Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Tempus AI Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the conference over to Liz Krutoholow. Please go ahead.

Thank you, Briana. Good afternoon, and welcome to Tempus’ third quarter 2024 conference call. This afternoon, Tempus released results for the quarter ending September 30, 2024. Joining me today from Tempus are Eric Lefkofsky, Founder and CEO of Tempus; and Jim Rogers, CFO. Before we begin, I would like to remind you that during this call, management may make forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of these risks, please visit our 10-Q for the quarter ended September 30, 2024, filed on November 4, 2024, as well as any future reports that we file with the SEC. During the call, we will discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures are included in our third quarter earnings release, which has been furnished to the SEC and is available on our website. I would now like to turn the call over to Eric.

Hi, all. Just before we start the Q&A session, I thought I would briefly run through some of the highlights for the quarter. Q3 was a solid quarter for Tempus. We delivered revenue growth of 33%, hitting $180.9 million. We had Genomics unit growth that accelerated from last quarter to 23.9%, which was meaningful acceleration in terms of unit growth. The overall business was about 20% growth based upon some ASP true-ups from last year, but we were excited to see the unit growth pick up. Our Data and Services revenue accelerated to 64.4% year-over-year growth, notably led by our insights or data licensing business, which came in at 86.6%, which was a meaningful acceleration from last year – in last quarter. We also delivered adjusted EBITDA of negative $21.8 million, which was a $14.4 million year-over-year improvement and also a significant improvement quarter-over-quarter. On top of that, the big news for the quarter is that we announced the acquisition of Ambry Genetics, who is a leader in hereditary screening and whose business we’ve come to know well over the past few years. They’re our largest reference lab for the hereditary screening we do and we have spent significant time with the team understanding the business and are just super excited to have them join our world. The business is synergistic across all of our products from sequencing to our Data business and our AI Applications business. They also accelerate our path to cash flow and adjusted EBITDA breakeven given that the business today is growing at more than 25%, which is meaningful growth, but even more exciting is that they generate significant EBITDA. They’ve achieved one of the rare things in our space, which is a Genomics business that has both significant growth and a proprietary business model while also being profitable. We’re excited that the combination of our businesses will result in annualized adjusted EBITDA and cash flow positive performance. We are paying $600 million for the business, $375 million in cash and $225 million in equity, with $125 million vesting at closing, which should occur in early Q1, and the other $100 million locked up for a year. In terms of the multiples we’re paying, it’s about 1.9 times current revenue and roughly 15 times EBITDA. We feel like we are buying the business at an attractive price and we are able to finance the business largely with additional debt from Ares. Overall, it was a fantastic quarter, and on that note, we’re happy to take any questions folks have.

Thank you. Our first question comes from the line of Tejas Savant with Morgan Stanley. Please go ahead.

Hey guys, good evening, and thanks for taking the questions here. Eric, maybe I’ll start with the Ambry news. First of all, congrats on the announcement. Can you just walk us through the rationale of expanding into hereditary cancer testing? One of the questions we often receive is regarding the sustainability of the 25% growth you cited for the Ambry asset, in light of some of the mixed growth trends that some of the peers have faced in that market. Can you also comment on just the organizational readiness to continue progressing on the somatic side of the portfolio, including your MRD push, while also expanding into these new verticals and integrating the transaction? Or is the plan here to operate at arm’s length, given it’s a well-run asset? You talked about the EBITDA generation there and essentially thinking about integrating it further down the road.

Yes. So I’m happy to jump in. Ambry fits squarely within our current strategic platform for Genomics, in that we currently offer hereditary testing. We have an assay called xG; it’s one of our main product categories. It's critical for us because we want to capture patients early, be there for them during treatment, and monitor their disease over time. Our strategy has always been that physicians and care teams will prefer to work with labs that can provide comprehensive profiling instead of having to coordinate with multiple labs. We believe it’s essential to be involved in hereditary screening, somatic testing, and MRD monitoring. Recently, Ambry has been accelerating its growth rate, and we see stability in the hereditary market with growing insights relevant to inherited cancer risk. Despite some expected slowdown due to the law of large numbers, we believe Ambry's market position will allow it to continue performing well and growing. Regarding MRD monitoring, we have a strong portfolio and a good demand for our products. We recognize that reimbursement is a gating factor, and there will be more meaningful growth as we obtain those reimbursements.

Got it. That’s helpful. Switching gears to the data side, you talked about the Merck EMD contract renewal and the expansion of the Takeda collaboration and another one with BioNTech. Can you clarify whether the TCV grew slightly sequentially? I know you reiterated that it is still north of $900 million, but it would be helpful to reassure investors that it’s moving in the right direction. Jim, one for you in terms of the near-term dynamics. One of the questions we get is there’s a $20 million to $25 million sort of quarter-over-quarter step-up embedded in Street models into Q4 for the Data and Services business. So, just your visibility there in light of some of the mixed commentary we’ve received from the CROs and other players regarding biopharma funding weakness.

