RadNet, Inc. Q2 FY2025 Earnings Call

Good day, and welcome to RadNet, Inc. Second Quarter 2025 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. 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 second quarter 2025 financial results. Before we begin today, we'd like to remind everyone of the safe harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the safe harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may 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. 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 second quarter 2025 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 call this morning. Let's begin. I am very pleased with the performance in the second quarter. After experiencing significant disruption in the business during the first quarter of this year as a result of the California wildfires and severe winter weather conditions in the Northeast and Houston markets, in the second quarter, business rebounded, and we achieved record quarterly revenue and adjusted EBITDA. Relative to last year's second quarter, total company revenue increased 8.4% to a quarterly record of $498.2 million, and Digital Health segment revenue increased 30.9% to a quarterly record of $20.7 million. Contributing to core imaging center revenue growth are a variety of factors. First, industry trends continue to provide tailwinds. Imaging technology advances in equipment, post-processing software, artificial intelligence, contrast materials, and nuclear isotopes continue to drive increased utilization of diagnostic imaging within healthcare in general. Furthermore, within this growing industry, the shift of procedural volumes away from the more expensive hospital alternatives to more cost-effective ambulatory freestanding centers continues. Second, improvement continues in reimbursement rates with commercial and capitated payers that recognize the position RadNet offers as a lower-priced alternative to hospital-based imaging. To this end, we have been successful in receiving rate increases from many of the larger commercial payers, and several capitated contracts have been converted to higher-paying fee-for-service relationships. Lastly, and perhaps most importantly, the focus has been on driving more advanced imaging procedures. MRI, CT, and PET/CT, and increasing advanced imaging capacity through a variety of initiatives. Advanced imaging has a higher per-procedure pricing and typically better margins. During the second quarter of this year, advanced imaging as a percentage of total procedures increased to 27.5%, from 26.5% in last year's same quarter, an improvement of 102 basis points. This increase is due in part to initiatives that have been identified within each of these modalities. For example, within MRI, the 9% aggregate and 6.6% same-center growth in the second quarter, as compared with last year's second quarter, is partially the result of capacity created from investments made in MRI software upgrades and operating protocols, which enable shorter scan times. The shorter scan times allow for the scheduling of more patients in the same hours of operation. Within CT, programs have been expanded on both coasts to offer more complex procedures. An example of this is cardiac CT angiography, which is growing rapidly and which, in some cases, is enhanced with reimbursed artificial intelligence-assisted analytics. Within PET/CT, emphasis has been on newer diagnostic and screening offerings for prostate cancer, Alzheimer's disease, dementia, and new procedures with leading-edge tumor-specific radioactive tracers. PET/CT has been the fastest-growing procedure. This quarter, PET/CT increased 22.4% on an aggregate basis, and 16.2% on a same-center basis as compared with last year's second quarter. The increase in advanced imaging, particularly MRI, has also been driven by the implementation of TechLive, our remote screening technology recently cleared by the FDA. TechLive is a vendor-agnostic integrated solution, enabling remote scanning of MRI, CT, PET/CT, and ultrasound procedures. Amidst tech labor shortages and inflationary wage pressure, TechLive empowers technologists to scan for multiple locations, enables improved operational efficiency, extends center operating hours, and enhances access to complex procedures. The most significant impact we are experiencing with TechLive is its ability to expand hours of operation by staffing exam rooms, which previously would have been closed. As an example, in a pilot deployment at 64 locations inside of RadNet's New York area facilities, TechLive significantly contributed to a 42% decrease in MRI room closures and during the second quarter of 2025, as compared with the same period of 2024. Currently, more than 300 of RadNet's MRI, CT, PET/CT, and ultrasound systems are connected with DeepHealth's TechLive solution, and we are targeting to connect substantially all of RadNet's advanced imaging equipment to TechLive in early 2026. The strong revenue growth from all the factors just discussed, and in particular, the initiatives driving more advanced imaging, along with cost-effective management, contributed to the record adjusted EBITDA and margin expansion in the quarter. Adjusted EBITDA during the second quarter of 2025 increased by 12.3% to a quarterly record of $81.2 million, up from $72.3 million in last year's second quarter, and adjusted EBITDA margin increased to 16.3% during the second quarter of 2025, which compares with 15.7% in last year's second quarter, an improvement of almost 60 basis points. The strong operating results in the second quarter relative to our internal budget resulted in the decision to increase 2025 full-year guidance ranges for revenue and adjusted EBITDA. Mark will discuss this in more detail in his prepared remarks. Steady progress also continues in the Digital Health operating segment. The EBCD DeepHealth, AI-powered breast cancer screening program continues to expand. Currently, we are experiencing a blended adoption rate nationally, approaching 45%, with more cancers being found across RadNet centers, which otherwise might have been detected at a much later date. On July 17, the previously announced acquisition of iCAD, a global leader in clinically proven AI-powered breast health solutions was completed. iCAD's ProFound Breast Health Suite and RadNet's DeepHealth AI-powered screening solutions together can materially expand and improve patient diagnosis and outcomes on a global basis through further enabling accuracy and early detection. With over 1,500 healthcare provider locations, facilitating over 8 million annual mammograms in 50 countries, iCAD's installed base and strong sales, engineering, and marketing capabilities will provide immediate broad and valuable customer relationships and commercialization capabilities that can accelerate DeepHealth's objectives. On June 4, the acquisition of See-Mode Technologies, a global innovator in AI for ultrasound imaging, was completed. See-Mode's initial applications to detect and characterize thyroid nodules and breast lesions in ultrasound imaging improve diagnostic accuracy and enhance clinical workflows. With the inherent complexity of ultrasound imaging and its dependency on the individual capabilities of the technologists and radiologists, the opportunity to improve care through AI is significant. With demand exceeding available appointment slots for many of the 900 ultrasound units in 326 of our locations, the increase in capacity created by See-Mode's technology should improve our ability to drive better access and more revenue through RadNet's existing centers. Early deployment of See-Mode's FDA-approved