RadNet, Inc. Price & Performance (RDNT)

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 RadNet Report on Form 10 ks for the year ended 12/31/2024, 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 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 Doctor. 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 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'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.

With that, let's begin. I am very pleased with the performance in the fourth quarter. It was the strongest quarter in the company's history with record revenue and adjusted EBITDA.

Total company revenue increased 135% to $477,100,000 and adjusted EBITDA increased 14% from last year's fourth quarter to $75,000,000 Digital health revenues increased 28.1% to $18,900,000 dollars and Digital Health's adjusted EBITDA increased 61.6% to $4,500,000 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 healthcare 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 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 towards 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 of the PETCT 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 we require 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 three ninety eight 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 side of care towards 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 on equipment and commercialize the TechLive remote scanning solution for MRI and other modalities. During 2024, we also continue to build executive management capabilities within digital health, culminating with Keith Wipstorf joining as the CEO of the Digital Health Division in September of twenty twenty three. Throughout 2025, we will be focused on implementing these detailed 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 $20,000,000 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 financially financial leverage. At year end 2024, Redneck's cash balance was $740,000,000 and the net debt to adjusted EBITDA leverage ratio was under [indiscernible] During 2024, we consummated a $230,000,000 stock offering in March a debt refinancing transaction in April, which lowered our cost of of capital and extended maturities through 02/1931 and a debt repricing transaction in November which further lowered the interest cost on RadNet's credit facility. At this time, I'd 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 he is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our our fourth quarter and full year 2024 performance and a I will also give some further explanation of certain items in our financial statement 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 [indiscernible] 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 other income or loss loss on debt extinguishments and non cash equity compensation. Adjusted EBITDA includes equity and earnings of unconsolidated operations and subtracts allocation of earnings to non controlling interest in subsidiaries. And is adjusted for non cash or extraordinary and onetime 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 contained in yesterday's earnings report, here are some highlights. Fourth quarter total company revenue and adjusted 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 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. 8% aggregate and 44% same center procedure volume growth drove much of the top line performance. Also benefiting the fourth quarter was the continuing shift 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 Center segment as well as digital health. We finished 2024 with a strong cash and liquidity position [indiscernible] At year end, we had over $740,000,000 of cash on the balance sheet full availability of a $282,000,000 revolving a term loan that is priced at SOFR plus two twenty five basis points reflective of the financial repricing transaction we completed refinancing transaction we completed in April and the repricing transaction we completed in November. Continued improvement in revenue cycle has kept our DSOs our days sales outstanding at thirty two point three days our record low.

With regards to our financial leverage as of 12/31/2024, unadjusted for bond and term loan discounts we had $268,800,000 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 Networks RadNet debt of $41,400,000 for which RadNet is neither a borrower nor guarantor. [indiscernible] 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 While I'm not going to run through all the numbers the numbers on this call, I will emphasize some important points. In January and February of twenty twenty five, we experienced severe winter weather conditions.

These winter weather conditions were significantly more severe [indiscernible] As a result, our operations in the Northeast Mid Atlantic and in Houston, which together account almost 60% of our revenues, we impacted materially. Winter storms impact our business principally in two ways. First, the patient schedules on the days of the storm suffer from cancellations due to difficult travel conditions loss of powers 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 storm. Unfortunately, once scanning slots go unused, they are never 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 Wild 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 healthcare was not a priority for those impacted by the wildfires. We estimate that the impact we saw was approximately $22,000,000 of revenue and $15,000,000 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 twenty twenty five remain unchanged from the original budget. In regards to the digital health reported, reportable segment, we are anticipating 2025 revenue growth in the neighborhood of 30%. This growth will continue 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 tech live portfolios. The growth in digital health adjusted EBITDA is expected to lag revenue growth due to approximately $20,000,000 of planned investments throughout 2025 in the infrastructure which is necessary to support external customers. Areas of investment include sales, marketing, customer support and implementation. I'd now like to turn the call back over to Doctor.