I’ll start with the overall business, and then Jim can address the financial metric. The Data business continues to be strong. We have noticed significant pressure affecting the market; however, we continue to see robust growth in our data licensing business, which is up nearly 87%. We don't anticipate sustaining this growth rate, but we are on a strong trajectory. Overall, I’d say everything is moving in the right direction. Regarding the Merck renewal, it’s a testament to the value our data products provide when a significant client renews and expands their license—demonstrating that we deliver real value. Now, I’ll let Jim weigh in on the metrics.

Yes. As we noted at the end of Q2, it was north of $900 million, and it remains above that at the end of Q3. We obviously recognize a significant amount of revenue in Q3 from the volume we had at Q2. Therefore, we continue to refill the pipeline, and we believe that maintaining this level provides us with excellent visibility for the coming years in data licensing. As for the anticipated step-up in Q4, traditionally, Q4 is our largest quarter from a data perspective due to project alignment with pharma budgeting cycles. Thus, it is not unusual for us to see a step-up in Q4 for data licensing.

Got it. That’s helpful. Appreciate the time, guys.

Thanks.

Our next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead.

Hi, good afternoon. Thanks for taking the questions. First up on the core Genomics business, Eric, I believe you mentioned that unit growth accelerated this quarter. Can you break down for us what volumes grew sequentially? Which tests did you see a faster uptake from the portfolio?

Yes. Total volume was about 66,500 in Q2, just about 69,000 tests in Q3. We should note that both of those numbers exclude any MRD testing. The growth we’re observing quarter-over-quarter is coming from our core assays—xT, xR, xF, and xG, especially xT, xR, and xF.

Yes. We expected to see additional unit lift in the quarter, and we saw what we expected, so it’s always nice to confirm those projections.

Great. For my follow-up, last quarter, you mentioned hiring some of the sales force. I believe you added roughly 60 new sales reps. Initially, this led to lower productivity during the ramp-up period and some territory adjustments. Can you provide an update regarding the current productivity levels of your sales force? How should we view that in terms of the ramp into Q4 and next year?

Yes, the sales force is becoming more productive each month as they gain training and experience. Historically, it can take six to nine months for reps to get fully up to speed with our varied testing portfolio. We expect continued improvement in productivity as they adjust. While increased productivity might imply some fluctuations in growth, it won’t significantly affect our financial health given the overall trends toward improved losses and EBITDA.

Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead.

Great. Thanks for taking the question, guys. Appreciate the color on Ambry earlier, and congrats on that deal. It seems like the financials are compelling. I want to expand a bit on your existing relationship with them as your primary reference lab. Can you clarify the $300 million in revenue they generated—how much of that will be incremental? Specifically, what percentage of the business comes from your relationship and how should we interpret the impact on your model going forward?

Yes. The vast majority of their business is not overlapping. However, we haven’t provided exact numbers regarding the breakdown of our tests. We believe that our inherited cancer risk screening is still relatively small within our broader Genomics business and that most of Ambry’s business is not overlapping with ours.

Also, the primary call point is genetic counselors, while our testing volume primarily comes through oncologists. This makes our offerings complement each other effectively.

Okay, thanks. Regarding Genomics, you mentioned 69,000 tests with $1,530 ASP, showing nice sequential improvement. Can you talk about the reimbursement trends we should be aware of? Did any particular payers come on board, or was it a broad uplift?

From a reimbursement standpoint, we've made significant progress with commercial payers, adding contracts with Blue Shield of Illinois, Blue Shield of California, and Avalon, which cover our therapy selection and inherited cancer panels. This contributed to slight improvements quarter-over-quarter. Looking ahead, we are still targeting $4,500 per test for the xT CDx as we migrate volume to that in Q1 of 2025.

All right, thank you.

Our next question comes from the line of Daniel Brennan with TD Cowen. Please go ahead.

Great, thanks for the questions. Regarding Ambry, given your partnership, was there a competitive process for the deal? Can you clarify what kind of top-line growth you are anticipating and whether any synergies come with this deal?

Yes, in terms of the competitive process, Ambry did go through a competitive assessment. They had banks involved and explored their options. It's important to note the partnership enabled us to closely observe their performance over time, bolstering our confidence in their business and the economics. Regarding top-line growth, our investor deck outlines expectations for combined business growth in the 23% to 25% range. As for synergies, while it's a well-run business that we’ll operate independently for now, we will leverage our large data business and the existing health system relationships Ambry has built.

Additionally, about 95% of their volume is in-network, and their strong payer relationships could be beneficial for Tempus as we interact with those systems in the future.

Got it. Thank you. As a follow-up, regarding your outlook for the rest of the year, in the press release, you cited that the genomics business is expected to stay in the 25% to 30% growth range and reiterated the $700 million guide for the year. Should we assume Genomics remains in that range for Q4 and we can solve for the Data business growth accordingly?

