SGRY Q1 Earnings Call: Volume Growth and Business Mix Shape Outlook Amid Margin Pressures

Healthcare company Surgery Partners (NASDAQ:SGRY) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 8.2% year on year to $776 million. Its non-GAAP profit of $0.04 per share was 1.4 cents below analysts’ consensus estimates.

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StockStory’s Take

Surgery Partners’ first quarter results were shaped by higher surgical case volumes and a shift in procedure mix. Management pointed to 6.5% surgical case growth, led by gastrointestinal and musculoskeletal procedures, as the main driver behind revenue gains. CEO Eric Evans credited the company’s expanding de novo (new facility) pipeline and robust physician recruitment, particularly in orthopedics, as key contributors to this momentum. However, Evans acknowledged that growth in lower-acuity specialties like GI, which carry lower reimbursement rates, pressured revenue per procedure. CFO David Doherty added that seasonality and calendar effects also influenced the mix and rate dynamics. Management maintained that these trends were anticipated and remain consistent with their internal expectations for the quarter.

Looking forward, Surgery Partners’ guidance centers on continued surgical volume increases, margin expansion initiatives, and sustained investment in both M&A and de novo facility openings. Management reiterated confidence in achieving its long-term growth algorithm, underpinned by ongoing physician recruitment and integration of recent acquisitions. CEO Eric Evans highlighted, “We expect same-facility growth at or above the high end of our target, with more balanced volume and rate contributions as the year progresses.” CFO David Doherty cautioned that interest expense would be a headwind in coming quarters due to higher rates, but emphasized the company’s strong liquidity and ability to fund growth without raising new debt or equity. Management reported no material supply chain risks from tariffs and minimal exposure to changes in Medicaid reimbursement, supporting the company’s outlook for steady performance.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to strong organic surgical case growth, strategic physician recruitment, and continued investment in new facilities, while acknowledging margin pressure from business mix and external cost factors.

• Surgical volume growth: Case growth was driven by higher volumes in gastrointestinal and orthopedic procedures, with total joint surgeries up 22% year-on-year. This reflects targeted investments in facility capabilities and recruitment of specialists.
• De novo facility expansion: The company’s pipeline of newly opened and under-construction facilities is heavily weighted toward higher-acuity specialties like orthopedics. These new sites are expected to deliver long-term growth at a lower capital outlay compared to traditional acquisitions.
• Physician recruitment impact: Nearly 150 new physicians joined in the quarter, with this cohort bringing in higher-acuity and higher-revenue cases relative to prior years. Management expects this compounding effect to continue as new recruits ramp up their case volumes.
• Margin pressure from mix: A shift toward lower-acuity GI procedures, which receive lower reimbursement rates, led to lower revenue per case and contributed to a decline in operating margin. Management expects business mix to normalize over the course of the year.
• Investment in operating efficiency: Ongoing standardization of revenue cycle management and process integration from recent acquisitions are intended to drive future margin improvements. Management cited early benefits from these initiatives, particularly in reducing days sales outstanding and improving cash conversion.

Drivers of Future Performance

Surgery Partners’ outlook for the remainder of 2025 is anchored by expectations for continued volume growth, margin recovery, and disciplined capital deployment.

• Balanced volume and rate growth: Management anticipates a more even contribution from both surgical volume and reimbursement rates as the year progresses, with particular emphasis on ramping newly recruited physicians and de novo facilities.
• Margin improvement initiatives: The company is pursuing ongoing cost efficiency efforts, including standardized revenue cycle management and operational improvements, to offset prior margin compression. Integration of recent acquisitions is expected to yield further gains.
• Capital allocation and liquidity: Leadership underlined sufficient liquidity and stable leverage to support targeted M&A and de novo development, without the need for additional debt or equity issuance. However, rising interest expense will be a headwind to free cash flow in the next few quarters.

Catalysts in Upcoming Quarters

Key areas to monitor in upcoming quarters include (1) the pace at which new de novo facilities and recruited physicians ramp up case volumes, (2) the success of ongoing margin improvement and revenue cycle initiatives, and (3) progress in integrating recent acquisitions to drive incremental earnings. Continued stability in payer mix and the absence of supply chain disruptions will also be important indicators of execution.

Surgery Partners currently trades at a forward P/E ratio of 21.3×. At this valuation, is it a buy or sell post earnings? Find out in our full research report (it’s free).

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