RadNet, Inc. Q4 FY2024 Earnings Call

Good day, and welcome to the RadNet, Inc. Fourth Quarter 2024 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. Please note this event is being recorded. I would now like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. 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 fourth quarter and full year 2024 financial results. Before we begin today, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time including RadNet's annual report on Form 10-K for the year ended December 31, 2024, to be filed shortly. Undue reliance should not be placed on forward-looking statements especially guidance on future financial performance, which speaks only as of the date that 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 would 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 fourth quarter and full year 2024 results, give you more insight into factors which affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I would 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. For that, let's begin. I am very pleased to report that this was the strongest quarter in the company's history with record revenue and adjusted EBITDA. Total company revenue increased 13.5% to $477.1 million and adjusted EBITDA increased 14% from last year's fourth quarter to $75 million. Digital Health revenues increased 28.1% to $18.9 million and Digital Health's adjusted EBITDA increased 61.6% to $4.5 million from last year's fourth quarter. Imaging center revenue was driven by increased demand in virtually all of our markets, benefiting from the growing utilization of diagnostic imaging within health care as well as the continuing shift of procedural volumes away from the more expensive hospital alternatives to ambulatory freestanding imaging centers. As a result, we experienced 8% aggregate and 4% same-center procedural volume growth in this year's fourth quarter relative to last year's same quarter. Also contributing to the strong revenue performance was the positive impact of improved reimbursement from commercial payers who recognize the important role we are playing as a lower-priced alternative to hospital-based imaging. Lastly, revenue benefited from the continuing shift in modality mix toward advanced imaging — MRI, CT, and PET-CT — where revenue per scan is substantially higher than with routine imaging. During the fourth quarter, advanced imaging represented 26.8% of RadNet's procedural volume, an increase of 137 basis points from last year's same quarter. This is both a function of the overall industry trend of more PET-CT exams being ordered as a result of technology advances in these modalities as well as the significant capital investment we have made in the last few years in advanced imaging equipment for growth and replacement. 2024 was also a year of significant investment. During 2024, we opened nine de novo facilities in markets where our patient backlogs required additional capacity or we currently lack access points to service identified patient populations. These centers should be material contributors to long-term performance and growth. We continue to grow the hospital and health system joint venture business. Currently, 153 of RadNet's 398 centers, or 38.4%, are held within system partnerships. This is an increase of 23 centers from year-end 2023. Health systems continue to seek long-term strategies around outpatient imaging and have recognized that cost-effective and efficient freestanding centers will continue to capture market share from hospitals as payors and patients migrate their site of care toward lower-cost, high-quality solutions. Our hospital and health system partners have been instrumental in increasing our procedural volumes with their physician medical group relationships. Momentum continues with initiatives inside the Digital Health segment. In the fourth quarter, we commercially launched the Deep Health OS operational and diagnostic software suites, announced partnerships with GE and Siemens to bundle with or embed smart technologies into mammography and ultrasound equipment, and commercialized the TechLive remote scanning solution for MRI and other modalities. During 2024, we also continued to build executive management capabilities within Digital Health, culminating with Keith Wood Wipstorf joining as the CEO of the Digital Health division in September of 2023. Throughout 2025, we will be focused on implementing these solutions within the RadNet network of centers, which is expected to drive operational efficiencies in many of the business processes performed on behalf of the imaging centers, primarily through automation. Furthermore, these technologies will help create capacity that will enable the imaging centers to service increasing demand for diagnostic services. At the same time, we will be investing aggressively to build the necessary infrastructure within Digital Health to sell and support external customers. Embedded in our 2025 Digital Health guidance is approximately $20 million of investment primarily directed towards building sales, marketing, customer support, and implementation capabilities requisite to support significant external growth in the coming years. We continue to focus on strengthening the balance sheet by managing liquidity and financial leverage. At year-end 2024, RadNet's cash balance was $740 million and the net debt to adjusted EBITDA leverage ratio was under one times. During 2024, we consummated a $230 million stock offering in March, a debt refinancing transaction in April which lowered our cost of capital and extended maturities through 2031, and a debt repricing transaction in November which further lowered the interest cost on RadNet's credit facility. At this