thyroid ultrasound artificial intelligence across 83 of the imaging centers has demonstrated up to a 30% reduction in scan time, and it is anticipated that See-Mode will be fully implemented in the remaining centers by the end of the first quarter of 2026. Furthermore, our reimbursement code already exists that makes a portion of our approximately 250,000 annual thyroid ultrasounds eligible for additional reimbursement. An initiative is ongoing to pursue FDA approval for See-Mode's next application in breast AI ultrasound, which constitutes over 600,000 of RadNet's approximately 2.7 million annual ultrasound exams performed. While initial focus will be on the implementation within RadNet, these technologies will also be sold and marketed by the Digital Health division to third parties as the offerings are further commercialized. Finally, financial liquidity and leverage continue to be carefully managed. As of June 30, 2025, our cash balance was $833 million, and the net debt to adjusted EBITDA ratio was 0.96. An attractive pipeline of acquisition opportunities is being evaluated for both the core imaging services division and for Digital Health, and we have confidence in our ability to invest the cash balance over time in opportunities that advance RadNet's strategic objectives. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our second quarter 2025 performance. When he has finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our second quarter 2025 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our second quarter performance. I will also provide an update to 2025 financial guidance levels, which were released in conjunction with our 2024 year-end results in February, and amended following our first quarter financial results in May. In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization, and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, and noncash equity compensation. Adjusted EBITDA includes equity and earnings and unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and one-time items taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet income and shareholders is included in our earnings release. With that said, I'd now like to review our second quarter 2025 results. As Dr. Berger highlighted in his remarks, our business bounced back in the second quarter nicely, recovering to more anticipated levels following the California wildfires and severe winter weather conditions in the Northeast that significantly impacted us in the first quarter of this year. In the second quarter, we returned to the type of growth we have been demonstrating over the last several years. Our results were highlighted by strong performance and growth in advanced imaging, which is being driven by many of the initiatives that Dr. Berger discussed. Advanced imaging grew 9% in aggregate, and 6.6% on a same-center basis relative to last year's second quarter. PET/CT, which continues to be our fastest-growing modality, grew 22.4% in aggregate, and 16.2% on a same-center basis, predominantly on the growth of PSMA and amyloid brain studies. The disproportional growth in advanced imaging relative to routine imaging has been a steady trend and continues to help us absorb the inflationary pressure we and the rest of the industry have been feeling with respect to the availability and rising cost of labor, especially as it pertains to radiology technologists. We believe there are continued opportunities for margin improvement as a result of driving more advanced imaging in our centers and through the implementation of many of the software tools offered by the Digital Health division. During the quarter, we opened one new facility in New Brunswick, New Jersey, and we have nine additional facilities that we are targeting to open by the end of the year, which includes three joint venture facilities and six wholly-owned locations. These de novo openings will give us the necessary capacity to support the heavy diagnostic imaging demand in our markets and should enable us to continue similar organic growth into the future. For the second quarter of 2025, RadNet reported total company revenue of $498.2 million and adjusted EBITDA of $81.2 million, both quarterly records. Revenue increased $38.5 million, or 8.4%, and adjusted EBITDA increased $8.9 million, or 12.3%, as compared with the second quarter of 2024. The combination of the strong top-line growth and our ability to manage operating costs effectively caused EBITDA margins to improve by 57 basis points relative to last year's second quarter. The Digital Health segment reported revenue of $20.7 million, a 30.9% increase from last year's second quarter. Breaking this down further, AI revenue within Digital Health increased 21.6%, from a combination of growing the EBCD program revenue and through expanded licensing of DeepHealth lung, prostate, and neuro solutions, primarily in Europe. Radiology software revenue within Digital Health grew 36.1% relative to last year's second quarter, from a combination of internal revenue from RadNet's imaging centers adopting further elements of DeepHealth OS, including certain contact center software and TechLive, as well as from external sales of workflow software solutions. We continue to make important investments in sales, marketing, development, customer support, and implementation teams necessary to support anticipated growth over the next five years. Despite these investments in infrastructure related operating expenses, EBITDA for Digital Health grew 4.1% over last year's second quarter. As Dr. Berger mentioned, we finished the second quarter of 2025 with a strong cash and liquidity position. At quarter end, we had $833 million of cash on the balance sheet, full availability of a $282 million credit facility and a term loan that is priced at SOFR plus 225 basis points, reflective of the refinancing transaction we completed last April, and the repricing transaction we completed last November. Continued improvements in revenue cycle have driven down DSOs, or days sales outstanding, to 32.4 days, slightly lower than where we were at this time last year. With regards to our financial leverage as of March 31, 2025, unadjusted for bond and term loan discounts, we had $264.6 million of net debt which is our total debt at par value less our cash balance. Note that this debt includes RadNet's ownership percentage of New Jersey Imaging Network's net debt of $36.2 million for which RadNet is neither a borrower nor a guarantor. At quarter end, our net debt to adjusted EBITDA leverage was slightly less than 1x. Given the strong second quarter results and the positive trends we continue to experience, we elected to increase revenue and adjusted EBITDA guidance for our Imaging Center business. We increased revenue by $15 million at the low and high ends of the guidance ranges and increased adjusted EBITDA by $3 million at the low and high ends of the ranges. We also increased our capital expenditure guidance range by $7 million, which is reflective of additional growth investment opportunities we plan to pursue in the second half of the year. Otherwise, all guidance ranges for the Imaging Center segment remain unchanged. For Digital Health, we plan to update guidance ranges upon announcing our third quarter results in November. This update will reflect contributions from the iCAD and See-Mode transactions, and incorporate any other information about the operating segment we have at that time. At that time, we should have a much better sense as to how the integration of iCAD and See-Mode is progressing as well as each's revenue contribution for the second half of the year.

