RadNet Inc (RDNT) 2015 Q2 法說會逐字稿

Good day and welcome to the RadNet, Inc. second-quarter 2015 results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's second-quarter 2015 financial results.

Before we begin today we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the US 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, 2014 and RadNet's quarterly report on Form 10-Q 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.

With that I would like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning, everyone, and thank you for joining us today.

On today's call Mark and I plan to provide you with highlights from our second quarter 2015 results, give you more insight into factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I would like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

Overall I am very encouraged by the improvement in our metrics and financial performance relative to the first quarter this year. Our strong revenue growth continued. Sequentially our revenue increased 12.7% from the first quarter. This was the result of increased procedural volume and from increased capitation business on the West Coast as well as improved demand on the East Coast.

As compared with last year's second quarter, revenue increased 14.1% in aggregate and procedural volumes increased 7.6% on a same center basis. But as important to me as the continued growth in our top line was the fact that EBITDA and our net income markedly improved relative to the first quarter of 2015. Our EBITDA increased by 66% and our loss in the first quarter turned to a profit in the second quarter. Most encouraging though was our operating expense ratio which dropped from 92.9% of revenue in the first quarter of this year to 86.1% in the second quarter. Although this metric has not yet returned to this year's full-year operating expense ratio of 84%, I am pleased with these trends. I believe the return to last year's expense level is achievable by year-end.

As we discussed during the last several quarters, some of our centers in California were stretched to their operating limits by demand from new patients. This is probably the result of strong participation in statewide healthcare exchanges as well as new capitation contracts we initiated in the second half of last year and throughout 2015. The organic growth from these new patient populations has been stronger than we ever experienced in the past.

This is very exciting to me as meaningful organic growth can be difficult to create in our business and was not achievable during the several years following the severe downturn in our economy beginning in 2009.

Today we are experiencing growth from all revenue sources. Our capitation business alone which included the implementation of new contracts in this year's second quarter has increased over 35% from last year's second quarter. But as we discussed last quarter, the extraordinary growth necessitated our making infrastructure investments to accommodate current patients as well as prepare ourselves for the future growth we are projecting. We invested in and incurred costs from expanding call centers, pre-authorization teams, front office representatives, patient liaisons and technologists.

We also are upgrading corporate IT systems for human resources purchasing and for the accelerated implementation of our eRAD system which is now substantially complete.

Although these investments are providing us the capability to more effectively service current demand, we expect benefits from these investments to accelerate as we grow in the future. Many of the ongoing costs that remain from our recent investments are fixed in nature and create the capacity which can accommodate significantly more revenue.

When compared to the first quarter, we experienced some of this operating leverage but we have much more to go. I believe we can continue to grow substantially while leveraging the new infrastructure we've built. As we do, margins can expand with more of our revenue flowing through to our EBITDA and net income.

On our financial results call several months ago, we talked about our difficulties in profitably serving some of our newer capitation contracts. I'm happy to report that some of the extraordinary utilization we experienced in the first quarter from these contracts appears to be normalizing.

On a same contract basis, utilization of our new contracts slightly declined in the second quarter which we believe is the result of our centers having already serviced some of the pent-up demand these patients had as new members of the healthcare delivery system. I expect our performance under these contracts will continue to improve and we may have opportunities to reprice certain contracts at or ahead of their renewal dates.

As contracts become more mature and long-standing, it is common for utilization to become more predictable and our profitability to rise. I am certain that the relationships we have created or expanded with the contracted medical groups and the physicians will continue to pay dividends for us as time goes on.

During the quarter, we also focused on the early integration of the recently acquired New York Radiology Partners facilities in Manhattan. I continue to believe that these assets when combined with our Lenox Hills operations and other facilities in that market will be critical locations for our Metropolitan New York strategy.