time, I would like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full 2024 performance as well as discuss our 2025 guidance. When it is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 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 fourth quarter and full year 2024 performance. I will also provide 2025 financial guidance levels which were released in last evening's financial results press release. In my discussion, I will use the term adjusted EBITDA which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, and non-cash equity compensation. Adjusted EBITDA includes equity 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 fourth quarter and full year 2024 results. As many of you may have seen in the financial results press release we made last night, we had a very strong fourth quarter. While I won't recap all the financial information that's contained in yesterday's earnings report, here are some highlights. Fourth quarter total company revenue and adjusted EBITDA were quarterly records. Revenue increased 13.5% and adjusted EBITDA increased 14% from last year's fourth quarter. The Digital Health segment also exhibited strong growth in the quarter with revenue growing 28.1% and adjusted EBITDA growing 61.6% from last year's fourth quarter. Fourth quarter adjusted earnings per share for RadNet grew to $0.22 per share versus $0.15 per share for last year's fourth quarter. Eight percent aggregate and 4% same-center procedure volume growth drove much of the top-line performance. Also benefiting the fourth quarter was the continuing shift in business mix in favor of advanced imaging. Advanced imaging during the quarter represented 26.8% of our procedure volume, an increase of 137 basis points from last year's fourth quarter. Higher-acuity advanced imaging drives more revenue per procedure and improved profitability. The strong ending to the year caused us to meet or exceed the principal 2024 guidance ranges of revenue, adjusted EBITDA, and free cash flow in both the imaging centers segment as well as Digital Health. We finished 2024 with a strong cash and liquidity position and at year-end we had over $740 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 and repricing transactions we completed in April and November. Continued improvement in revenue cycle has capped our DSOs, our days sales outstanding, at 32.3 days year-to-date, our record low. With regards to our financial leverage, as of December 31, 2024, unadjusted for bond and term loan discounts, we had $268.8 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 net debt of $41.4 million for which RadNet is neither a borrower nor guarantor. At year-end, our net debt to adjusted EBITDA leverage ratio was below one times. As some of you may have seen, we released 2025 financial guidance ranges in conjunction with our financial results press release last night. While I'm not going to run through all the numbers on this call, I will emphasize some important points. In January and February of 2025, we experienced severe winter weather conditions. These winter weather conditions were significantly more severe than the first quarter of 2024, which experienced a relatively mild winter season. As a result, our operations in the Northeast, Mid-Atlantic, and in Houston, which together account for almost 60% of our revenues, were materially impacted. Winter storms impact our business principally in two ways. First, patient schedules on the days of the storm suffer from cancellations due to difficult travel conditions, loss of power at centers, center closures, and the inability of our own staff to come to work. Second, the patient flow of our referring physicians is similarly impacted causing a disruption in our scheduled appointments for days following the storms. Unfortunately, once scanning slots go unused they are never made up. In addition to the winter storms on the East Coast and in Houston in January and February, we lost revenue and adjusted EBITDA as a result of the Southern California wildfires. Though RadNet suffered no property damage at any of our nearby centers, during and after the fires, all businesses, regardless of industry, lost revenue. Populations were displaced and the utilization of health care was not a priority for those impacted by the wildfires. We estimate that the impact we suffered in January and February from the winter storms and the wildfires was approximately $22 million of revenue and $15 million of adjusted EBITDA. Fortunately, our business has bounced back in recent weeks and we are experiencing strong volumes in line with our original projections. We do not expect an impact from the severe weather conditions or the wildfires to go beyond the first quarter of this year. As a result of these weather and wildfire impacts in January and February, we modified our full year 2025 budget and the guidance ranges for the loss of this revenue and adjusted EBITDA. Our original projections for the second, third, and fourth quarters of 2025 remain unchanged from the original budget. In regards to the Digital Health reportable segment, we are anticipating 2025 revenue growth in the neighborhood of 30%. This growth will come from a combination of revenue increases in our clinical AI solutions as well as sales and licensing from the Deep Health OS, smart technologies, and TechLive portfolios. The growth in Digital Health adjusted EBITDA is expected to lag revenue growth due to approximately $20 million of planned investments throughout 2025 in the infrastructure necessary to support external customers. Areas of investment include sales, marketing, and customer support and implementation. I'd now like to turn the call back over to Dr. Berger who will make some closing remarks.

