RadNet, Inc. ($RDNT)

Good morning, and welcome back to the Barclays Global Healthcare Conference. My name is Thomas Walsh, and I'm a member of the Facilities and Managed Care team here at Barclays. Joining me on stage is Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Welcome.

Good morning.

So RadNet hosted its first Investor Day in November last year, recently closed the books on 2025 and announced a large acquisition, which rounds out the company's artificial intelligence offerings. Can you spend a minute on the current state of affairs and outlook for 2026?

Sure. Well, I can't remember a time, at least in my 21-year tenure where I've been more excited about where the business is today, how it's positioned and what the future looks like for us. We came off a great year last year, probably the best quarter in the company's history where revenue was up over 14.8%. EBITDA was up substantially. We've been demonstrating over the last several quarters, margin improvement relative to the prior year's quarters. Volumes in an aggregate basis have been very strong. Same-center performance has been excellent. We've been growing MRI volume at historic highs the last 2 quarters. Our MRI volume has been in double-digit same-center performance relative to prior quarters. CT has been ranging in the mid-single digits. PET/CT has been -- has continued to be the superstar of all of our modalities. The last 2 quarters growing over 14% relative to the prior year's quarters on a same-center basis. And so many of these trends have -- seem to be continuing into this year with respect to the industry growing, the overall pie growing as well as the outpatient portion of that pie benefiting from more and more of the outpatient business leaving more expensive hospitals into lower-cost sites of care, which is being driven both by patients who have elected into these higher deductible plans and are shouldering more of the burden of their health care costs, deciding to go to the lower-cost providers as well as a concerted effort on the part of the commercial payers to try to drive this business out of the more expensive hospitals into the more efficient, more productive, lower-cost sites of care. So we're -- as indicated in the guidance that we released in March in conjunction with our fourth quarter and 2025 full year results, we're expecting revenue growth for 2026 to be in the range of 17% to 19%. We're expecting EBITDA to grow anywhere between 18% and 22% in 2026, which implies margin improvement throughout 2026. And we're assuming tremendous growth from our digital health arena, our Digital Health segment, where we're expecting over 50% growth in that business, which is a combination of both organic internal growth as well as some of the acquisitions that we've done, including the Gleamer acquisition that we completed last year. So we're very excited about it. We've -- as a continuing effort, we're trying to create more and more transparency around a lot of these initiatives. We've -- that started really a few years ago when we started breaking out our AI revenue separately from -- our AI performance from the rest of the business. Then we created the Digital Health operating segment, which includes all of our digital businesses and gave transparency on that. In the fourth quarter of last year, we started with a new metric that we're allowing investors to follow our progress within the Digital Health division around annual recurring revenue or ARR. And this coming quarter, we're going to start giving much more information or more comprehensive information around our same-center performance and all of the operating metrics that go into that, which include both consolidated and unconsolidated centers, so system-level information, whereas in the past, through the third quarter of last year, we only gave consolidated information or consolidated center. So we're really excited, really pumped for this year. And it should be a very active and interesting 2026.

Great. Let's turn to your recent acquisition of Gleamer, which is the largest deal RadNet has done and rounds out your clinical AI offerings with some strong capabilities in X-ray. Can you walk us through the sourcing and strategic rationale of the deal?