Berger 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, which appear to unlikely be abated 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 [indiscernible] Through providing digital health solutions which address the most critical industry needs. The announcement that was made earlier this week with OB Guinee Specialists of Palm Beaches is a case study of how RadNet can be a solution provider to enable leading edge diagnostics imaging at the point of care enabling physician offices multi specialty medical groups, urgent care centers in addition to OB GYNIO offices with tools to provide high quality, cost effective diagnostic imaging. Which will increase access to imaging services particularly for mammography, ultrasonography and X-ray. These These routine imaging procedures represent about seventy five percent of [indiscernible] 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 healthcare 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 thirty five plus year 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 largest equipment manufacturers and more recently its newly developed array of digital health solutions, including the Deep Health OS, smart mammography, smart sonography TechLive RadNet its ability to develop and commercialize critical AI tools, so such as what we have already accomplished in breast, lung, prostate and brain. These essential solutions are driving our continued focus and 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 be opportunistically in evaluating acquisitions that serve to either add new products and [indiscernible] 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.

We will now begin the question and answer session. First question comes from David MacDonald with Truist. Please go ahead. Hey, good morning, guys. So guys, just one quick question. Just wanted to ask a quick follow-up on the weather impact piece. So it sounds like I just want to confirm more on the Wildfire Southern California piece.

As you guys kind of look out at your scheduling and this and that, you expect to be kind of 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 first contextual world. Okay context here. The firestorms and I want to use the word storm, in Southern California, particularly in the Los Angeles area, Pasadena area, Riverside and Ventura County, we're like almost a snowstorm. In the sense that it impacted virtually everybody throughout Southern California having lived through that because of location and the corporate headquarters here in Los Angeles everybody was impacted by this. I can tell you that daily basis, people were glued to the television watching these fires just to get some sense of when relief might occur. And when we could start returning back to normal. In addition to that, the air quality was noticeably dangerous and people were just reluctant to travel which was all hampered by the fires and the emergency vehicles that were given obviously first priority and being brought in from all over not only Southern California, but other states. So the impact of this is not just a simple fire, but effectively could almost be thought of as like a massive snowstorm that not only impacted the days and in this case about ten to weeks ten days to two weeks that this ongoing saga unfolded. Both afterwards, both in terms of people who were uninfected directly, but indirectly and new people that were impacted and we're reaching out to try to provide their own comfort and aid.

So that being said, we have recovered I believe, as back to normal probably within the last ten days. And find ourselves slowly in back to or perhaps even exceeding in some areas the volumes that we had projected for the first quarter And if you add what we estimate our loss of business was the first unimpacted by both the firestorms here in Southern California and the severe winter weather conditions on the East Coast, we probably would have met or exceeded our first quarter budget. That being said, and more directly your answer question, Dave, We believe that March should be a very normal month for us. As indicated, as I mentioned by the improved volumes we're seeing throughout the company in over the last ten days. As well as March being a more normal month from a climb climate standpoint that we expect not to be impacted. By weather. So I think January and February were extraordinary circumstances. That affected not only RadNet, but virtually everybody in those markets and every business and is unfortunately something that we just have to absorb. But extremely confident in the rest of the year and March going forward that the budget projections and expectations will be met and and hopefully exceeded.

As we as we have done almost for every quarter in the last two to three years.

Okay, great. I guess second question, just I realize it's early, but any early learnings from the OS rollout as you guys start looking at some of your internal metrics or just some of the feedback from some of the clinical folks, just any early learnings there? Or is it a bit too early to start asking for that?

Well, I think it's a little bit early Dave, but We have a very close collaboration as you would anticipate, but And testing and rolling out the enormous changes that will occur as a result of the Deep Health operating system. And I think all of our physicians as well as the tech staff and our more administrative staff, particularly in the scheduling, insurance verification, are all very enthusiastic about the opportunities for very substantial change in virtually everything that we do. You would have think that this is a logical extension because kind of go through these changes, if you will. Things like [indiscernible] scheduling and contact centers, other kinds of insurance triaging through bots. Are all routine in a number of industries. We happen to be a little bit more complicated because the insurance industry itself is one difficult for people to navigate through in a live presentation, not to mention all of the thought that has to go into creating this. So We believe that we're on target to implement most of the OS system here in internally through the three quarters remaining in this year. And as we present this, to the various constituents in In RADNet, on the services side, they come up with very valuable recommendations on how we can continue to improve it.

