Tempus AI (TEM): Q1 2025 Earnings Report - Buy, Sell, or Hold?

Tempus AI Q1 2025 Earnings Analysis: A Deeper Dive

This article analyzes Tempus AI's Q1 2025 earnings report, focusing on key data points and providing a comprehensive understanding of the company's business model. We'll explore their revenue streams, growth rates, and profitability, as well as discuss key takeaways for investors.

Tempus AI's Business Model: Genomics and Data

Tempus AI's business hinges on two core components: genomics testing and data.

• Genomics Testing: The foundation of Tempus AI's business is gene sequencing. This generates revenue and, more importantly, provides raw data.

• Data Acquisition: To enrich their database, Tempus AI utilizes various methods to acquire additional data, including:

  • Acquisitions: Buying companies like Ambry (specializing in genetic testing) brings in revenue and associated data.

  • Purchasing Data: Directly buying data from external sources.

  • Data Sharing: Exchanging data with other entities.

Monetizing the Data: Revenue Streams

Tempus AI leverages its data assets in multiple ways to generate revenue:

• Selling Data: Directly selling data to interested parties.

• AI Platform Development: Using the data internally to build and monetize AI platforms.

• Enhanced Genomics Testing: Using data to improve the accuracy and effectiveness of genomic sequencing, leading to more testing revenue.

The more data Tempus AI acquires, the more accurate its genomic sequencing becomes, attracting more customers and driving revenue growth in both genomics and data services.

Key Financial Metrics from Q1 2025

Here's a breakdown of the key financial metrics from Tempus AI's Q1 2025 earnings report:

• Genomics Testing Revenue: \$193 million in Q1 2025.

• Genomics Gross Margin: 56.3%, a slight increase from 48.5% in the same period last year.

• Data Services Gross Margin: 74.6%, significantly higher than genomics, highlighting the importance of this segment.

The higher gross margin of data services compared to genomics, underlines the potential of the data-driven aspects of the business. Genomics testing requires more equipment and specialized personnel, therefore limiting the gross margin.

Analysis of Revenue Growth

Looking at revenue growth, it's important to consider the impact of the Ambry acquisition. The company's presentation provides limited insight into actual growth due to lack of comparable data and due to the addition of Ambry.

• Oncology Testing Cases: The growth rate of oncology testing cases (a significant portion of genomics testing) slowed down from over 50% in previous years to 24% more recently. This suggests increasing competition and regulatory pressures.

• Data Services Revenue Growth: Data services revenue grew by 43% year-over-year in Q1 2025. This is a positive sign, exceeding the growth rate of genomics testing.

While genomic testing continues to grow, data service offerings show good increase. Data is a critical component of the company's long term strategy.

Profitability and Guidance

• Adjusted EBITDA: The company's adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was negative \$16.2 million in Q1 2025. Tempus AI aims to achieve positive \$5 million in adjusted EBITDA for the full year 2025.

• Revenue Guidance: The company raised its full-year 2025 revenue guidance slightly to \$1.25 billion, which includes 11 months of revenue from the Ambry acquisition.

The current negative EBITDA highlights the need for improvement in profitability. The company still needs to reach its stated goals for profitability.

Data Service as Percentage of Total Revenue

An important consideration is the contribution of data services to the company's total revenue.

• 2022: 41%

• 2023: 32%

• 2024: 35%

• Q1 2024: 30%

• Q1 2025: 24%

While data services has a high gross margin, its contribution to total revenue has actually been decreasing. The acquisition of Embry further dilutes that revenue percentage, as Genomics becomes a larger percentage of the total revenue.

Key Takeaways and Investment Considerations

Here's a summary of the key takeaways and considerations for investors:

1. Revenue Growth Slowing: Overall revenue growth is decelerating, particularly in traditional genomics testing due to increased competition and regulatory constraints.
2. Profitability Uncertain: Tempus AI has yet to achieve profitability, and its ability to reach its 2025 EBITDA target remains to be seen.
3. Stock Volatility: The stock price is highly volatile, with significant swings in the past year.
4. Focus on Data: Data revenue growth needs to continue at a rapid pace, and the percentage of data revenue needs to increase back to 40%+.

Currently, the author is choosing not to invest in Tempus AI. A decision to invest would be contingent on accelerating revenue growth, improved profitability, and a more favorable valuation. Monitoring key metrics and market conditions will be essential.