I'll now take a few minutes to give you an update on 2026 anticipated Medicare reimbursement rates. As a reminder, Medicare represents about 23% of our business mix. With respect to Medicare reimbursement, several weeks ago, we received a matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal that is released about this time every year. We have completed an initial analysis and compared those proposed rates to our current 2025 rates, and we volume-weighted our analysis using expected 2026 procedure volumes. In the proposed rule, Medicare is proposing increasing the conversion factor in the Medicare fee schedule by 3.3%, from $32.35 to $33.42, along with certain changes to the RVUs, or relative value units, of specific radiology CPT procedure codes, and to the Medicare geographic practice cost indices for GPCIs. Our initial analysis of all these moving parts of the proposal indicates that RadNet on roughly $1.9 billion in revenue will benefit from an approximately $4 million to $5 million Medicare revenue uplift in 2026. We are very pleased that we will likely be getting this modest increase next year after about five years of annual cuts to Medicare reimbursement, including in 2025 when we have absorbed and are continuing to absorb about a $7 million to $8 million cut. We hope that this is a recognition from CMS that it must compensate providers appropriately and that its reimbursement should be commensurate with the rising cost of providing services. The Medicare physician fee final rule is expected to be released on or about November 1, 2025. There is no assurance that the final rule will be consistent with this proposal. On our third quarter financial results call in November, we hope to be able to provide more certainty around 2026 Medicare rates. I'd now like to turn the call back over to Dr. Berger, who will make some closing remarks. Thank you, Mark. The diagnostic imaging industry has entered a period of transformation. Traditionally, diagnostic imaging has relied primarily on manual processes and labor to complete most aspects of services. The manual nature of the industry has historically leaned heavily on the availability of skilled labor for all clinical aspects of the patient journey, as well as for performing all the requisite non-patient-facing support functions, including scheduling, pre-authorization, insurance verification, revenue cycle, coding, just to name a few. More recently, quantum leaps in computing power, machine learning, and artificial intelligence have demonstrated the possibilities for the future of the industry. Having under one roof both the largest scale imaging services business in the United States and a leading radiology-focused digital health segment that is building innovative workflow and clinical solutions, RadNet is at the nexus of this industry's transformation. Over the past five years, RadNet has been investing in both clinical and operational artificial intelligence. Within clinical, or predictive AI, the focus of our investments and development efforts are in two areas. The first is in the development of interpretive AI solutions focused on population health screening. Today, the diagnostic imaging industry principally performs procedures on patients who are already symptomatic, sick, or injured. In contrast, the solutions being developed in breast, lung, and prostate are designed to lower the cost and increase the effectiveness of diagnostic imaging-based screening tools to detect diseases earlier when better patient outcomes are achievable. Launching the EBCD AI-powered breast screening program, working with the NHS in the U.K. to implement the targeted lung health check program, and beginning an MRI-based AI-powered prostate screening program are examples of what is possible in diagnostic imaging-based population health. The second area of RadNet's clinical AI and technology investment is in AI tools that can make the clinical staff, technologists, and radiologists more productive. Two examples of these are the recent purchase of See-Mode and the recently FDA-cleared TechLive solution. In regards to See-Mode, the technology eliminates certain manual processes of technologists and radiologists in conjunction with commonly performed thyroid and breast ultrasound exams, thereby increasing center-level productivity by reducing scanning times and creating valuable scanning capacity. TechLive, as we discussed earlier, reduces exam room closures from insufficient staffing and allows for the expansion of hours of operations, thereby helping to create scanning capacity. Within operational or generative AI, the focus has been on developing DeepHealth's OS, a comprehensive end-to-end cloud-native operations and image management solution designed to automate many of the manual functions that are currently performed throughout the diagnostic imaging workflow. RadNet's performance in the second quarter reflected some of the early benefits from these strategic technological initiatives and investment in both clinical and operational AI. During the quarter, revenue was enhanced from the clinical investment in screening programs from breast, lung, and prostate and from the early deployment of TechLive. In addition, costs were reduced and margins were improved from some of the early implementation of certain DeepHealth OS modules at selected RadNet centers. In the coming quarters, we will continue to expand all of these programs within RadNet centers, and we'll be more actively marketing the Digital Health solutions through external customers, including some of our existing health system joint venture partners and current customers of our legacy eRAD software solutions. We look forward to updating you on our progress in the coming months. Operator, we are now ready for the question-and-answer portion of the call.