Thank you, Mark. As we begin 2025, diagnostic imaging is rapidly transitioning into a tech-enabled specialty. Fundamentally, in order to service the growing demand for diagnostic imaging, which is expected to steadily rise over the next decade and is challenged by labor shortages that are unlikely to abate in the near future, our industry needs to embrace technology solutions that will enhance operational efficiency, streamline workflow, improve the patient experience, and provide better clinical outcomes. It is RadNet's mission to lead the industry down this path through providing Digital Health solutions which address the most critical industry needs. The announcement that was made earlier this week with OBGYN Specialists of Palm Beaches is a case study of how RadNet can be a solution provider to enable leading-edge diagnostic imaging at the point of care. Enabling physician offices, multi-specialty medical groups, urgent care centers, in addition to OB/GYN offices with tools to provide high-quality, cost-effective diagnostic imaging will increase access to imaging services, particularly for mammography, ultrasonography, and X-ray. These routine imaging procedures represent a significant portion of outpatient imaging services. Furthermore, tech-enabled point of care imaging will create better compliance for routine screening such as mammography, and will reduce cost to the health care system by providing additional sites that are more convenient and cost-effective. In order to effectively and safely provide these imaging services, alternative sites of care will need tech-enabled turnkey solutions to manage workflow, professional interpretive services powered by clinical artificial intelligence, and solutions to improve the effectiveness of on-site or remote technologies. RadNet is uniquely positioned to lead radiology in this direction because of its 35-plus years of experience in building the industry's largest and most successful outpatient provider, its significant financial and managerial resources, its industry relationships, including those with radiology's largest equipment manufacturers, and, more recently, its newly developed array of Digital Health solutions, including the Deep Health OS, smart mammography, smart sonography, TechLive, and its ability to develop and commercialize clinical AI tools such as what we have already accomplished in breast, lung, prostate, and brain. Focused investment in these essential solutions is driving our continued investment into Digital Health. 2025 will be an important year for onboarding Digital Health team members in sales, marketing, customer support, and implementation both internally and externally. Lastly, we will opportunistically evaluate acquisitions that serve to either add new products and clinical AI solutions and/or provide us with a customer base to which we can market and sell our portfolio of solutions. Operator, we are now ready for the question and answer portion of the call.

If at any time your question has been addressed and you would like to withdraw your question, press star then one. The first question comes from David McDonald with Truist. Please go ahead.

Hey, good morning, guys. Just one quick question. I wanted to follow up on the weather impact piece. It sounds like, regarding the Southern California wildfire impact, you expect to be back to 100% in terms of scheduling either later in March or certainly by the end of the quarter. So no leakage into the second quarter?

Hi, Dave. Let me provide a little context. The wildfires in Southern California — particularly in the Los Angeles area, Pasadena, Riverside, and Ventura County — were like a storm that impacted virtually everybody throughout Southern California. Having lived through that, I can tell you that people were focused on the fires and waiting to see when relief would occur and when normal activity could resume. In addition, the air quality was dangerous and people were reluctant to travel. Emergency vehicles were given first priority and were brought in from across the region and other states. The impact of this was not just an isolated fire; it was effectively like a massive storm that impacted us for about ten days to two weeks and had aftereffects as populations and communities were indirectly impacted. That being said, we have recovered and I believe we returned to normal within the last ten days. We are slowly increasing back to, or perhaps even exceeding in some areas, the volumes we had projected for the first quarter. If you add back what we estimate our loss of business was in January and February from both the fires and the severe winter weather on the East Coast, we probably would have met or exceeded our first quarter budget. To answer your question more directly, we believe March should be a very normal month for us. As I mentioned, volumes have improved over the last ten days and March is typically a more normal month from a climate standpoint that we expect not to be impacted by weather. January and February were extraordinary circumstances that affected not only RadNet, but virtually every business in those markets, and we just have to absorb that impact. We are, however, extremely confident in the rest of the year and expect that the budget projections and expectations will be met, and potentially exceeded, as we have done in recent years.