I would like to take a few minutes now to discuss a couple of initiatives we recently completed with large health systems in two of our existing markets. On Friday we announced an extensive expansion of our existing joint venture with Barnabas Health in New Jersey. As many of you recall, we began a relationship with Barnabas Health in 2012. Our venture started with nothing and today prior to completing last week's announced transaction have seven imaging centers. As part of the transaction we announced on Friday, Barnabas Health and RadNet are selling our respective wholly-owned imaging centers to the joint venture, a total of 11 facilities, and we will be purchasing together a statewide growth and consolidation strategy.

In light of Barnabas Health's pending merger with Robert Wood Johnson Health System, this strategy can be more significant and successful. After its combination with Robert Wood Johnson, Barnabas Health will be the clear leading healthcare system in New Jersey and will have over $4.5 billion in annual revenues.

Our transaction with the Barnabas Health joint venture will bring $35.5 million of new capital into RadNet and have significant other financial and strategic benefits. The newly acquired facilities will now bill under the joint ventures contracted rates which Barnabas and RadNet in concert negotiated with private payers and health plans. RadNet will direct all the day to day operations of the joint venture and perform most of the necessary support functions such as billing and collecting, marketing, accounting, information technology, purchasing and human resources. I believe these are excellent opportunities for further consolidation and organic growth opportunities in New Jersey.

In addition, last week we established a new joint venture with LifeBridge Health, one of the leading hospital systems in the Baltimore, Maryland and surrounding areas. In conjunction with establishing the new joint venture, we sold to LifeBridge a 25% interest in two of our imaging centers for $5 million and the potential for further cash consideration should financial targets be met.

I believe there are considerable opportunities to grow this new venture and benefit from the reach LifeBridge has in the communities surrounding its medical centers including opportunities for growth with its own and its affiliated medical groups.

These partnerships and others likely to come will be a key part of RadNet's strategic direction and continue to validate our model of providing regionally concentrated, high quality, multimodality imaging services to large patient populations.

RadNet remains an attractive partner to any hospital, health system or accountable care organization seeking a broad array of emerging expertise. As the landscape of healthcare continues to dynamically change, I believe partnering with large health systems will likely become a more meaningful part of our business.

At this time I would like to turn the call back over to Mark to discuss some of the highlights of our second-quarter 2015 performance. When he is finished I will have some closing remarks.

Thank you, Howard. I am now going to briefly review our second quarter 2015 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. Lastly, I will update 2015 financial guidance levels.

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 each from continuing operations and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-cash equity compensation.

Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release.

With that said, I would like to review our second-quarter 2015 results. For the three months ended June 30, 2015, RadNet reported revenue and adjusted EBITDA of $204.3 million and $30.5 million, respectively. Revenue increased $25.2 million or 14.1% over the prior year's same quarter and adjusted EBITDA increased $0.1 million or 0.4% over the prior year's same quarter.

For the second quarter of 2015 as compared to the prior year second quarter, MRI volume increased 17.9%, CT volume increased 26.6% and PET CT volume increased 11%. Overall volume taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and all other exams increased 15.5% over the prior year second quarter.

In the second quarter of 2015, we performed 1,391,980 total procedures. The procedures were consistent with our multimodality approach whereby 76.7% of all the work we did by volume was from routine imaging. Our procedures in the second quarter of 2015 were as follows: 183,082 MRIs as compared with 155,309 MRIs in the second quarter of 2014; 134,734 CTs as compared with 106,444 CTs in the second quarter of 2014; 6572 PET CTs as compared with 5921 PET CTs in the second quarter of 2014; and 1,067,592 routine imaging exams as compared with 937,731 of all these exams in the second quarter of 2014.

Net income for the second quarter of 2015 was $3.4 million or $0.08 per share compared to net income of $5.1 million or $0.12 per share reported for the three-month period ended June 30, 2014. This is based upon weighted average number of shares outstanding of 44.7 million and 43.3 million shares for these periods in 2015 and 2014 respectively.