That I believe is a critical part of the value proposition that RadNet plays in creating these deep health solutions, if you will. That the services side of our business and the digital health side that really was born out from the services side.

Work together very collaboratively and will produce a product that is unlike anything in the industry from certainly a operational side and I believe also from the clinical side. I I believe that some of the efforts that we're working on And the digital health area, will become a little bit clearer as to how we want to be the leading operator and developer of these solutions in the industry particularly as I mentioned in some of my closing remarks, into other point of care providers that will help drive the access for the increasing demand, particularly surrounding around routine imaging. That nobody else is focused on. At all, including OEMs in radiology.

And then guys just last one for me. Just anything that you would with regards to I guess two par question, with regards to the pipeline, anything that you'd call out in terms of either size of the deal you're seeing, anything happening with multiples, etcetera? And then I guess the second part of the question is, can you provide a little bit more detail on the Palm Beach OBGYN deal? That something where they came to you, you guys reached out to them? Are you getting both incomings and I assume doing outreaches? Just any detail on how that kind of came together would be interesting. Thank you.

Let's see, Dave. Yes, yes and yes. They reached out to us because of their own concern and dissatisfaction with some of the professional and operational relationships that they had. It was a very [indiscernible] conference or not conference, but call and then ultimately arranging a new solution for this group, which is quite large. It's the largest provider of OB GYNY services in the [indiscernible] With 10 offices, five of which provide mammography services. And when we went in, while their focus was primarily on professional services, we could quickly were able to have them adopt some of the digital health solutions surrounding [indiscernible] [indiscernible] [indiscernible] both scheduling as well as their annual visits and sometime in the March, they'll actually be RadNet which we'd expect to have very substantial endorsement and adoption for. So what we their inquiry originally came from was to provide better quality professional and interpretive services and we were very quickly able to add the other operational capabilities as well as artificial intelligence that they had not ever seriously considered. So This is a case study for us and one where I believe there will be a lot of other opportunities As I mentioned in my remarks, in the OB GYN area that we want to aggressively pursue both to improve access for mammography to help more of the women that aren't getting their annual screening done as well as elevating the quality of the service to take what we believe is now the standard of care with artificial intelligence.

And I'm proud to say that on the East Coast and in our in our Florida market, well over fifty percent of our patients are opting in for our early breast cancer detection. So we expect that to even be greater where there's better control of the patient particularly for the woman to get that [indiscernible] with their wellness visits. And so this collaboration, I believe, once and it won't take us that long to ramp this up, once we're able to statistically demonstrate to the marketplace the value prop various lines of service, not only as a company, but bringing in professional services also really is looking at the turnkey solutions that I was talking about in the my last part of my remarks that I think are really critical to help decompress also some of demand for routine imaging at [indiscernible] more and more difficult for outpatient imaging centers as well as hospitals to absorb. [indiscernible] Very much guys. Appreciate it. Thanks Dave. 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 we think about your comment that volume has bounced back after the impact of the storms. You can give us some color on kind of what kind of growth rates are you thinking about or contemplating in the guidance prior to this and then then kind of like just any observations if there's like the demand dynamics in the market?

Sure. So if you were to take the guidance that released last night and you add back the revenue which we've estimated that we lost, meaning the $22,000,000 and you look at sort of the midpoint of that guidance RadNet, it implies about a 7% there and which we think is we're very, very confident in and highly achievable and we're hoping to exceed that as we have in the past few years and adjust our guidance throughout the year. Within that, we're assuming that that is being driven by procedure volume growth and implied in the procedure volume growth is about a 3% same store sales growth year over year. Which is more in line with our historical same center performance. It's less than what we've been achieving over the last several years. And so I think that there's some potential conservatism built into that. But given that we started off the year with January and February and all the impacts of the wildfires and winter weather conditions on the East Coast, we didn't have a very good view on the trends in the business because of those impacts. And so we wanted to be what we felt was conservative for the remainder of the year.