The first question comes from David MacDonald with Truist.

I have a couple of questions. First, could you discuss what you expect once everything is fully rolled out in 2026, considering the additional capacity from new facilities and improvements in technology for faster processing? Can you provide some insights on the incremental capacity you anticipate or the additional efficiency with your current workforce?

Thank you for joining us, David. I can illustrate my point with examples mentioned in our prepared remarks. For instance, in our New York market, which shows the highest demand and staffing challenges, we managed to cut the hours our centers needed to close for certain modalities by 40%. Specifically, I’m referring to MRI, where we see the most significant adoption of TechLive. This improvement has allowed us to expand operational hours and create additional capacity, which can only be beneficial if there is sufficient demand for procedures to fill these new slots. We decided to introduce this in the Greater New York City area due to the high volume of procedures and strong demand we experience. This demonstrates the positive impact of TechLive, as it helps us reopen rooms that would otherwise be shut. Using this as a benchmark, we can reasonably estimate similar outcomes in other locations, leading to a 40% increase in capacity for those centers that had rooms closed. For example, if we closed a room for two hours or could open it for two additional hours, and each hour accommodated three patients, that translates to six patients per day. With enough demand to fill these slots, the revenue potential rises significantly. Additionally, regarding equipment upgrades, we've enhanced some of our MRI scanners with software that accelerates imaging processing, thereby reducing the time patients spend on the scanner. On the West Coast, where we implemented many upgrades, the investment was relatively modest—around $150,000 to $200,000 for software versus approximately $1.5 million for a new MRI scanner. This allowed us to perform an extra four to five scans per day within the same operating hours, presenting a substantial opportunity for revenue growth. We view this as a strong benchmark for margin improvement. While increased revenue is beneficial, our existing operations and future plans could also drive margin growth, but we need more time to measure improvements from the DeepHealth OS system as it rolls out over the next 12 months. In summary, two key points: firstly, enhancing capacity with minimal investment is a clear factor in improving margins; and secondly, completing the transformative process for the patient experience could bring an even greater impact once fully implemented and the tools deliver the expected results.

And then, there are a couple of points to address. I apologize for that.

No, I was going to just add one more thing to Dr. Berger's answer, which is to say that this year in 2025, we are targeting to build 11 facilities, and we've opened 2 thus far. We've got 9 that are on the docket for the second half of the year to open. And we have 11 projects in the works for additional de novo facilities in 2026. So if you add those 2 together, you're talking about 22 additional centers on 405 current locations. So that's about a 5% increase in centers, or additional potential capacity to be filled going forward. So the combination of what we're trying to do within the existing footprint, as well as expanding the existing footprint pretty substantially, I think, should give us the ability to continue to drive similar types of same-center procedure volume growth into the future.

And then, guys, just a couple of other quick ones. One, can you just give us a sense of initial feedback from the iCAD customer base, how you think about the cross-selling opportunities, and just as you start to put the two companies together?

Well, I think we're a little bit early in that journey, David, given that we just closed and are starting to do a deeper dive into iCAD as of July 17. So we're barely three weeks into that process. What we are pleased with is the quality of the sales and marketing team, the engineers, and the management team, to help embrace both cross-selling and most importantly, take the iCAD products along with the DeepHealth's breast AI products and put them into a more comprehensive offering. So I think it's a little early to give you more specifics other than we're very pleased with what we see so far. And I think I'll be able to make more comments on that at the end of our third quarter financial reporting.

Okay. And just last one for me. Just curious, additional conversations, or anything that's been prompted by some of the EBCD reimbursement announcement that you guys put out. Just what you're hearing from other payers in terms of potential further expansion of coverage of that product?

