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To: Investment Committee From: Equity Research Team Date: October 26, 2023 Subject: Investment Recommendation: LedgerLift (LLLT)
1. Recommendation: LONG
12-Month Price Target Range: $58 – $76 (Base to Bull Case) Thesis: LedgerLift is a high-quality mid-market SaaS compounder with exceptional unit economics (123% NRR) and a clear path to operating leverage as it moves from high-growth to steady-state profitability. The market is currently underestimating the margin expansion potential inherent in its 80%+ subscription gross margins and improving CAC efficiency.
2. Business Overview & Competitive Moat
LedgerLift provides a unified B2B spend management and AP automation platform specifically tailored for mid-market enterprises ($100M–$1B revenue).
Why it wins:
- Integrated Workflow: Unlike point solutions, LLLT combines procurement, AP, and expense management. This creates high switching costs and deep ERP integration.
- Mid-Market Sweet Spot: LLLT captures the "Goldilocks" zone—too complex for SMB tools like Bill.com, but more agile and cost-effective than enterprise legacy systems like Coupa or SAP Ariba.
- Why Now: Macro pressures are forcing mid-market CFOs to digitize manual back-office tasks to reduce headcount. LLLT's 18-month CAC payback suggests a high-velocity sales motion that is resonating in the current "efficiency-first" environment.
3. KPI Quality Check
- NRR (123%) & Gross Retention (94%): These are "best-in-class" metrics. The 29% "expansion gap" (NRR minus Gross Retention) indicates a successful land-and-expand strategy, likely driven by seat expansion or module cross-selling.
- Churn (6%): Consistent with mid-market norms. It suggests the product is "sticky" and integrated into the daily accounting workflow.
- CAC Payback (18 months): Healthy for a $132k ARPA product. While S&M is high (34% of revenue), the payback period justifies the spend.
- Concentration: Low. Top 10 customers representing only 16% of revenue mitigates platform risk and suggests a broad, diversified market.
- What could be wrong: The 8% services mix is low, but if implementation becomes more complex, services could drag down blended margins or slow down the sales cycle.
4. Financial Modeling & Valuation
Financial Forecasts (2026–2030)
| Metric ($M) | 2026E | 2027E | 2028E | 2029E | 2030E |
|---|---|---|---|---|---|
| Base Case Revenue | $992 | $1,171 | $1,346 | $1,521 | $1,704 |
| Growth (%) | 21% | 18% | 15% | 13% | 12% |
| Base Case EBIT | $198 | $258 | $323 | $380 | $443 |
| EBIT Margin (%) | 20% | 22% | 24% | 25% | 26% |
| Base Case UFCF* | $154 | $201 | $252 | $297 | $347 |
*UFCF Calculation: EBIT * (1-Tax) + D&A - Capex - NWC Inv. (Assumes 23% tax, 2.5% D&A, 3% Capex, 1% incremental rev NWC).
Scenario DCF Analysis
Terminal Value calculated via Gordon Growth Method.
| Scenario | DCF Enterprise Value | Net Cash | Equity Value | Per Share |
|---|---|---|---|---|
| Bull Case | $13,040M | $1.4B | $14,440M | $76.00 |
| Base Case | $9,620M | $1.4B | $11,020M | $58.00 |
| Bear Case | $5,640M | $1.4B | $7,040M | $37.05 |
5. Comps Cross-Check
Peer Universe Median: EV/NTM Revenue: 9.0x | EV/NTM EBIT: 35.0x
- Revenue Multiple Approach: Applying a 9.0x multiple to 2025E Revenue ($820M) yields an EV of $7.38B. Adding $1.4B cash = $8.78B Equity Value ($46.21/share).
- EBIT Multiple Approach: Applying a 35.0x multiple to 2025E EBIT ($147.6M) yields an EV of $5.17B. Adding $1.4B cash = $6.57B Equity Value ($34.58/share).
Valuation Note: LLLT currently trades at its peer median on revenue but at a premium on EBIT due to its superior NRR and margin profile. The DCF suggests the market is currently pricing in the "Bear Case" growth/margin profile, offering an attractive entry point for the "Base Case" trajectory.
6. Catalysts, Risks, & Falsifiability
Catalysts:
- Operating Leverage Inflection: First quarterly print showing S&M declining as a % of revenue while maintaining 20%+ growth.
- M&A: With $1.4B in cash, a strategic acquisition in the "Payments" space could instantly boost take-rates and ARPA.
- Rule of 40 Achievement: Transitioning from "High Growth/Low Margin" to "Moderate Growth/High Margin" (e.g., 20% growth + 20% FCF margin).
Risks:
- Compression in Mid-Market IT Spend: General macro slowdown hitting the target customer base.
- Competitive Pricing: Incumbents (SAP/Coupa) moving down-market or SMB players (Bill) moving up-market.
- Execution Risk: Failure to transition services-heavy implementations to automated self-service.
- Interest Rate Sensitivity: High-growth SaaS valuations are sensitive to WACC fluctuations.
- Integration Risk: Misallocation of the $1.4B cash pile on a value-destructive acquisition.
"What would change my mind?" (Falsifiable Triggers):
- NRR drops below 110%: Indicates the "expand" engine has stalled or the product is losing its mission-critical status.
- CAC Payback exceeds 24 months: Suggests the mid-market is saturated or competitive pressure is driving up customer acquisition costs.
- Gross Margin erosion (<75%): Indicates a shift toward lower-margin services or a loss of pricing power in the core subscription product.
7. Diligence Questions for Management
- What percentage of the 123% NRR is driven by seat expansion vs. new module cross-sell?
- Can you bridge the gap between subscription GM (82%) and services GM (25%)—what is the long-term target for blended GM?
- In the top 10 customers (16% of revenue), what is the average contract length and remaining term?
- What is the specific roadmap for the $1.4B cash balance? Is there a "buy vs. build" framework for international expansion?
- How much of your 2024/2025 growth is coming from the existing partner channel vs. direct sales?
- What is the typical "trigger event" that causes a customer to switch from an ERP-native tool to LedgerLift?
- How has the sales cycle length changed over the last four quarters?
- What is the churn profile of customers who have been on the platform for >3 years?
- Are you seeing any pricing pressure from legacy ERP vendors discounting their own AP modules?
- What is the steady-state S&M as a % of revenue once you reach $1.5B in scale?