Affecting net income in the second quarter of 2015 were certain non-cash expenses and nonrecurring items including $2 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock; $94,000 of severance paid in connection with headcount reductions related to cost savings initiatives; $74,000 loss on the sale of certain capital equipment; and $1.4 million of amortization of deferred financing expense and debt discounts.

With regards to some specific income statement accounts, overall GAAP interest expense for the second quarter 2015 was $10.4 million. This compares with GAAP interest expense in the second quarter of 2014 of $10.3 million. For the second quarter of 2015, bad debt expense was 4.5% of our service fee revenue net of contractual allowances and discounts compared with 4.5% for the second quarter of 2014.

At June 30, 2015 after giving effect to bond and term loan discounts, we had $641.3 million of net debt which is our total debt less our cash balance and we were undrawn on our revolving $101.25 million line of credit. During the quarter we repaid $8.1 million of notes and leases payable and term loan debt and had cash capital expenditures net of asset dispositions of $11.8 million.

At this time I would like to reaffirm our 2015 financial guidance levels which we released in conjunction with our fourth-quarter and year-end 2014 financial results and updated after our first-quarter 2015 results.

For revenue, our guidance range is between $785 million and $805 million. For adjusted EBITDA, our guidance range is between $125 million and $135 million. For capital expenditures, our guidance range is between $40 million and $45 million. For cash interest expense, our guidance range is between $36 million and $40 million, and for free cash flow generation, our guidance range is between $42 million and $52 million.

I would now like to take a few minutes to give you an update on 2016 reimbursement and discuss what we know with regards to 2016 anticipated Medicare rates.

With respect to 2016 Medicare reimbursement, we recently received a matrix fir 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 rates to 2015 rates. We volume weighted our analysis using expected 2016 procedural volumes.

Our initial analysis shows that the Medicare rates for 2016 are essentially neutral relative to 2015 rates.

There are a few material changes proposed for 2016. We are obviously pleased with this as this is the first year since the advent of the Deficit Reduction Act in 2007 where CMS is proposing to leave rates essentially unchanged. Our industry has been heavily impacted by rate cuts and every year we have had to improve our business and in some cases dramatically just to stay in place. We hope that CMS recognizes that the problem in imaging is not pricing but our abuses like overutilization and self referral settings.

Of course the proposed rates and the physician fee schedule are subject to comment from lobbying and industry groups and there is no assurance that the final rule to be released in November of this year will reflect these same proposed rates.

Whether or not the final rule in November is consistent with the proposed rates, as Dr. Berger discussed earlier, we will continue to focus on lowering our cost structure through using our scale and ability to drive efficiencies in our organization. We will continue to seek pricing increases in regions where we are essential to the healthcare delivery system recognizing that our prices remained significantly discounted as compared to hospital settings.

We will also continue to pursue partnership opportunities with local hospitals and health systems like those discussed today with Barnabas Health and LifeBridge where we think these arrangements could result in increased volumes and long-term stable pricing with private payers.

Lastly, we will continue to acquire strategic targets at 3 to 4 times EBITDA in our core geographies and give us strength in our local markets and achieve efficiencies with our existing operations.

I would now like to turn the call back to Dr. Berger who will make some closing remarks.

Thank you, Mark. We are living in an exciting and dynamic time in healthcare. The landscape is rapidly changing and it is being reshaped by the effects of the Affordable Care Act and from the consolidation that has ensued. Today more than ever the lines are being blurred between payers and providers. Insurance companies are purchasing providers and medical groups. Hospitals are purchasing physician practices and ambulatory and out-patient service providers such as surgery centers, physical therapy centers, long-term care facilities and imaging to name a few. Risk based contracting is becoming more prevalent with physicians, hospitals and other providers assuming financial risk for patient care.

Healthcare is also experiencing widespread consolidation and vertical integration. Anthem is purchasing Cigna, Aetna is purchasing Humana, Centene is purchasing Health Net and you can be sure there will be others.

Diagnostic imaging plays a central role in healthcare. Its effectiveness and widespread acceptance have and will continue to be the reasons why major providers and payers will need access to and desire to partner with high-quality imaging operators.

