically, we issue equity to our existing employee base as part of their annual compensation in the first quarter, which has already been completed. Therefore, I don’t foresee any substantial increase in our shares between now and the end of the year unless we pursue an acquisition that involves using stock.

And ladies and gentlemen, at this time showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

All right. Thank you, operator. Again, I would like to take this opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader 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.

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.