Totally understand. Then maybe Howard, as I think about the comments on the $20,000,000 of infrastructure investments in the digital health side. If you can walk me through, number one, is this going to be the run rate or do you think you'll have to add to that over time as the business keeps growing? And then second, what are you seeing in the market that for digital health that has prompted you to make these investments today? I mean, you have visibility to like contracts whether it's hospitals for digital health or just other requires you to put that level of investment into the business today.

Hi. Good morning, Brian. Thanks for the question. One thing I just before I respond to your question to me, just to add a little color to Mark's remarks is that there is no built in benefit from deploying internally the Deep Health operating system into the RadNet [indiscernible] [indiscernible] additional opportunity both on the revenue side as we create capacity and better through better workflow and efficiency as well as reducing costs which we expect to see predominantly in 2026 when we're fully implemented Some of it may occur. We just can't be certain as to how it will result in in costs that may give us some benefits, but may be duplicative for some period of time as we transition. So I want to emphasize that point that we we've put no built in benefit from what we know we'll see in 2026 into our 2025 forecasting. But more to the point here, I think a lot of the $20,000,000 that we talked about will be one time costs. Because there'll be be primarily in building sales team, marketing teams, implementation teams, and other aspects of taking on this enormous responsibility both seriously for RadNet's benefit as well as the industry I would tell you that every system that we are partnered with, every opportunity that comes to us for potential at from imaging center providers Every hospital that we talk to that are that we have currently joint ventures with or new ones that we're talking to, which are rather extensive all have the same two fundamental problems.

Number one, as we mentioned from repeatedly in our quarterly remarks, The shift of business away from hospitals for outpatient imaging into the outpatient centers And that's a trend that has accelerated particularly after COVID. The other thing is that they're all being challenged by the labor shortage pools. And that's not going to go away, whether it's the shortage that we have for radiologists or the shortage for technologists and other personnel So what we're building is something that arguably anybody could use to help better drive performance efficiency and improve quality of care. And when you look at the potential impact just in The U. S, of this. And one of the examples that I gave there's about three fifty million outpatient imaging procedures done [indiscernible] That number continues to grow probably at a three percent to four percent rate just based on population growth aging, and newer applications for this the technology that's being developed both in the AI space as well as from the equipment manufacturers themselves. So this increasing demand is something that everybody has to be sensitive to and which the current systems are just not capable of managing not only in a cost effective way, but really at a level of clinical efficiency and quality that the new technology allows us to do.

So So the investment of this could be justified simply to build this for RadNet RadNet. But whatever is good for RadNet will be good for anybody else in the outpatient imaging space. It doesn't mean that everybody is going to run to RadNet RadNet. But certainly nobody else in the space, whether it's the OEMs or other developers of artificial intelligence or other tools is taking on the magnitude of what we're talking about and potentially creating the impact, which will be beneficial not only [indiscernible] excuse me for imaging providers hospital or other or outpatient, but also for healthcare in lowering costs by detecting disease earlier. And that's what these systems ultimately are capable of doing and that's where the biggest benefit will be to society as a whole healthcare in general and radiology and in particular. And I think that's a very important social responsibility that at RadNet RadNet, we take seriously because I'm not certain who could do it at the scale that we're talking about and at the a rapidity with, I want to emphasize too all of our stakeholders lenders, analysts, We've only been in this business practically a year and a half We're not even at the two year mark since we assembled this team and officially launched at the beginning of twenty twenty four, the digital health division.

And I think what we've done in that relatively short period of time rivals people that have been in this industry and creating products for ten to fifteen years sometimes. So I applaud the efforts of my entire team both in the services division as well as the digital health division And I very seriously the responsibility to improve and lead Radiology and Diagnostic Imaging into the future. And that future is here today. Not something that we have to wait for us to hit us like a bolt of lightning. I appreciate that.

Maybe Mark just two quick follow ups. Just on Howard's point, right? So as I think about your guidance today, if not for the storms, the step up in an investment here, you would have guided to roughly $320,000,000 of EBIT so 15 percentage growth. Is that the right growth rate as we think about 2026 and beyond? And then my second quick follow-up is just the clinical AI revenues, if you could share that with for the quarter for Q4. Thanks.