Sure. It's multifaceted. First, we had, over the last 6 years, had entered into the AI arena in all the other modalities, but for X-ray. So we have development and FDA-approved products within MRI, within CT, within ultrasound and within mammography. And the real missing link for us was in the arena of X-ray. And interestingly enough, X-ray is the most prevalent procedure that we, as a company, perform -- it represents about 25% of all the procedure volume that we do. And X-ray is one of those areas of radiology, which creates a lot of burnout in order for radiologists to make similar types of compensation that they do by reading other modalities. They have to read a lot of X-ray. It creates a lot of burnout. And we have been getting a lot of input from our radiologists over the years that if we could give them the tools to be more productive, be more accurate, and make their life easier that, that was going to be a major -- have a major impact on the way we could deliver our services. So we started -- this was really going back a couple of years ago, evaluating the companies all around the globe who had technologies in X-ray. And when -- after that evaluation was complete, Gleamer really stood out to us, not only based upon the fact that they had really advanced the areas within X-ray that were very important to us, which were fracture detection and chest X-ray, chest X-ray being the #1 CPT code of all the procedures that RadNet does. But they also have had tremendous commercial success. So they have over 700 customers worldwide. Many of their customers are in Europe and Asia and have a sales force of over 40 representatives strong or team members that really could then cross-sell and cross-market all the other DeepHealth products and services. They have more indications, more FDA approvals than any other X-ray company that we're aware of. And it was really a great cultural fit. So we're excited, one, for the continued growth of that company, and that company has been growing since 2022, growing their ARR, their annual recurring revenue by over 90% on a compound annual growth rate. So we're expecting continued growth with outside customers with that business as well as we're anticipating throughout this year, integrating all of the Gleamer technologies, X-ray technologies within RadNet to make our radiologists more efficient and lower our costs. They've also advanced a number of other areas that we're very excited about. They're commercializing an MRI of the lumbar spine, which is our #1 CPT code within MRI as well as chest CT. So it's a very exciting opportunity. There's a lot of very positive energy around the acquisition. I think the Gleamer staff is thrilled to be able to be a part of RadNet and be able to see their technology work at scale within an organization as complex and as large as we are. So it's -- there'll be a lot of things to talk about this year.

Great. And you zeroed in on $7 million of revenue synergies through cross-selling and upselling over time. Beyond those opportunities, how do Gleamer's capabilities change the DeepHealth sales pitch?

Well, it's a couple of things. I mean there's a number of very near-term synergies that we get with this deal. One is, of course, the cross-selling and cross-licensing using their sales force to sell all the other products and services as well as using our existing sales force, which came from all the acquisitions that we've done from iCAD to originally DeepHealth, Breast to our See-Mode acquisition, Thyroid Suite using our prostate or lung using all of that sales force to cross-sell the Gleamer opportunity. So that's where this $7 million estimate has come from in the short run, but there's also cost synergies associated with that, which -- with the integration of Gleamer into our Digital Health platform, which comes from the fact that we're getting some real talent within the Gleamer team that otherwise we would have had to hire and it was already in our budget to hire externally. So while Gleamer was losing a little bit of money when we bought it, we think within the next 12 months, it will be a profitable business with inside of RadNet.

And in the Digital Health segment, you have a series of acquisitions contributing to that 50% revenue growth guidance, including you mentioned iCAD, See-Mode and now Gleamer. Can you help us understand how that revenue growth is split between acquisitions internal sales to RadNet centers and then external sales?

Yes. So Digital Health's reliance on RadNet will continue to diminish over time as we continue to grow the outside customer base of the Digital Health platform. In 2025, so the year that we just finished, RadNet as a customer represented about 45% of the revenue of the Digital Health division. In 2026, that number should go down to about 33%. And what we said at our Investor Day in November that by the end of 2028, in other words, as we're exiting 2028, we expect RadNet as a customer from a concentration standpoint to be below 20%. So that's our objective. That's our aspiration, and that speaks to our level of confidence in selling and licensing these solutions to outside customers. In the end of the day, as we focus on solving some of the pain points within our own workflow and within our own clinical operations, meaning our radiologists, these are the same pain points that the industry at large has. And we believe and based upon all of our customer interactions that as we continue to create these solutions for ourselves, they'll have real commercial value outside of RadNet.

Great. And hospitals within those 2028 targets are expected to make up half of DeepHealth's customer mix. Can you describe the enterprise solutions you're building for those specific customers and the traction you're seeing with hospitals today?