Yes. That's another one of those journeys that we're going to have to be patient with. But I think the announcement that we did at one of our capitated groups has now endorsed and is paying for EBCD for all their membership at no cost to their patients. Should be some impetus for other payers to recognize that the value proposition that we're talking about is rather profound. And I think putting pressure to have these kinds of screening tools, particularly, I think, at what I believe are very modest prices and recognize the opportunity for better outcomes is extraordinary. And I think we are having conversations with a number of the payors. It's just a matter of time until this becomes fully recognized as the state-of-the-art here in the U.S., and it's adopted. But I think we're just going to have to go through the efforts of having the consumer, meaning our patients, recognize it ahead of perhaps the payors that are going to adopt it, put pressure themselves on those systems to do the right thing, and that is to make good medicine, good business.

The next question comes from Brian Tanquilut with Jefferies.

Congrats on the quarter. Mark, to follow up on some of the acquisitions you've made, See-Mode stands out as a technology that supports the other side of the business, even though it operates under Digital Health. Howard, you mentioned how technology is helping to increase capacity. I'm curious about quantifying this. Is there enough backlog in demand that adding capacity will also lead to increased revenue? Regarding See-Mode, I recall you mentioned it adds around two scans a day, which translates to a significant number overall. Can you elaborate on your thoughts about this and what kind of margins we should expect from these technology additions to the business?

It's always a pleasure to speak with you, Brian. Let me frame my response using some examples you've mentioned. We see three main ways that See-Mode, particularly its thyroid ultrasound AI, will benefit us, which influenced our decision to acquire rather than just license it. The first point relates to radiologists. Thyroid ultrasounds are among the most challenging and time-consuming diagnostic procedures in radiology, requiring significant manual effort from both radiologists and technologists. Our early results suggest that the interpretation time for thyroid ultrasounds could be reduced by about 50% after a substantial trial using the technology. This improvement will increase our radiologists' capacity and decrease our reliance on external teleradiology services to meet demand. On the technology and equipment front, initial reports indicate we can cut scan times by at least 30%. Typically, an ultrasound takes about 30 minutes, so a 30% reduction would be significant, potentially allowing for one to two additional slots per hour for each system. However, similar to my comments about MRI, the demand must match this new capacity if we implement it. Additionally, not every ultrasound unit will perform at the same level; consequently, our busiest centers will benefit the most. Currently, we have over 900 ultrasound machines across 326 centers, with about 25% to 30% now utilizing See-Mode, primarily in areas experiencing the most significant challenges. Ultrasound imaging has always been highly sought after and is likely growing faster than many other procedures, making it a major focus for our next AI enhancements after mammography. I anticipate that we will have better statistical data on this soon, even with modest increases in capacity. The key will be to ensure that our scheduling synchronizes with the newly created capacity to meet specific demand at each location. Our teams on both coasts are confident they can achieve this, but there will be an adjustment period because it's essential to integrate the changes into our overall workflow for success. The potential numbers are quite impressive, and we believe that not only RadNet but the entire industry will benefit, driving sales opportunities and enhancing our platform's commercial capabilities. It may be a bit premature to provide more specifics, and I prefer to wait until we have more data. We completed the See-Mode acquisition on June 1, and after testing, we're fully deploying it to upgrade the remaining 70% to 75% of our ultrasound scanners to this technology. We're eager to expedite this process. In the past, I've expressed that if we had enough rooms for ultrasounds, we could fill them. Now, we believe we don't need more ultrasound systems or technicians; we need to improve capacity on our existing machines.

I'll add one more point regarding the flow-through and margin. The flow-through will be significant because we're simply increasing the number of scans performed in the same facilities during the same operational hours. Essentially, See-Mode allows for reduced scanning times. Therefore, the primary cost associated with these additional scans at the same centers and within the same hours is mainly the radiologist's fee for interpreting the new scans, which typically falls in the 20% range, give or take a few points on that revenue. As we've always stated, our most profitable growth stems from generating more revenue while utilizing the same fixed cost base of our centers.

No, it's great. It sounds really good. Mark, as I consider mergers and acquisitions and capital deployment, I know you utilized a credit facility during the quarter, which means your cash balance is even more substantial now. I'm interested in your thoughts on capital deployment specifically regarding M&A. Also, I know you're working on 11 new locations, so I'm curious about how you're approaching the costs of that and what your expectations are for these new locations as we look ahead at growth opportunities.

Our pipeline of opportunities has expanded, and we feel more confident than in previous quarters about utilizing some of our cash balance in the second half of this year. We are particularly focused on traditional imaging center acquisitions and some new joint ventures where we will invest capital. Additionally, we are assessing a few potential Digital Health acquisitions. We anticipate being able to discuss these developments publicly in the coming months. On the de novo front, we aim to open nine new facilities by the end of the year, which we hope to achieve. Furthermore, we have eleven additional facilities in various stages of development and construction, expected to open in 2026. Looking ahead, we will continue to determine the best use of our capital based on the available opportunities, whether for M&A, de novos, or hospital joint ventures. Currently, we see significant potential on the de novo side, especially in areas where there is high demand in local markets or where we lack access points to serve patient populations effectively. We are continually assessing the optimal allocation of our capital.