Yes. So just on the first part of your question, if you add $15,000,000 of EBITDA to our guidance levels for both digital health and imaging services together, we're about $300,000,000 of EBITDA, which is which is where we were which is where our original budget was for this this particular year. And then what was the second part of your clinical AI revenue for the Q4? Yes. So clinical AI revenues of The Digital Health division for Q4 was about 6.5%. Hold on. Let me just look at a report that I've got here. We can take it offline, Mark. Yes. It's about 6 it's either 6.5 or $6,000,000 of the digital health and fourth quarter.

Awesome. Thank you. Congrats again. Okay. Thanks. Thanks, Brian. The next question comes from John Ransom with Raymond James. Please go ahead. Hey, good morning, everybody.

Few for me here. Mark, if we think about the Deep Health I'm sorry, not the digital health revenue guide for 2025. Can you kind of help us think about the different components of that including detail? Do you mean Deep Health OS?

Yes. Like what's coming from Deep Health versus what's coming from all the other stuff?

Yes, sure. [indiscernible] about $80,000,000 to $90,000,000 And then of that, we're expecting that the AI component will be in the range of $25,000,000 to $30,000,000 And then the remainder will be software. As well as our other technologies such as Smart MAMO and [indiscernible] So do you expect to convert all of your legacy Deep Health over time?

Hi, John. Yes, we do.

Okay.

We will sunset [indiscernible] the older platform for two reasons. Number one, it's an on prem service that we're still doing and we will be migrating the entire company cloud and not only for storage, but it will be cloud native they have all of our applications will be in our [indiscernible] network. And we hope to have that entire all the 400 centers on that cloud platform including our legacy system by the end of this year. So all of our legacy customers will be transitioned over to this new service. The second part of this [indiscernible] that when we talk about the digital health division, we really have to focus on three things. One is clinical AI, The second is the generative AI, which are the processes that we're going to use to change the way Our centers operate almost from very beginning of calling in for an appointment to the final bill and scheduling and reporting. [indiscernible] the other piece of this are ways that we believe uniquely that we can potentially accelerate this growth through the efforts of perhaps looking at other companies that we could acquire. So as opposed to what we've done in the past, [indiscernible] much of our capital has been invested in the imaging services side and will continue to be that.

We will look for opportunistic businesses that are synergistic with our platform [indiscernible] further develop those tools that we think clinically will help drive not only new revenue, but efficiencies in running Our business and allow us to become the leader in the development of Arto artificial intelligence for mammography ultrasound and X-ray. So I think the example that I gave and the importance of that was in the example with our latest efforts with the in the OB GYN space, And I mentioned other areas that we will pursue where all of these tools will be transformative and as opposed to perhaps a lot of the focus, which is of the of the OEMs in their development of the more advanced imaging tools meaning MRI, CT, PETCT, areas in mammography and ultrasound and X-ray, have been much slower to adopt a lot of the artificial intelligence that now almost all of the OEMs that we're talking to are looking for us to take our clinical expertise and help with the development of some newer tools in that area because they all see the opportunities now and the need to be transformative in the use of this technology throughout the I just want to clarify something with or reiterate with something.

I just got the numbers in front of me with what Brian asked with regard to the AI portion of the digital health revenue. So the digital health revenue in the quarter was 18,900,000.0 and indeed the AI piece was $6,700,000 of that $18,900,000 and that was a 31.9% growth in just the AIPs from last year's fourth quarter. I think we lost you, John. We can't hear you. Hear me now?

Yes. Don't ever get Apple ear pods, by the way. You guys have done a couple of nice capital raises, but obviously the money has been kind of sitting there. What What are the odds that you write a check out of that cash this year? Do you think Well, I think the odds are very, very high that we will be using some of that capital within 2025. And as Howard said in his closing remarks, that some of that capital could be used within the digital health segment for acquisitions that could either bring us new products and services or new clinical AI tools that will be important not only for our own business, but for external customers or for acquiring businesses that already have a significant customer base that we could then further penetrate by selling our portfolio of deep health products and services.