Imaging along with other diagnostic tests such as those performed by clinical laboratories, is used at the front end of almost every injury or disease process in healthcare today. All of us likely have had imaging exams or if not, will certainly have them in the future. Imaging interfaces with all disciplines of medicine from general internal medicine, practices and family practices to specialty practices such as orthopedics, pediatrics, OB/GYN, cardiology, neurology, nephrology, oncology, and the list goes on.

These trends give me optimism and strong conviction about the future opportunities for RadNet. The trends are working with us and we intend to capitalize on all opportunities in the changing healthcare landscape. We believe we can create significant values for all our stakeholders.

Operator, we are now ready for the question-and-answer portion of the call.

(Operator Instructions). Brian Tanquilut, Jefferies.

Good morning. Congratulations, Howard and Mark. Mark, just a first question for you. So as we think about Barnabas and the changes that you guys are making with all these structures also the deal in Maryland, how should we think about the P&L impact of that in terms of shifting revenue around from the top line to I am guessing it will be in the noncontrolling interests line just on a more technical basis so that we can model this properly?

Sure. Thanks, Brian. Yes, so as you recall the Barnabas joint ventures owned 51% by Barnabas, 49% by one of our wholly-owned subsidiaries, New Jersey Imaging Partners, when we sell the 10 facilities in New Jersey into that joint venture, they will flip from being consolidated operations to unconsolidated operations. So from a P&L standpoint, both the revenue and the expenses will leave our income statement and will be -- will continue I should say to be accounting for the joint venture under the equity method so we will bring in our 49% of the net income into our earnings and unconsolidated joint ventures line item in our P&L.

Just to follow up on that, if I'm modeling for 2016 basically and I don't know if you have given the exact number yet but in terms of Barnabas I should just pull all the revenue out of the topline as I think about modeling for 2016?

Right.

What is that number if you don't mind?

Yes, it is about $50 million. While we are continuing to talk, I will check on that.

And I guess that is my next question for Dr. Berger. Yes, Dr. Berger?

Just to comment on the LifeBridge, in that particular situation we sold 25% of these two imaging centers so we will continue to be the consolidator in that particular joint venture so there will be no top line or P&L change in the revenue or expense line.

Yes, our minority interest will go up because we are going to be deducting LifeBridge's 25% interest in those two facilities.

Got it.

On the Barnabas, associated with that while we really deconsolidate the revenue through the joint venture, we do have a management contract and other expense reimbursement through New Jersey Imaging Network which is the name of the joint venture with Barnabas and so while there will be a loss of patient revenue, there will be somewhat of a replacement which needs to go into the modeling in our revenue from management services that now we will be providing on that, on the revenue from the 10 wholly-owned centers that go into the joint venture.

So to follow up on that comment, Dr. Berger, two things. One, as I think about the economics of Barnabas and similar contracts like this or agreements like this where you get a rate lift from getting under contracts and also you get the management fees. So if we think about the economic value of the agreement or the joint venture, net net given that you are giving up more equity to them in essence, would you say that the EBITDA that accrues to you will still be higher?

The overall EBITDA as a result of this transaction will be comparable with the management fee revenue and some of the rate lift that we are getting to what we are actually giving up. So we do not feel that even though we've sold a 51% stake in these centers, there will be a substantial change in our overall EBITDA with using the equity method of accounting for the results of New Jersey Imaging Network along with the net revenue we will get from the management fee.

And then the second part of that is as we think about the rate lift and just what a hospital partnership brings to the table, should we think about this as sort of the next part of your growth strategy where you are focused more in partnering with the hospitals rather than building stuff on your own? And also I noticed that you mentioned you went into some new markets with some acquisition so just putting all that together how should we think about your expansion plans going forward?

