Tempus AI, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Acquisition of Ambry Genetics: Announced the acquisition of Ambry Genetics, a leader in hereditary screening, for $600 million ($375M cash, $225M equity). The business is synergistic across products, accelerates EBITDA and cash flow positive goals, and is growing at over 25% with significant EBITDA generation.
• Revenue Growth: Q3 revenue was $180.9 million, a 33% increase. Genomics unit growth accelerated to 23.9%, and Data and Services revenue grew 64.4% year-over-year.
• Data Business Strength: The data licensing business has a TCV north of $900 million, with strong client relationships like Merck renewing and expanding contracts, demonstrating data's value.
• Sales Force Productivity: Sales force is becoming more productive as reps get trained, though it takes 6-9 months to get up to speed.
• Reimbursement Progress: Made progress with commercial payers like Blue Shield of Illinois and California, with targeting ADLT status for xT CDx in Q1 2025 to drive ASP improvement.

Segment Performance

• Genomics: Q3 revenue growth contributed to overall 33% revenue increase to $180.9 million. Genomics unit growth accelerated to 23.9% from the prior quarter. Test volumes were ~66,500 in Q2 and ~69,000 in Q3 (excluding MRD), with core assays like xT, xR, and xF driving growth. The ASP for Genomics was ~$1,530, showing sequential improvement.
• Data and Services: Revenue accelerated to 64.4% year-over-year growth, notably led by the insights/data licensing business at 86.6% growth. The total contract value (TCV) for data licensing was north of $900 million at the end of Q3, with Q4 historically being the largest quarter from a data perspective.

Guidance

• The combined business of Tempus and Ambry is expected to grow 23%-25% in 2025, with adjusted EBITDA and cash flow positive on an annualized basis.
• Genomics is expected to be in the 25%-30% growth range. The Data business growth rate is not expected to sustain the 87% rate seen in Q3, with focus on long-term sustainable growth.
• The acquisition of Ambry accelerates the path to EBITDA and cash flow positive, with the combined entity expected to be profitable.

Risks

• Reimbursement Uncertainties: Challenges in demonstrating value for algorithmic diagnostics to get favorable reimbursement from payers like Medicare and Medicaid.
• Market Fluctuations: Impact on data purchasing environment as biotech R&D budgets shift, though Tempus continues to see strong interest in its data products.
• Synergy Integration Challenges: Potential challenges in fully integrating Ambry Genetics and realizing synergies in the near term.

Question and Answer

Q: Tejas Savant from Morgan Stanley asked about the rationale for expanding into hereditary cancer testing with Ambry and organizational readiness for somatic portfolio growth.

A: Eric Lefkofsky stated Ambry fits squarely in Tempus' strategic Genomics platform, with Ambry's business growing over 25% and making money, and the acquisition accelerating EBITDA and cash flow positive goals. Jim Rogers added on data business TCV and Q4 seasonality.

Q: Rachel Vatnsdal from JPMorgan asked about Genomics unit growth breakdown and sales force productivity.

A: Jim Rogers provided test volume details (66,500 in Q2, ~69,000 in Q3, excluding MRD) and Eric Lefkofsky discussed sales force productivity improving but taking time to get up to speed.

Q: Michael Ryskin from Bank of America asked about Ambry's revenue impact and Genomics reimbursement trends.

A: Eric Lefkofsky and Jim Rogers discussed Ambry's business complementing Tempus' and reimbursement progress with commercial payers, targeting ADLT status for xT CDx.

Q: Ryan MacDonald from Needham asked about data purchasing environment changes and apps collaboration with Northwestern Medicine.

A: Eric Lefkofsky talked about continued strong interest in data products despite market tailwinds, and Ryan MacDonald was informed about the apps collaboration and challenges in demonstrating value for algorithmic diagnostics for reimbursement.

Q: Andrew Brackmann from William Blair asked about Ambry's impact on health system relationships and profitability balancing.

A: Jim Rogers and Eric Lefkofsky discussed Ambry's complementing health system relationships and Tempus' disciplined path to profitability, with focus on sustainable growth and EBITDA harvesting.

Q: Unidentified Analyst from Piper Sandler asked about pharmacogenomics reimbursement and CGP test value.

A: Jim Rogers and Eric Lefkofsky discussed minimal impact on Tempus from Myriad Genetics issues and established reimbursement rates for CGP tests, with focus on independent reimbursement ascertainment.