The next question comes from John Ransom with Raymond James.

A couple for me. Mark, as we think about M&A, and I know you haven't announced anything, but just directionally, how should we think about the next year, currently considering in digital assets versus traditional imaging assets?

Sure. I think more of the capital is going to be allocated at this point, given what we see and what we have in the pipeline towards the Imaging Center and the traditional services business. There are some acquisitions we are looking at on the Digital Health side. I think most of them are smaller than the iCAD opportunity, so I don't necessarily see us using a lot of our capital towards Digital Health at this point. Obviously, that could change if something compelling comes up. But right now, the majority of our actionable pipeline is on the imaging services side.

Great. For my second question, Mark, as a state school graduate, I find the Digital Health story has become complex. We are still working on it and figuring it out. For now, let's focus on the technology in your core imaging segment. There are several developments taking place. There's the transition to DeepHealth OS and remote technology, which you've discussed extensively in this call. I know you have a call center that you invest significantly in. If we could envision a few years ahead, and I’m not asking for guidance for 2026, could you provide an idea of what kind of margin this could unlock once fully implemented?

Well, I think the best way to answer that question is to look at some of the other radiology software providers, or just SaaS-based software businesses out there that where we think, and we hope, and we aspire to grow our Digital Health software business in the range of 30% per year for many years to come. That doesn't mean that every year might be 30%. It could be a little lower, a little higher in any given year, but that's the trajectory that we're looking for, for that business. And we think once mature, if you look at other SaaS-based software businesses, we should have EBITDA margins approaching 50% with little capital intensivity certainly as compared to our core Imaging Center business.

That was a different question than I asked, but I appreciate the information. Now I'm inquiring about the core imaging aspect. Once you fully implement the DeepHealth iOS and remote technology, and potentially explore some opportunities in your call center, what do you anticipate the EBITDA margin unlock percentage for imaging will be once all these tools are completely deployed in the coming years? I am not referring to the Digital Health segment; rather, what impact could this have on your core business?

Now I understand your question. Yes. Howard, do you want to take that? Or should I give it a try?

I'll give it a try, and then you can expand on it, Mark. John, you need to focus not just on the overall total, but on the individual components that will contribute to the total savings. Our platform is modular, enabling us to assess one function at a time, or multiple if preferred, to evaluate the potential impact of transitioning from a labor-intensive process to a more technology-enabled one. For instance, in our contact centers, we currently track the average call handling time. While some calls are shorter, if we consider 5 minutes as a standard duration—which I believe is actually longer—a modest 10% reduction in every logged call would result in significant improvements, particularly when we handle around 11 million procedures each year. Each procedure generates multiple calls, not just for scheduling, but also for inquiries like directions or insurance information. We believe we can positively influence these interactions. Simple calculations show that achieving a 10% improvement is quite attainable, leading to staggering numbers. While this may not reduce our workforce, it enhances the productivity of our current employees, allowing us to increase volume without the ongoing challenges of labor costs and availability that the entire industry is dealing with. We could gather some statistics around this in the future, though we have not done so yet. Every initiative we pursue will incorporate either a full or partial element of artificial intelligence, as mentioned in my earlier comments.

Maybe you can tell, what do you spend on your call center today? What's that cost?

Yes. Our overall call center cost for the company is north of $60 million a year. That includes the people, the systems, the facility rent, services that we currently use offshore. So it's very substantial.

Yes, I've been following your company for a long time, and I don't believe I've ever discussed the cost center. So, I might be late to the conversation, but I find that quite interesting. Additionally, Mark, you've mentioned previously that deploying your centers on DeepHealth OS is an 8-figure investment. I understand you're just beginning that process. Is the objective still to complete this by the end of the year? Have you considered narrowing down that investment amount, as 8 figures could range from $10 million to $99 million?

It's difficult to provide a specific number at this moment. We are exploring new avenues with our Digital Health initiatives, and as we begin to implement these, particularly with the TechLive pilot, we will gain a clearer perspective. As we approach our budgeting process at the end of this year and start planning for 2026, I believe we will have a better understanding. However, some of these modules will not be adopted until 2026 or throughout that year, so even if we were to estimate a significant figure, the realization will be gradual over the next few years.

The next question comes from Andrew Mok with Barclays.

Just one question for me. Mark, I think you called out a $4 million to $5 million benefit from the physician fee schedule next year. I think this year's rate headwind without the doc fix was $7 million to $8 million, and the headline rate update next year would suggest at least 3% or 4%-plus and maybe a larger benefit than what you called out. So can you help us understand the items weighing on that benefit when you did the CPT analysis?