It is multi-tiered. First of all, maybe you are correct, we really haven't gone into new markets. The only new market that we've really entered is the Metropolitan New York market which we entered about 2.5 years ago with our Lenox Hill transaction and that was followed on by the New York Radiology Partners transaction that became effective April 1 or the beginning of this quarter.

So while that was not a brand-new market for us, it was certainly a statement of the opportunities that we see in the Metropolitan New York area. But I think partnering with health systems perhaps even partnering with payers are something that we are going to continue to look at as the opportunities are presented to us and I think it needs to really be emphasized that those opportunities come to us because of our size and scale in those markets.

It is clear to everybody inside of RadNet and I hope to our investors that if we were just operating one or two or three centers in a marketplace, the interest level from some of these larger players would certainly not have the kind of appetite that we see now with the Barnabas Health system.

So I think as Mark and I both tried to point out, the strategy that we have employed at RadNet now for well over a decade of being multimodality and concentrated in markets will be a major driver of our strategy going forward and beginning to have I think opportunities for us that none of us probably could have seriously considered a year or two ago.

So I think you will see more activity in the markets that we are in, with other health system providers and payers that recognize that RadNet brings something that is invaluable in the healthcare delivery system.

Brian, to answer your question specifically about how much revenue we will be deconsolidating, net of additional or incremental management fees we will now be receiving, we will be deconsolidating about $30 million of revenue.

Got it. And then last question for me. You guys talked about the new capitation contract that you won this quarter or that you started. So just if you don't mind giving us some insights into how the implementation of the new contract is progressing in terms of the utilization coming in relative to what you had modeled? Just trying to compare that with the issues we had in Q1 and then to give us visibility into your trends in terms of the capitation business?

Sure, one of the things we surmised last quarter when we were analyzing some of these newer capitation contracts is that part of the reason why we were seeing such high utilization in these contracts was that many of the lives that were part of these newer contracts and some of the additional lives that are enrollees in existing contracts weren't part of the healthcare delivery system prior to this so that there was some amount of pent-up demand that we were fulfilling in the new contracts and in some of the older contracts where the lives had materially increased. And when we analyzed our cap data this quarter, we did see a slight decline -- not a huge decline but a slight decline in the utilization of the newer contracts on a same center basis. So the thesis that we had in the first quarter about kind of pent-up demand is probably accurate. We are hoping to see that trend continue into the third quarter and we will see.

Usually what we do at the end of the first year of any contract, we analyze the data and we get prepared for renewal discussions with these contracts and to the extent that utilization was higher than what everyone expected, we often get significant price increases and that is what we are hoping for.

Mark, one last follow-up if I may. Just from a capital perspective since you are getting some cash from the JVs, what is the plan on the cash, both from LifeBridge and Barnabas?

So between the two of those transactions we will be receiving $40 million to $41 million of cash. Right now our plan is to keep it on the balance sheet for the time being. Should there not be any uses for that capital that is accretive in terms of other transactions, we will use that to pay down debt.

Thank you.

(Operator Instructions). Bill Bonello, Craig-Hallum.

Good morning. Just a question on sort of the payer trends, your capitated business is growing at about twice the rate as the business as a whole. Can you just tell us how much of that is total new business versus a transition of the existing business from fee for service to capitation if that was any of it at all? And then maybe speak a little bit more broadly to what you are seeing in the market in terms of evolving payment models and payer interest in capitated contracts?

Good morning, Bill. Most if not almost all of our capitated contracts are with groups that we have had existing relationships with. Several of those relationships though were as fee for service models, not capitation. So what has really transpired and again I think mostly as a result of the Affordable Care Act and the healthcare exchanges here in California, is that several of these groups have now chosen to go to a capitated model away from the fee for service. And what that has done for us is allow us to be more exclusive with their imaging needs and has resulted in increased volume and revenue from them. But it certainly is not all brand-new revenue.

So the discussion really is not so much how much of these are new contracts but how much of the 35% increase we saw comparing Q2 of this year to Q1 of last year comes from the fee for service business that had transitioned to capitated business. And I would say that the preponderance of it was fee for service business that transitioned. While there were some new contracts, it was really with already existing relationships that we had that just expanded.