Okay, great. Second question: any early learnings from the Deep Health OS rollout as you start looking at internal metrics or feedback from clinical staff, or is it too early?

It's a little early, Dave, but we have a very close collaboration between the services side and the Digital Health side in testing and rolling out the significant changes that will occur as a result of the Deep Health operating system. Our physicians, tech staff, and administrative staff, particularly in scheduling and insurance verification, are enthusiastic about the opportunities for substantial change. This is a logical extension of broader industry trends like remote scheduling and contact centers. We are more complicated because the insurance industry is difficult to navigate, but we believe we are on target to implement most of the OS internally across the remaining three quarters of this year. As we present this to various RadNet constituents, they provide valuable recommendations on improvements. That collaborative process — services and Digital Health working together — is a critical part of the value proposition. The product will be operationally and clinically differentiated, and some efforts will become clearer as we pursue point-of-care providers to drive access for increasing demand, particularly routine imaging.

And last one for me: two-part question on pipeline. Anything to call out in deal flow or multiples? And can you provide more detail on the Palm Beach OB/GYN deal — did they come to you, did you approach them, how did it come together?

Let's see, Dave. Yes, yes, and yes.

They reached out to us because of their dissatisfaction with some of the professional and operational relationships they had. It was an expeditious process: an initial call and then we arranged a new solution for this group. The group is quite large — the largest OB/GYN provider in the southern Florida marketplace, with ten offices, five of which provide mammography services. Their initial focus was on professional services, and we were quickly able to have them adopt Digital Health solutions for scheduling and patient reminders for annual visits. Sometime in the first part of March, they will adopt a program we expect will see substantial endorsement and adoption. Their inquiry originally sought better quality professional and interpretive services, and we were able to add operational capabilities and AI tools that they had not seriously considered. This is a case study for us and a model for other OB/GYN practices we want to pursue to improve access for mammography and elevate quality using AI. In our Florida market, well over 50% of our patients are opting in for our early breast cancer detection program, and we expect even greater adoption where there's better control of patient workflows during wellness visits. This collaboration should ramp quickly once we can demonstrate the value proposition statistically to the marketplace.

Okay. Very much, guys. Appreciate it.

Thanks, Dave.

The next question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Maybe, Mark, I'll start with you. As you mentioned volume has bounced back after the storms, can you give us color on the growth rates you were contemplating in the guidance prior to these events and any observations on demand dynamics in the market?

If you take the guidance we released last night and add back the revenue we estimated we lost — the $22 million — and look at the midpoint of that guidance range, it implies about a 7% gross growth, which we are very confident in and highly achievable. Within that, we are assuming procedure volume growth that implies about a 3% same-store sales growth year over year, which is more in line with our historical same-center performance and is less than what we've been achieving over the last several years. Given the unusual January and February impacts, we wanted to be conservative for the remainder of the year.

Totally understand. Howard, on the $20 million of infrastructure investments in Digital Health: is that likely to be the ongoing run rate or will you need to add to that as the business grows? Also, what are you seeing in the market that prompted these investments now — do you have visibility to contracts or demand that justify this spend?

Good morning, Brian. First, note that we put no built-in benefit from deploying Deep Health OS internally into our 2025 forecasts. There is potential upside — both revenue and cost-reduction — from capacity and workflow improvements, but much of that is expected in 2026 when we are fully implemented. Regarding the $20 million, a lot of it will be one-time costs to build the sales team, marketing, implementation, and support functions to scale externally. We see universal demand: every system partner, every acquisition opportunity, every hospital or imaging partner we speak to has the same two fundamental problems — the shift of imaging from hospitals to outpatient centers and labor shortages for radiologists and technologists. These challenges are accelerating demand for digital solutions that improve operational efficiency and quality. The U.S. outpatient imaging volume is large — roughly 350 million procedures annually — and growing a few percent per year. We believe our investments will create solutions that others can use to drive performance, efficiency, and clinical quality. No single company has taken on this scale and rapidity in building an integrated cloud-native platform combined with clinical AI and operational tools. We launched Digital Health officially at the beginning of 2024 and have made rapid progress; the team has accomplished a lot in a short time.

