Tempus AI, Inc. (TEM) Earnings

Management highlights

Overall Business Performance - The business performed at or above internal plan, with three straight quarters of bookings north of $100 million for the data applications segment, and visibility for the data business at its strongest level in years. - The company added large new top-tier pharma partners in Q1 2026, including a large strategic collaboration with Merck and an expanded relationship with Gilead, with a robust pipeline of additional new agreements in late-stage discussion. Diagnostic Business Updates - The FDA submission for the XF liquid biopsy assay was completed earlier this year, and the company is awaiting feedback; no impact on 2026 pricing or average selling prices (ASPs) is expected. An FDA amendment for the approved XT assay to cover tumor-only cases (when no normal sample is available) has been submitted, with a decision expected imminently. - Oncology testing adoption remains in the early-to-middle growth stage, with significant untapped demand as many physicians still do not order comprehensive genomic profiling for cancer patients; the company expects continued industry volume growth over the next three to five years, and projects it will outpace peers due to its comprehensive technology platform. - The company has built multiple proprietary clinical decision support algorithms for oncology testing, with a 40% attach rate on solid tumor assays. These algorithms improve clinical decision-making for physicians, drive increased ordering, and the company expects attach rates to continue expanding. Data Business Updates - The company's de-identified matched clinical-molecular database exceeds 500 petabytes, integrated with an analytics and model-building platform compatible with both CPUs and GPUs. More pharma partners are not only licensing data but also building custom proprietary AI models (including foundation models) to improve internal R&D productivity. - Currently, almost all data licensing revenue comes from oncology data generated from the company's diagnostic testing business. The company has started to secure new projects in non-oncology disease areas, such as a multimillion-dollar Alzheimer's disease multimodal AI model project, representing a long-term growth driver. Financial Position - The company has delivered eight consecutive quarters of year-over-year adjusted EBITDA improvement, holds a strong cash position, does not need additional financing to fund operations, and expects to become full-year adjusted EBITDA positive in 2026.

Guidance

- Management raised full year 2026 total revenue guidance to a range of $1.59 billion to $1.6 billion, with adjusted EBITDA projected at approximately $65 million. - The company expects the hereditary diagnostic business to return to mid-teens year-over-year growth in the second half of 2026. - Adjusted EBITDA is expected to improve sequentially throughout 2026, with the strongest performance in the second half of the year, driven by higher-margin data revenue contribution. - Free cash flow is expected to improve significantly in Q2 2026 after Q1 headwinds from timing of payables and annual bonus payments, and continue improving through the rest of the year. - Management projects 25% annual top-line growth over the next three years, supported by both ASP increases from FDA approval-related reimbursement gains and ongoing unit volume growth across its diversified business segments. - The company expects up to $500 of incremental ASP lift for its diagnostic assays over the next one to two years as all core assays gain FDA approval.

Segment performance

Total Q1 2026 revenue was $348.1 million, representing 36% year-over-year growth. 1. Diagnostic segment: Revenue reached $261.1 million, accounting for 75% of total revenue, with 35% year-over-year growth. Growth was led by the oncology business, which delivered 28% unit growth, with solid tumor and liquid biopsies performing strongly, and minimal residual disease (MRD) volume seeing even faster growth. The hereditary testing business saw slower growth in the quarter, lapping extremely high growth rates from the prior year period. The MRD assay grew 500% year-over-year, off a small base of 6,500 tests. The XG germline assay grew 50% year-over-year, also off a small base. 2. Data applications segment: Revenue was $87 million, representing 25% of total revenue, with 40.5% year-over-year growth. The data licensing and modeling business insights sub-segment grew over 44% year-over-year. This segment marked its third consecutive quarter with bookings above $100 million, with rising total contract value (TCV) and improved business visibility.

Risks & headwinds

- MRD volume growth is currently constrained by limited reimbursement approvals; the company is metering growth in coordination with partner Personalis until broader reimbursement is secured to avoid excessive losses. - Hereditary testing growth is currently lumpy, lapping extremely high growth rates from the prior year, and the new rare disease testing product launched slower than expected, limiting near-term volume upside. - FDA approval timing and final outcomes for new assay submissions and amendments are uncertain, creating uncertainty around the timing of expected ASP increases.

Analyst Q&A

• Q: How are discussions with large pharma customers trending in 2026 around AI and de-identified data, and what is the outlook for large contract renewals and extensions? /

  A: Management states existing large pharma data relationships are very strong, with a long history of renewing agreements at or above historical values, and this trend is expected to continue. The company added large new partners (including Merck in Q1) and expanded existing deals like Gilead, with a robust pipeline of additional large agreements. More big pharma are signing $100 million+ multi-year agreements, and the trend of partners combining data licensing with custom AI model building for R&D is growing rapidly.

• Q: How differentiated are the recent Merck and Gilead deals from prior collaborations, and how much visibility does the company have into hitting 2026 data revenue guidance? /

  A: Merck’s deal is a very large strategic data and modeling collaboration, one of only a handful of agreements of that size for the company, reflecting a long-term deeply committed partnership. Gilead’s deal is smaller than Merck’s but represents a major step-up from Gilead’s historical spending, demonstrating the trend of existing accounts expanding over time. Management notes that there was already $350 million of TCV earmarked for 2026 revenue entering the year, the closing of Merck and Gilead in Q1 increased visibility, and the company has never had this level of visibility into full-year data revenue at this point in the year.

• Q: What is the outlook for cash flow improvement in 2026, and will having two FDA-approved assays change separate billing eligibility for Medicare? /

  A: Q1 2026 cash flow was lower due to typical seasonal factors including timing of payables and annual bonus payments; significant improvement is expected in Q2 from normalized working capital and the shift to quarterly payments for large insights contracts, with further improvement through the rest of the year. Management expects FDA approval of all core assays will not change how tests are ordered or billed, as billing is based on individual medical necessity, and expects FDA approval will drive an estimated $500 of incremental ASP lift over the next 1-2 years.

• Q: When will MRD volume start ramping up meaningfully, and what is constraining growth today? /

  A: MRD is already delivering very robust percentage growth, but the company has not yet rolled it out to its full 100+ person sales force due to incomplete reimbursement. Around 97% of the company’s MRD tests are tumor-informed, and broader reimbursement approval is still pending; full ramp would create significant losses today, so growth is being metered. Management states that as reimbursement improves, the company can aggressively roll out MRD and become a very formidable competitor in the U.S. MRD market.