So I think what you are seeing is the additional benefit of what RadNet provides in the way of utilization management tools, access and willingness to invest in their centers. I don't think either Mark or I mentioned that we have two random centers that came online at the beginning of August of this year to help accommodate the demand that we are seeing, one at the Northern California and one here in Southern California.

So we are expanding the centers that we currently have as well as building when necessary to accommodate the demand that we are getting with these expanding relationships that we have with virtually all of the large medical groups throughout California.

Remember also, Bill, one of the nice things about capitation is what we call the pullthrough revenue meaning that all of these capitated patients are part of HMO programs. But the physicians at these medical groups with whom we contract see all the other payer classes of patients so they see workers comp, personal injury, private insurance, Medicare patients. And because we have an overarching relationship with them on the capitated or HMO side of the business, they tend to send us their discretionary business as well. They are already familiar with our facilities, they have the RadNet prescription pads on their desks and they presumably if we are servicing them well on the capitated side of the business, they are happy to send us their discretionary business as well.

Okay, that is helpful. Just to be clear to Dr. Berger's answer, while the preponderance of the capitated revenue is from payers that you were doing something for service business with, the total amounts of revenue that you are getting from those payers has grown. Is that what I heard?

Yes, Bill, and there's two benefits to that. One is not only has it increased revenue for RadNet but it puts additional pressure on our competitors who are losing that business.

And then just more broadly in the payer environment, one of the sort of conundrums about the imaging space and certain other provider spaces is that being the low-cost provider doesn't necessarily put you in the position of getting as much market share as you would expect. I am just curious what you are seeing in terms of payer strategies more generally? Are you seeing increased efforts by payers to try and tighten up networks or pursue other strategies that would drive more volume to low-cost providers and perhaps away from some of the higher cost hospital imaging centers?

Yes, I think that is an excellent point, Bill. Thank you for asking. What we are seeing in the marketplace and there is examples I think of this outside of imaging for example we saw on the East Coast United through its wholly-owned subsidiary, Optum, recently purchased an Urgent Care Center operator who I think had 114 facilities -- 150 outpatient urgent care facilities. And I think as I mentioned, the blurring of the lines here between payers and providers is going to continue to be beneficial to people like RadNet and other ambulatory providers because the effort and we are seeing this in our markets a plan design that will drive patients with incentives for lower co-pays or more effective use of the higher deductibles into lower-cost operations, I believe is heating up at a very, very rapid pace.

So I think you will continue to see people reaching out to operators like RadNet that can have large areas of access delivered with high quality and lower cost structures that will continue to move people away from the more costly hospital-based operations. And to people like Barnabas and LifeBridge, I applaud their willingness to recognize the need for this and become a partner with RadNet for these kind of broader opportunities.

Great. Thank you guys very much.

Juan Molta, B. Riley.

Good morning, Howard, Mark. Thank you very much and again congratulations for the revenue and bringing down the operating expenses. A couple of questions. You have in your press release 276 centers so that is an increase of 17 from last quarter. Eight of those are from the New York Radiology Partners. Do you have the locations of the other nine?

Sure, a number of them, five of them came from a small acquisition of an operator here in California called California Radiology. I think we mentioned this at the last conference call that we were struggling to service a number of the capitation lines that we brought on last quarter because we did not have coverage in three critical markets where a number of these lives resided. And so what we had to do is we had to essentially subcontract the imaging services to local imaging centers that we didn't own and pay them essentially a fee for service rate for servicing our capitation customers.

We acquired subsequent to the first quarter end, we acquired California Radiology which had facilities in three of those markets and then had a couple of additional facilities. So that added another five and then we have constructed several centers as well in areas where we need to get capacity and coverage so give or take that comes to the 12 additional facilities.

All in California then?

All in California.

Thank you. And then the other question about the other revenues and 7%, can you talk a little bit about that and are you seeing it mostly from the software side of the business or any other?