I'm sorry, John, there will be also acquisitions on, of course, as the normal course of business on the imaging center side. Have you been a little surprised nothing really has materialized in the core imaging business that has been of interest to you in terms of Biddesque or size or multiple or what have you [indiscernible] Your communication here is a little unclear sometimes, John. So I think I understand.

We're not [indiscernible] I don't think we're surprised as you are aware a number of larger consolidators our private equity backed and I dare say they're all for sale at the right price. The question is, what's the right price and if it doesn't fit in with the with the metrics that we think are important to maintain, appropriate leverage and and synergies that we traditionally expect from our acquisitions We just passed on them. So but we're actively working on a number of opportunities both in the digital health and in the Imaging Services division, which I believe we'll be able to talk about later in the year, And but we want to be very strategic and we want to be good. Stewards of how we use this cash. And it's better for us keep a good cash balance and ready to move on those deals that we think are accretive not only from a financial standpoint, but from a long term future and growth standpoint. And I think you'll be hearing more about that from us Great. Coming quarters. All right. Thanks so much.

Thanks, John. Take care.

And the next question comes from Andrew Mak with Barclays.

Please go ahead. Hi, good morning.

Wanted to follow-up on the labor remarks that you've made. I think you said it was unlikely to abate in the future.

You provide a bit more color on inflation trends you're seeing in the market? When did you see the acceleration inflation? How far along do you think we are in this cycle? Thanks. Thanks, Andrew.

I think we started seeing this two years ago. I mean, it was really the big right, really in COVID or right after after COVID? After COVID. So this is not something that we're that's unexpected I think what happened in COVID though to drive some of the challenges that that we and everybody are facing in healthcare, but particularly Imaging is the fact that some people are just throwing in the towel. They're either retiring earlier or they're being very more specific about where they want to work and how much work that they want to do. It's really created a different mindset altogether here. And it was probably something that was already simmering and brewing but the challenges that we've had from the labor market are really reflected because of the demand that we have for imaging. And so that's where the problem has manifest itself because have come out of the COVID period the demand has accelerated either because of delayed services like has been reported so much particularly for routine screening, procedures or just the continuing demand that the technology that we are providing has created in the way of better quality medicine. And the driver for that is something that I think has caught everybody by surprise.

So it's a combination of supply and demand the supply of the labor force not growing and maybe shrinking and the demand accelerating. I think our recognition of this two plus years ago was really what drove us into the digital health opportunity. We may not have gotten there were it not for this is our solution and for that matter, everybody's solution to deal with the labor issue. From a cost standpoint, we are analyzing this and Although the industry as a whole probably is low single digits over the last couple of years in growth of salaries. Maybe even more than that. I'm getting a sign from Mark that he's better But our internal numbers are that we're managing control of that We've seen industry in the mid to higher single digits single digits, particularly within the hospitals who tend to be sometimes a little less economically focused, particularly the non for profit community based hospitals, which are the majority of the health systems out there. So I think we've had a better experience around labor than most in the industries overall in the industry partly because I think RadNet is we've done a a concerted effort towards making RadNet a place where people want to work, particularly radiologists who come here because the lifestyle is significantly better than in the hospital.

The hours are more predictable pathology that allows our radiologists to sub specialize in the types of scans and modalities that not only they're best equipped to handle, but also that they most enjoy practicing with. So, I think we've had a better experience than most. But within having said that, within our guidance, We've in 2025, we're going to be absorbing of salary benefits and wage increase within our guidance. So we're projecting $25,000,000 that this trend that we've been facing over the last several years will continue, but I think the real opportunity is is adopting the types of solutions, the digital solutions that we're developing and have developed and that's going to have an impact in our business really in 'twenty six and beyond once we get that fully implemented with inside of RadNet. And that's also what's giving us such great confidence that we're going to be success [indiscernible] we're all facing the same issues around labor. Got it. And is the radiology labor pressure, is that all current rate in the market? Or do you also have exposure to physicians sub common in hospital systems No.