That's likely a question for Liz post-call, as I don’t have a quick segment breakdown right now. However, we do indeed expect Genomics to stay in that 25% to 30% growth range, which can help you project accordingly.

We wouldn't anticipate any significant shift in Q4 compared to how the businesses have been growing independently.

That said, we should clarify that while the Data business is performing well, we should not expect it to sustain the previous 87% growth rate. Our focus is on maintaining long-term growth in the 25% range as opposed to pursuing short-term spikes in growth.

Great, thank you.

Our next question comes from the line of Ryan MacDonald with Needham. Please go ahead.

Hi, congrats on a great quarter and thanks for taking my questions. To start on the data purchasing environment, we've seen some significant notable deals this quarter. Can you discuss any changes in how new customers are approaching purchases of data, especially growth or larger initial deals compared to the last 6 to 12 months? It's been a tougher purchasing environment recently.

We continue to see strong interest in our data products. We’ve won substantial contracts this year and have gained significant momentum with various new clients, such as BioNTech. However, generally speaking, the overall market lacks some of the capital flow we observed a few years ago when biotech investments surged. Companies are now more focused on preserving capital, but the fact that we're still growing and have a robust backlog is promising for the future value of our offerings. We haven’t seen a significant shift in purchasing patterns; clients typically start with smaller data purchases and gradually increase their engagement through larger deals.

Really helpful color. As a follow-up, I recognize it's a small part of the business today, but regarding the apps segment. You've recently announced a collaboration with Northwestern Medicine regarding ECG-AF algo. Can you elaborate on this collaboration? Is this indicating a pathway toward monetizing the apps segment?

That’s precisely correct. Many large medical systems are eager to leverage generative AI and large language models for improved patient care and outcomes. There are few companies of our size providing such innovative solutions. Working with leading institutions like Northwestern allows us to effectively deploy these advanced models. I believe that over the coming years, we will see these tools being broadly utilized in clinical practice. While this may not yield significant revenue right now, demonstrating value to payers for reimbursement is crucial for monetizing these algorithmic diagnostic tools in the future.

Our next question comes from the line of Andrew Brackmann with William Blair. Please go ahead.

Hi, good afternoon. Thanks for taking the questions. To start with the Ambry acquisition, can you discuss how it enhances your health system relationships and how it positions Tempus as a go-to provider?

The in-network focus of Ambry enhances their relationships with payers, while we have primarily operated out of network. This will facilitate our deeper engagement with payers and health systems. Their primary call is with genetic counselors, while our volumes focus on oncologists. This synergy will enable us to strengthen our overall service offering within the healthcare ecosystem.

During my recent visits to major academic medical centers, I noticed that precision medicine departments are eager to integrate hereditary screening with therapy selection and genomic profiling for a comprehensive approach to cancer care. The trend is clear: hospitals want fewer vendors providing comprehensive services. This acquisition strengthens our capabilities and aligns perfectly with such comprehensive needs.

Great. I want to revisit your previous answer regarding profitability. How should we view balancing investments with the path toward profitability in the future? Does this acquisition change your philosophy in that regard?

When we went public, we communicated our disciplined approach toward achieving EBITDA positivity. We plan to leverage the gross profit growth generated while ensuring losses decline. The acquisition has set us on a path to being an EBITDA positive and cash flow positive business on an annualized basis, yet we haven’t decided how we will utilize the profits generated relative to future investments. Our focus remains on maintaining growth rather than generating excessive short-term EBITDA. We want to balance these priorities thoughtfully.

Our next question comes from the line of David Westenberg with Piper Sandler. Please go ahead.

Hi, thanks for taking the question. This is John on for Dave. First, I wanted to ask about recent reimbursement issues between Myriad Genetics and United regarding GeneSight. What insight do you have about how the industry might see reimbursement for psychiatric conditions and pharmacogenomics moving forward?

Our neuropsych business is relatively small, so any disruption in reimbursement will significantly impact our growth rate. It remains to be seen how other payers will react to those developments in the industry.

Got it. Thank you. Regarding billing for transcriptomics and genomics, could you elaborate on how your CGP test provides different value relative to competitors? Is your billing aligned with the value you believe it provides?

First, our billing is not out of alignment. The rates are established by CMS and our local MAX. Our blended rate of $1,530 accounts for various tests with differing rates that are all following AMA codes and reimbursement pathways. Our rates have been evaluated multiple times by different independent payers, and they consistently fall into the same range. We expect some increases for our DNA tests as we achieve ADLT status, but we prefer not to commit to projections until they have materialized. We aim to maintain a high margin and profitable business.

Thank you.

We have no further questions at this time. With that, we will conclude today’s conference call. Thank you all for your participation. You may now disconnect.