Yes, it is really a variety of things. It is eRAD revenue, it is imaging on call revenue which is our total radiology professional services group which does night call and weekend call for hospitals and hospital-based radiologists.

We have certain management fees that we consider other revenue from all of our existing joint ventures which has increased as these joint ventures have broadened and expanded. We have also our Breastlink practice here in California we consider other revenue which is our breast disease management oncology operation that is doing infusions, breast surgery, reconstructive surgery, plastic surgery and the like. So it is really kind of a variety of not imaging center revenue but ancillary revenue around the imaging business.

And out of those businesses, are you seeing growth in particular from any one of them? Is it weighted towards a particular service line?

We are seeing growth in almost all of those lines. As I mentioned, we have broadened and expanded a number of our joint ventures so the management fees have been increasing. We have had some successes with eRAD. We tried to announce some of the larger transactions that we do such as -- with eRAD such as the Assuta Health implementation in Israel which is I think the largest private health care system in Israel.

We have had some growth in imaging on call as we have had some of these joint ventures also incorporate us staffing the in-house part of their hospitals business or hospital radiology departments. So we have had some growth in all of these aspects of our business.

Perfect. Thank you, guys.

Brian Tanquilut, Jefferies.

Just a follow-up. Mark, in your prepared remarks you talked about how this is the first time for the DRA in 2006 that you have essentially flat rates. So without going into guidance as we think about earnings trend for next year, you have been fighting these rate cuts and have been successful in flattening earnings since the DRA. So is it right to assume that earnings will grow by a decent amount next year?

It is certainly very positive for us that CMS is finally laying off imaging at least for a year and as you point out, we have been effective over the last seven, eight years in mitigating a lot of the reimbursement impact that CMS has imposed on us and the industry at large. We constantly look at every aspect of our business to look for ways that we can save money and to utilize our leverage and scale with our suppliers and everybody we do business with as well as to implement tools such as information technology that can make our business more efficient.

So we are going to continue to do that with our business regardless of what CMS does or doesn't do with our reimbursement.

So to the extent we can be effective in continuing to pull costs out of our business in the next six to 12 months that should bode well for more of our revenue to flow through to our EBITDA and to our net income level.

So we are hopeful that CMS giving us a little respite on reimbursement cuts will help us derive a little bit more profitability in 2016.

And then one last question, when you talked about your night hawking service, has MEDNAX's acquisition of vRad caused increased competitive pressure in that business yet or are you seeing anything just because now you have a large player that has hospital relationships in that business?

MEDNAX buying Virtual Radiology, Virtual Rad, I should say, was a real interesting transaction because I think it gives MEDNAX a new arrow in its quiver with respect to providing outsourced services to hospitals beyond emergency room and anesthesia and other things like neonatal and other things that they do. But we were competing favorably with vRad before that acquisition and I think that we will do fine after that acquisition. If anything, what it has done is it has put a higher profile and a higher valuation on this type of business and they paid a lot of money for this business, well over 12 times EBITDA from the intelligence that we have heard and so we like when people put high valuations on pieces of our business because we think that our imaging on call could be a hidden asset within RadNet.

I will add to that, the recent purchase of Merge Healthcare by IBM put an enormous premium on the IT part of the business that we are very, very heavily invested in right now. So I think the two takeaways from these are one, consolidation is running rampant at all aspects of the healthcare delivery system and the ownership of the other assets whether they are for professional services, information technology or for the facilities much like I mentioned on the urgent care centers, are garnering a higher and higher premium in the marketplace as the healthcare industry evolves or changes that I think are going to affect the way healthcare is delivered for the next 50 years.

Got it. Thank you, guys.

There are no further questions. I will turn the conference back over to our speakers for any additional remarks.

Thank you, operator. Again I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be the market leader that provides high-quality services and appropriate return on investment for all of our stakeholders.

Thank you for your time today and I look forward to our next call.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.