I mean, subsidies that you're hearing about are from hospital based radiology groups only agreeing to work for the hospitals if the hospitals subsidize them because they simply can't make enough money by billing for the professional only components with inside of the hospital because remember the hospital is billing and collecting for the technical component. In our business, for the most part that the we make our money on the technical component and the physician the physicians are paid out of the global bill, but are receiving essentially the lion's share, if not all of the professional component the global bill.

So we're not subsidies really aren't applicable to the outpatient industry.

Got it. That's helpful. Then maybe just finally, can you talk maybe about the switching costs of tax and RIZ as it relates to Deep Health. I think a lot of attention is on the AI side and rightly so. But I just want to understand how this part of the sales cycle works works? How much of a barrier is it to switch on to Deep Health's packs and risk systems for a new customer even if that customer really likes those products? Thanks.

Well, the packs business like a lot of software businesses, if you will, goes through cycles, if you will. If you will. And cycle that we're in now are that most people are using pack systems that are perhaps ten plus years old. Don't support the kind of productivity and other tools that can improve the efficiency of the radiologists. And so our systems are designed to actually be the next generation of packs. We don't like using the term packs because I think that's an old term. And a lot of the benefit that we're talking about will be using newer software engineered tools that can reside in the cloud and therefore create better use of the radiologists' time both to read the study as well as utilize artificial intelligence [indiscernible] kind of aid, if you will, in the diagnostic work of what they do. Maybe with something as simple as triaging what artificial intelligence would call normals to not normals and allowing more time to be spent doing the work of those cases that need more evaluation, if you will, and less time for those that are normal. And remember, the majority of what we do is normal.

So even a triaging tool where the radiologists can trust the AI to be very accurate in that will allow a lot of improvement. And that's what's perhaps a little bit different about the hospital space versus the outpatient space. We can bring these tools and truly make our radiologists more productive and they will earn more by reading more whereas in the hospital, Well, you would think some of this would be applicable and it will be The cases and the pathology that they see in a hospital are far more complicated and in terms of evaluating why the person is in the hospital and a much greater percent are abnormal than in the outpatient space. So I think the real opportunity here is for the new technology to utilize newer computer science to develop better and faster software for doing these same functions, if you will, and then bringing it into cloud to make that functionality for what they're looking at, for looking at priors, more targeted software. One of the best examples I can give is that the newer technology is generating in some cases hundreds of images that used to be [indiscernible] a handful of images and it's very difficult for the average radiologist to be looking at that many images.

A lot of the artificial intelligence and work that we'll do will cone down the relevant images by applying the artificial intelligence to that, which they were looking for, given why the patient was referred but also perhaps looking at other things that weren't ordered that may be opportunistic in the way of evaluating early diseases. So That's why this whole evolution of PACS is not just about reading, it's about what you're providing for the read additionally that helps make it more efficient, more accurate and more trustworthy than the prior PAC systems.

And one thing I want to emphasize Andrew, going back to your question about how likely what are the the impediments to switching PAC systems from a radiologist standpoint. When you look at the overall industry for PAC today, a very small percentage, I believe the last report I saw was about 15% of all the PAC systems out there our cloud based systems today. So the vast majority of people out there, radiologists are using on premises software. And when you look at the benefits of cloud based in terms of the ability to compress datasets, the ability to do cloud based storage, cloud based retrieval, the speed at which you can look through prior images and call up prior studies, the viewer that's there today that allows for visualization tools It's so far superior in the cloud versus on premises software that Doug as Howard said, there's going to be a cycle in this industry three over the neck in the coming years where the radiologists are going to switch from these on premises systems to cloud based solutions like they have within other industries and other areas of software development. And that's the the cycle that Deep Health is preparing for.

Great. Thanks for the color. The next question comes from Larry Solow with CJS Securities. Great.

A lot of my questions have been answered.

Just a couple of follow ups. I guess on the you mentioned Mark that the $45,000,000 increase in wages and benefits, Is that it sounds like the biggest driver, but just overall, it looks like EBITDA margin you actually have even if you add back the one time or the $15,000,000 impact, you have segment margin actually declining about forty, fifty bps year over year. [indiscernible]