Tempus AI's High Stakes IPO: A Gamble On Growth Amid Soaring Losses (TEM) (2024)

Tempus Is Growing, But Losses Are Heavy

Tempus AI, Inc (TEM) has filed to raise $100 million in an IPO of its Class A common stock, according to an SEC S-1 registration statement.

Tempus uses multimodal healthcare data and analytics to provide improved decision-making by researchers and clinicians.

While Tempus AI, Inc. is growing revenue, its rate of growth is decelerating, and it is generating heavy operating losses and operating cash burn.

I’ll provide a final opinion when we learn more IPO details.

What Does Tempus Do?

Chicago, Illinois-based Tempus AI, Inc. was founded to develop its Tempus Platform, which gathers data from various silos and combines it with AI-driven capabilities to help physicians and researchers improve diagnostic results.

Management is headed by founder and CEO Eric Lefkofsky, who has been with the firm since its founding in 2015 and was previously founder and CEO of Groupon and co-founder of the venture capital firm Lightbank.

The company has focused its efforts on the areas of oncology, neuropsychology, radiology and cardiology and aims to improve patient care through better diagnostics as well as through accelerated drug development.

As of March 31, 2024, Tempus has booked fair market value investment of $1.1 billion from investors, including Keeks, Baillie Gifford & Co. and others.

The firm seeks to market its genomics diagnostics and data businesses to clinicians and pharmaceutical/biopharmaceutical customers, respectively.

Leadership plans to expand its genomics diagnostics system to cover additional medical condition categories and advance its AI application capabilities.

Selling, G&A expenses as a percentage of total revenue have trended lower as revenues have grown, as shown in the table below:

(Source - SEC.)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, has dropped to 0.4x in the most recent reporting period, as shown here:

(Source - SEC.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TEM’s most recent calculation was negative (10%) as of March 31, 2024, so the firm has grown revenue but produced high operating losses, per the table below:

(Source - SEC.)

What Is Tempus’ Market?

According to a 2024 market research report by Grand View Research, the global healthcare analytics market was an estimated $43 billion in 2023 and is forecasted to reach $164 billion by 2030.

This represents a forecast of a very high CAGR (Compound Annual Growth Rate) of 21.1% from 2024 to 2030.

The main drivers for this expected growth are pressures to reduce the cost of treatment, the desire for increasing and better treatment options and improving patient care across the healthcare industry.

Also, the graphic shown below illustrates the expected growth trajectory of the U.S. healthcare analytics market through 2030 by product type:

Major competitive or other industry participants include the following:

• Foundation Medicine (Roche)

• Caris Life Sciences

• Guardant Health

• Neogenomics

• ResolutionBio (Agilent)

• Quest

• LabCorp

• Flatiron Health

• ConcertAI

• Fortrea

• ICON

• Syneos

• PPD

• Others.

Tempus AI, Inc. Recent Financial Results

The company’s recent financial results can be summarized as follows:

• Growing top-line revenue, at a decelerating rate of growth

• Decreasing gross profit and gross margin

• High operating losses

• Increasing cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source - SEC.)

As of March 31, 2024, Tempus had $79.9 million in cash and $809 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2024, was negative ($284 million).

Tempus AI's Preliminary IPO Information

Tempus intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the figure may be exceeding $500 million.

No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.

The Class A shareholders will be entitled to one vote per share, and the Class B shareholders will have 30 votes per share.

The S&P 500 Index (SP500) no longer admits companies with multiple share classes into its index due to voting concentration and other reasons.

Management is electing to have the company classified as an "emerging growth company," which means it has the option to provide substantially less information to shareholders.

Many of these types of company stocks have performed poorly recently.

Management says it will use the net proceeds from the IPO as follows:

to pay tax withholding and remittance obligations related to the RSU Net Settlement (defined below). As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the remaining net proceeds of this offering. However, we currently intend to use the remaining net proceeds of this offering for general corporate purposes, including working capital, operating expenses, repayment of debt and capital expenditures. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. At this time, we do not have agreements or commitments to enter into any material acquisitions.

(Source - SEC.)

An online presentation of the company roadshow is not yet available.

Regarding outstanding legal proceedings, leadership made the following statement:

The listed book runners of the IPO are Morgan Stanley, J.P. Morgan, Allen & Company, BofA Securities, TD Cowen, Stifel, William Blair, Loop Capital Markets and Needham & Company.

Tempus Is Growing, But Losses Are Heavy

TEM is seeking U.S. public capital market funding for its continued R&D and operating requirements, as the firm is burning through cash at a high rate.

The company’s financials have produced increasing topline revenue but at a decelerating rate of growth, reduced gross profit and gross margin, very high operating losses and even higher operating cash burn.

Free cash flow for the twelve months ended March 31, 2024, was negative ($284 million), an extremely high figure.

Selling, G&A expenses as a percentage of total revenue have dropped as revenue has increased; its Selling, G&A efficiency multiple fell to 0.4x in the most recent reporting period.

The firm currently plans to retain any future earnings for its corporate growth efforts and working capital requirements.

TEM’s recent capital spending activity indicates it has spent moderately on capital expenditures as a function of its use of cash in operations.

The company’s Rule of 40 results have been materially negative, with revenue growth more than offset by heavy operating losses.

The market opportunity for healthcare analytics is large and expected to grow at a high rate of growth in the coming years, so the company operates in dynamic industry markets that feature significant competition.

Risks to the company’s outlook as a public company include significant competition in the various markets it operates in and the firm’s cash burn, which may require it to seek additional capital or debt as a public company, potentially diluting shareholders or increasing its interest expense.

Also, it appears the company's business model requires it to expand into other disease condition areas, which may not be the "low-hanging fruit" that its previous areas of focus have been.

When we learn more IPO details from management, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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