Sure. Our initial focus has been on solving the problems of outpatient independent freestanding centers like the ones that we operate, of course, because we're trying to focus on making our own operations and our own workflow more and more efficient and being able to deliver our services at a lower cost. Having said that, when you look at the $5-plus billion worldwide industry for radiology software, you've got the hospital marketplace or the health system marketplace is larger than the freestanding imaging marketplace in terms of being customers for these products and services. So as we continue to develop these products and first focus on the outpatient, we're starting to build the capabilities in some of these products that are -- that make the very attractive to the health system marketplace. In the case of our DeepHealth OS workflow, we're talking about a multi-specialty viewer and a vendor-neutral archive, which allows the hospital not only to store, retrieve, visualize radiology images, but also for all their other specialties like dermatology and cardiology and clinical laboratory pathology and the others out there. So by the end of this year, most of that development work will have been completed, and we'll be focusing more and more on the health system marketplace in 2027 and beyond. What's really nice about that is that, as you're probably aware, about 36% of all of RadNet's facilities are held with -- or 151 facilities are held within joint ventures with some of the largest hospital systems in the United States who represent a built-in customer base for the DeepHealth products and services. So we've been having conversations with many of our health system partners who are very, very eager to start deploying and using some of these technologies that we're deploying internally.

Great. And on that last point, can you provide an update on labor efficiencies RadNet has been able to drive so far through your implementation of TechLive internally and comment more broadly on the labor cost environment?

Sure. Well, we're still in a challenging labor market, and I don't think that, that's unique to radiology. Maybe there are some things around the shortage of radiologists that are unique to our specialty. But labor is our #1 expense. It's been growing over the last several years, particularly since COVID when we saw the labor force not graduating as many techs and to keep up proportionately with the growth of the industry. And so a lot of the focus of many of these digital health products are to automate many of the processes that today we're performing manually. And over the last several years, we've absorbed well over $100 million of same center labor increases within our network. We've built in a 4% to 5% increase in labor costs into our guidance for 2027 -- excuse me, 2026. And we're hoping that some of the products and services that we implement today and throughout the year will start influencing or start impacting the growth of that labor expense, which could have a real positive impact in our margins. And as we said in November at the Investor Day, we think that we're aspiring to increase our company-wide EBITDA margins by anywhere between 100 and 150 basis points by the end of 2028. So while labor is still challenging, I think that we're doing all the right things to figure out how to manage that labor more effectively. You mentioned one of them. I'll mention a couple of them. First, the TechLive product, this is that remote MRI scanning technology where we can have a technologist not have to be at the site where he or she is scanning patients. And this has already had a major impact on reducing exam room closure hours, where in the past, when a tech calls up in the morning and says, I'm sick, I can't come to work. we've had to close down that schedule. And similar to the airline industry and the hotel industry, when you lose -- when a plane takes off without selling that seat, you can never go back and resell it or when a hotel comes to the morning and hasn't sold the room the night before, you can never go back and resell it. So we were losing patient volume. We were losing revenue. Now we're able to remotely control that machine and continue to have that schedule and not lose that revenue. And that's had a market impact on our MRI volumes, in particular. You saw last quarter, our MRI volumes were up over 11% on a same-center basis. Much of it has to do with deploying these types of technologies. See-Mode is the other one that I'll call out. See-Mode is a company that we bought last year in Australia that had an FDA-approved product that vastly automates thyroid ultrasound. And thyroid ultrasound is a very laborious exam, both for the technologist and the radiologist who has to interpret it and synthesize a lot of data into the report. And this is a technology that is already in practice within RadNet, and it's lowering our exam time by 30% to 50%, which is creating more slots for exams that we could then fill. So these -- all these technologies that we're deploying can either speed up the exam time, which creates capacity for us or create efficiencies on the clinical side, on the radiologist side, which allows for more scanning. So very excited about these technologies.

Great. Why don't we turn to the industry backdrop for demand in imaging. Advanced modalities have been the key demand tailwind and are a disproportionate driver of revenue and margin. What are you seeing today in referral patterns and clinical indications that give you confidence this remains a multiyear trend?