Yes, absolutely. We consistently advise people not to simply take the headlines from news articles or CMS tables at face value. It's crucial to examine each CPT code individually and consider the geographic codes relevant to where you operate in the United States. Often, what may appear to be a significant impact may not reflect our actual experience, as traditionally we have faced cuts, though ours may not be as substantial as the initial figures suggest. The same applies to next year's projected increases, which also may not match the headline figures. While the conversion factor is set to rise by 3.3% next year for non-APM facility-based Medicare fee schedule billers, individual CPT codes show numerous adjustments. Specifically, there are reductions to the practice expense portion, resulting in some RVUs and geographic codes declining, which diminishes the overall benefit reflected in the headline figures. We conduct a thorough analysis annually, and we are confident in anticipating a 4% to 5% increase in our reimbursement for next year.

The next question comes from Larry Solow with CJS Securities.

Howard, you provided some excellent insights on the See-Mode strategy, which I find very logical. I’m interested to know about the strategy with iCAD at a high level. Your involvement with mammography procedures is increasing significantly. Is the plan primarily to upsell your AI equipment to these clients, or is it a mix of the ProFound breast health suite that iCAD offers along with your technologies? Could you elaborate on this from a high-level perspective?

Sure, Larry. The iCAD products, which is their ProFound suite and the DeepHealth product, which is primarily our Saige-Dx platform, or Smart Mammography, are really very different in some respects. And well, what our teams are working on already is how do we blend those into a single set of offerings to both the current RadNet customers as well as iCAD customers. But I would also like to point out that iCAD also has a couple of other products that they either have or will be getting FDA approval that we can add to the existing EBCD program that will expand the value proposition for early breast care detection. So we're still working out some of those details. And again, this has only been the last three weeks that we've been able to speak directly to the various people and departments inside of iCAD. But I think you can expect both customer bases, if you will, that which iCAD brought to the table and which RadNet is bringing to the table, to be beneficiaries of a more comprehensive solution, not only for the mammography that we're doing here in the United States. But iCAD, I want to point out, has a substantial number of customers outside of the United States, primarily in Europe that we think some of our other products in the DeepHealth program or just in mammography will gain a lot of traction. So we're very pleased that we've done the iCAD transaction. And I think the marketplace should be pleased with that too, because I think putting these two brands together is going to have a far greater impact on the overall value proposition of artificial intelligence and early disease detection. And I'm specifically using the word disease detection and not breast cancer detection because some of the tools that we're looking at, things like risk assessment and breast arterial calcification are all things that fall into the category of screening but not necessarily just for breast cancer.

I appreciate the information. Mark, I understand you cannot provide guidance at this moment, but from a broad perspective, when you first announced the acquisition, you mentioned that there was some organic spending you planned which might not be necessary now that you are acquiring iCAD. Is that still the case, especially since you have a few more months to plan your internal strategy?

Yes. Before we announced the iCAD acquisition, we had planned to allocate up to about $20 million for additional infrastructure investments in Digital Health for 2025. This was why we did not expect to see significant profitability in that business in 2025. However, with the iCAD acquisition, some of the infrastructure investments earmarked for sales and marketing, commercialization, customer support, and implementation will now be supported by the iCAD transaction and the talented team members we have brought on board. We believe that in this quarter and when we report our third-quarter results in November, we will update our guidance for Digital Health. This update will reflect the revenue contributions we anticipate from both iCAD and See-Mode in the second half of the year, along with any adjustments we may make regarding profitability, which will include the benefits we discussed.

The next question comes from Yuan Zhi with B. Riley.

Congrats on another strong quarter. With increased utilization mentioned by multiple payers, how did that impact your conversations on capitated contracts?

Are you asking if the improved pricing from some of the commercial insurance companies is influencing our perspective or outlook on capitation? Is that correct?

So my question is the multiple health care insurance companies have mentioned that they have increased utilization, including imaging and diagnostic imaging. I wonder, did they try to hedge those risks by signing more capitated contracts? And how does that impact your conversation of capitated contracts?

We have been in the capitation business for nearly 30 years and enjoy it. Most of our business is in California, and we have managed nearly 2 million lives at our peak. We are comfortable with taking and managing risk. Our capitation contracts have been quite profitable over the decades. However, as you noted, utilization in diagnostic imaging continues to rise. We experience this within our capitation contracts, and upon renewal, we need to ensure we are compensated fairly based on the efforts and the number of procedures involved. In cases where we believe the compensation is insufficient and we cannot secure the necessary increases, we transition some of these contracts to fee-for-service agreements. Under these arrangements, the clients are no longer required to send us all their patients as they did when we were capitating for them. However, due to our strong position in many local markets, we typically see most, if not all, of these patients anyway under fee-for-service contracts, where we can negotiate significantly better pricing. Consequently, over the past four to six quarters, while our capitation revenue has decreased, our overall revenue has increased because we obtain better reimbursement by converting some contracts to fee-for-service. The capitation arrangements we continue to have are at rates we find suitable given our other business contexts.