Appreciate that. Mark, two quick follow-ups: as Howard said, with the storms and the investment step-up adjusted out, you would have been around $300 million of EBITDA. Is that the growth rate to expect into 2026 and beyond? And second, what was Digital Health clinical AI revenue for the quarter?

If you add the $15 million of EBITDA back to our guidance levels for both Digital Health and imaging services together, we are about $300 million of EBITDA, which aligns with our original budget for the year. On the AI revenue question: digital health revenue in the quarter was $18.9 million and the AI component was $6.7 million of that $18.9 million. The AI revenue grew 31.9% from last year's fourth quarter.

Okay. Thanks.

Thanks, Brian.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey, good morning, everybody. If we think about Digital Health revenue guidance for 2025, can you help us think about the different components of that — how much from AI, how much from software and other tech?

Sure. Total Digital Health revenue guidance for 2025 is about $80 to $90 million. We expect the AI component to be in the range of $25 to $30 million, and the remainder will be software as well as other technologies such as smart mammography and TechLive.

Do you expect to convert all of your legacy software clients to the new platform over time?

Yes. We plan to migrate our legacy on-premise customers to a cloud-native Deep Health platform. We will sunset the older on-prem systems. We hope to have all four hundred centers on the cloud platform, including our legacy systems, by the end of this year. When we discuss the Digital Health division, we focus on three things: clinical AI; generative AI that changes how centers operate from appointment scheduling to billing and reporting; and acquisitions that can accelerate growth. We will consider opportunistic acquisitions that bring new products, services, or customer bases that we can cross-sell our Deep Health products into.

To reiterate, digital health revenue in the quarter was $18.9 million and AI was $6.7 million of that $18.9 million, a 31.9% growth in the AI piece from last year's fourth quarter.

You have done a couple of nice capital raises and have significant cash on hand. What are the odds you'll write checks from that cash this year?

The odds are very high that we will use some of that capital in 2025. As Howard mentioned, capital could be used within Digital Health for acquisitions that bring new products, services, or AI tools, or to acquire businesses with significant customer bases that we can penetrate with Deep Health products. There will also be acquisitions in the normal course of business on the imaging center side.

Have you been surprised that nothing materialized in the core imaging business in terms of mid-size deals or attractive multiples?

I wouldn't say surprised. Many larger consolidators are private-equity-backed and may be open to transactions at the right price. The question is whether a target fits our metrics around leverage and expected synergies. If it does not, we pass. We are actively working on a number of opportunities in both Digital Health and imaging services that we expect to discuss later in the year. We want to be strategic and prudent stewards of cash and ready to move on deals that are accretive financially and strategically.

Alright. Thanks so much.

Alright. Thanks, John. Take care.

The next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, good morning. I wanted to follow up on the labor remarks you made. You said shortages are unlikely to abate. Can you provide more color on inflation trends you're seeing in the market? When did you see the acceleration and how far along are we in this cycle?

Thanks, Andrew. We began seeing this labor issue two-plus years ago, around and after COVID. Some people retired earlier or changed how and where they want to work, creating a different mindset and pressure in the labor market. The supply of labor has not grown and may have contracted while demand for imaging has accelerated as delayed services returned and new applications increased. Our recognition of this issue drove us into the Digital Health opportunity. From a salary increase standpoint, the industry has seen mid- to higher-single-digit growth in wages, particularly in hospitals. RadNet has managed labor costs relatively well; we believe we're in the low single digits internally, and we continue efforts to make RadNet a desirable place to work, especially for radiologists due to predictable hours, less on-call burden, and strong pathology and subspecialization. Within our 2025 guidance, we are absorbing about $45 million of salary and wage increases. We expect this trend to continue, but our digital solutions should start to have a material impact on efficiency and labor needs in 2026 and beyond once implemented. This shared industry pain point is also why we believe there will be external demand for our solutions.

Is the radiology labor pressure causing exposure to physician subsidies that we see in hospitals?

No. Subsidies are primarily hospital-based; hospital-based radiology groups sometimes require subsidies from hospitals because they cannot profitably bill for professional components alone in a hospital setting. In our outpatient model, the technical component is where we generate revenue and radiologists are paid from global billing, receiving the professional component. So the hospital subsidy dynamic is not applicable to the outpatient industry in the same way.