Well, we'll always be a multi-modality company. I mean that's part of our ethos, part of our DNA. We've always wanted to be a one-stop shop for all the radiology needs of our physician referral base. And often, a patient will be sent to us for a routine study and based upon the results of that study will then be sent back to us for more advanced exams. And also in California, where we have $125 million capitation business where we're responsible for providing imaging services on an exclusive basis to roughly 1.5 million lives in California, and we have a contract in the New York metropolitan area as well, where because 75% of what these patients need by volume is routine imaging, the ability to have access points and for routine imaging is always going to be important for RadNet. Having said that, the 28.6% roughly of our procedure volume that is advanced imaging is driving over 60% of our revenue. So clearly, our bread is buttered on the advanced imaging side, and we're always looking at ways to capture more advanced imaging or create capacity at our centers where we can drive advanced imaging because advanced imaging in the industry is growing more quickly, and that's really a function of the evolution of technology. So most of the advances in imaging technology, both on the equipment side from the manufacturers to advances in contrast materials, radioactive, pharmaceuticals, post-processing software, that's all happening with advanced imaging, which -- so every year, there are more clinical indications for ordering these tests as the technology has gotten better and the efficacy for many of these studies has improved. So we think that, that trend is going to continue. When I started about 21 years ago, advanced imaging comprised about 20% of what we do. Today, we're approaching 30%. And I think the future bodes well for that to continue to go up.

Great. Turning to labor. Last Friday, the BLS released a weak jobs report with negative February headline numbers and downward revisions to prior months. Commercial mix is a meaningful part of your business, typically supporting higher pricing, but also introducing some cyclical volume dynamics. Have you seen any impact from changes in consumer confidence or employment trends on commercial mix? And how are you positioning the business in the event of a broader economic slowdown?

Yes. We haven't seen any changes in demand or procedure volume. I guess the weak employment in some ways is good for us because our own labor expense is the biggest expense that we have. But we haven't seen any slowdown, and I'm not sure that the BLS data -- I think it would have to get a lot worse for it to really impact our operations. So we'll watch it closely, of course, but we haven't seen any impact.

Great. And RadNet is going to benefit from Medicare pricing this year, which hasn't always been the case. And you've mentioned strong rate increases from capitated and commercial payers. Are these increases stronger than recent history? And are they sustainable at these levels?

Well, I think we're unique in our industry in so much as we're very highly concentrated on a regional basis. I mean all 418 centers as of the end of last quarter are within a small number of markets where we are -- we comprise the largest part of the provider networks on the outpatient imaging side for virtually all the markets in which we operate. And so the payers recognize -- while payers don't want to pay anybody more money, I mean they don't like to give increases, they do recognize that the pricing that we're charging is a fraction of what they're paying at the hospitals. In many of our markets, the hospitals charge anywhere between 200% and 500% of our pricing. And so I think the payers recognize that they have to pay us appropriately for our services. And if they can shift more and more volume to us and out of the hospitals, even if they're paying us 2% or 3% more this year, it's still a tremendous win for them. So I think our relationships with the large commercial payers have improved over time, and I think they're recognizing the value of the ambulatory sites of care, and that's not unique to radiology. You're seeing that within outpatient surgery centers, home health, outpatient dialysis, outpatient physical therapy, clinical laboratory. And I think that they recognize the strength that we have. And also to the extent we continue to have backlogs at many of our local markets. And we would be willing to walk away from commercial contracts if we feel like they're not paying us fairly. And so the ability to say no and to be able to fill your centers with other books of business gives you the strength in those negotiations. But I don't want to lead you to believe it's a contentious negotiation. I think it's been -- we've had good relationships over the years with the payers.

Great. Well, with that, we're out of time. Thanks again for joining us, Mark. And everyone, enjoy the rest of the conference.

Thanks, Thomas.