Got it. And then for this remote scanning solution, how quickly do you think you will be able to deploy it outside of the New York facilities? Any regulatory requirement for someone, let's say, in California to operate a machine in New York?

We have already started that process. Our technologists in Florida are using scanners in New York, and those in Arizona are aiding with scanning in California. We have expanded beyond just the New York market, which I mentioned because it is one of the most developed areas, and the demand issues are significant there. We aim to have the remainder of our MRI fleet equipped with TechLive by the first quarter of 2026. We are making rapid progress on that front right now.

We're also testing the ability for technologists to control multiple machines at one time. While not all of our techs may have the capabilities to do this, it will give us additional leverage with our labor force and allow some of our technologists to earn more money and be more productive.

Got it. And one last question from us. Considering the rapid increase of Alzheimer's related imaging, where are we in terms of the current capacity utilization for PET scan and MRI to have the remaining capacity for more backlogs or for utilization?

Yes. Go ahead, Howard.

Yes, I believe the answer to that is affirmative. The increased demand we're observing for MRI likely stems from Alzheimer's. After performing a PET/CT scan to identify a patient who may qualify for drug treatment, it typically leads to conducting three or four MRIs during the first year of treatment. Therefore, we're experiencing an enhanced benefit, as our MRI scanners are facing greater demands due to the success of our amyloid and Alzheimer's program, which has significantly expanded since the start of the year.

Regarding the PET/CT capacity, we currently have a significant amount available. If we calculate the PET/CTs completed this quarter and project that over a year, we are close to 90,000 scans annually. This is based on operating around 68 or 69 PET machines nationwide, assuming they are open for 255 workdays. On average, we are conducting about 5 scans per machine each day. A highly utilized PET/CT scanner can handle over 15 scans daily, indicating we still have ample capacity to expand our PET/CT services, including the PSMA business, amyloid brain studies, and other specific or complex exams using new radioactive tracers. However, we may face capacity challenges with the CT aspect since most of our PET/CT scanners also perform traditional CT scans when not in use for PET/CT. As demand increases, we may need to transfer some of the CT workload to additional scanners or expand our capacity.

The next question comes from Jim Sidoti with Sidoti & Co.

Can you give us some sense on how many centers or what percentage of your 405 centers are now using DeepHealth?

Well, Jim, it's great to hear from you. None of the centers are really utilizing the DeepHealth operating system platform with more than one or two modules. One of these modules is TechLive, and we're also starting to deploy our new reporting tools which significantly reduce the interpretation time for our radiologists and allow us to transition to our own platform rather than the one we currently license. Additionally, we are working on our contact centers and kiosks in our imaging centers. All these are being tested in various ways on a case-by-case basis. At this moment, no one is fully leveraging the capabilities of the DeepHealth OS in the outpatient space, even within RadNet, as we are still fine-tuning some of the algorithms and protocols associated with it. However, we are gradually testing every aspect of our operations to enhance nearly every part of what we call the patient journey. This includes scheduling, call-ins, notifying patients about necessary prep for specific exams, providing directions, and addressing many inquiries through chatbots instead of live representatives. When I mentioned the scale we’re aiming for, even a 10% reduction in call time could have a significant impact, considering we process around 11 million procedures, with each procedure averaging about three to four calls. This suggests we might be handling around 40 million to 50 million calls a year. As Mark pointed out, the expenses associated with our contact centers are quite high, but they can manage additional capacity if we implement these efficiency tools.

So how long do you expect it will be before you are fully implemented in your centers? Are we talking about 12 months, 18 months? How long do you expect this process to...

Yes. We're probably talking about towards the end of 2026 to have it fully implemented with all of these tools. So I think 15 to 18 months for all of the centers. There will be some of the centers and some regions that will go ahead of others, obviously. But our timetable is to not rush this because it's a heavy lift number one. And number two, it is the platform that we think will be a one of a kind in the industry that we're going to get a lot of traction externally for. So we want to make certain that we test this out in an environment at scale that can truly make certain that it achieves all of the operational performance tools that we know are capable.

Okay. And then for the second quarter, what was the same-center volume increase just on an overall procedure basis? I know you called it out for some of the different modalities, but overall, what was the same-center volume increase? We have begun separating our reporting into advanced imaging and routine imaging because we perform significantly more routine imaging in terms of procedure volumes, roughly 75% to 25%. However, the advanced imaging, which makes up 27.5% of our procedure volume, accounts for between 60% and 65% of our revenue. If advanced imaging were growing rapidly while routine imaging did not, blending the figures would misrepresent the situation. To directly answer your question, the combined increase for MRI, CT, and PET/CT advanced imaging was about 6.6%. Specifically, MRI increased by 6.6%, CT increased by 5.9%, and PET/CT saw an increase of 16.2%. In contrast, routine imaging, including ultrasound, mammography, and X-ray, had a modest increase of around 1.25% to 1.4%. When we used to combine these figures, it would show an overall increase of approximately 2.7% in all procedure volumes, but we are no longer doing that due to the distortion this creates.

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