Finally, can you discuss switching costs for PACS-like systems and how that affects Deep Health adoption? Even if a customer likes your products, how big a barrier is switching to Deep Health?

PACS evolution is changing. Many current PACS are over ten years old and do not support modern productivity tools. Our platform is designed to be a next-generation, cloud-native solution that improves radiologist productivity and supports AI tools. A key example is triaging: AI can identify normals and allow radiologists to focus on the abnormal cases, improving throughput since the majority of cases are normal. Newer equipment generates substantially more images per study; AI and modern viewers can surface the most relevant images and findings. The outpatient environment is particularly amenable to these productivity gains because radiologists can be more productive and read more cases, while hospitals often have a higher percentage of complex, abnormal cases. The switching cycle will occur industry-wide as more customers migrate from on-prem to cloud-based systems with superior viewer technology.

To add, only a small percentage of PACS today — roughly 15% — are cloud-based. The vast majority remain on-prem. The benefits of cloud-based platforms include faster retrieval, better compression, more powerful viewers, and improved performance overall. We expect a significant industry migration to cloud-native solutions in the coming years, which is the cycle Deep Health is preparing for.

Great. Thanks for the color.

The next question comes from Larry Solow with CJS Securities. Please go ahead.

Good morning. A couple of follow-ups: you mentioned an incremental $45 million in wages and benefits in 2025. Even if you add back the weather-related impact, it looks like segment margins decline about 40 to 50 basis points year over year. Is that driven primarily by higher wages, or what's driving that margin contraction?

When we built the 2025 guidance, we did a bottom-up budgeting process by center level, region, and then consolidated. For labor, on a same-center basis, we're assuming about a 4% increase in same-center labor rates, consistent with recent years. The overall EBITDA margin in our guidance is expected to be fairly stable year over year; it may be up slightly or flat. The primary opportunity for margin enhancement will be realized when Deep Health OS and automation are implemented, which we expect to begin showing more benefits in 2026. We are implementing region by region and have started with smaller regions so we can work out kinks before deploying to our largest, most complex regions.

On Digital Health: you reiterated the 30% revenue growth target. Over a five-year horizon, is that growth rate sustainable? Could this become a several-hundred-million-dollar business with high margins as it scales?

Without providing multiyear guidance, I would say the opportunity is large. We're investing today to build the infrastructure to support external customers. The global radiology software market is several billion dollars and is highly fragmented, with many point solutions. We seek to build an underlying cloud-native technology platform that could host many point solutions and be broadly adopted. If successful, this could indeed become a very substantial business. That's why we're devoting resources and are prepared to be opportunistic with acquisitions to accelerate growth.

Great. Thanks, Mark. I appreciate the color.

Thank you.

The next question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Hi. Two quick ones. One, how long will it take for the sales and marketing team you're building for the AI business to get trained and start contributing materially to revenue?

We hope to substantially complete the build-out of the sales, marketing, and implementation teams in this calendar year. There are multiple ways to scale; we'll consider various alternatives to accelerate ramp-up, but our objective is substantial completion by year-end.

Second, capitation revenue was down in the quarter and the year. Is that a trend? Are capitated models declining or is this specific to some contract dynamics?

Good observation. Capitation revenue this quarter was about 6.6% of revenue; at the height of our capitation it was north of 10%. The decline is intentional. Over the past 24 months we've renegotiated with payors to obtain price increases. In several cases, we've flipped capitation contracts to fee-for-service arrangements because, given how busy our centers are and backlog in many locations, it doesn't make sense to accept capitated payments that are below fair value. By moving to fee-for-service for some business, we receive significantly higher rates for the patients that do come to us. While capitation revenues have declined, overall revenue has increased. Some contracts may come back in the future, but our current approach has improved our revenue mix and pricing.

Thank you for explaining that.

My pleasure.

This concludes our question and answer session. I would like to turn the conference back over to Dr. Berger for any additional closing remarks.

Thank you. Again, I would like to take the 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 the 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. Good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.