Advanced Investment Memo (IC Memo)

MEMORANDUM

TO: Investment Committee
FROM: [Analyst Name]
DATE: October 24, 2023
SUBJECT: LedgerLift (Ticker: LLLT) – Initiation of Coverage

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1. Recommendation & Thesis

Recommendation: SHORT
Current Price: $46.00
12-Month Price Target Range: $17.00 (Bear) – $28.00 (Base)

Thesis: LedgerLift is a high-quality SaaS business priced for a reality its cash flows cannot mathematically support. The market is valuing LLLT on a lazy EV/Sales multiple, ignoring that even under aggressive bull-case assumptions (sustained >20% growth, 29% operating margins, and a 9% WACC), intrinsic DCF value peaks at $42/share. As revenue growth naturally decelerates from 21% to the mid-teens and investors pivot their valuation framework from EV/Revenue to EV/FCF, LLLT faces severe multiple compression, offering an asymmetrical short setup with ~40% base-case downside.

2. Business Overview: Why It Wins & Why Now

LedgerLift provides B2B spend management and Accounts Payable (AP) automation software for mid-market enterprises. The platform consolidates procurement, expense management, corporate cards, and AP routing into a single pane of glass.

Why it wins: LLLT replaces fragmented, clunky legacy ERP modules (e.g., legacy Oracle/SAP AP tools) with a modern, consumer-grade UI. Its 94% gross retention rate proves the product is sticky; once integrated into a CFO’s daily ledger and payment rails, the switching costs are immense. Why now: The mid-market is undergoing a long-overdue CFO tech-stack modernization. High interest rates have forced mid-sized enterprises to optimize working capital and clamp down on rogue spend, creating a structural tailwind for AP automation.

3. KPI Quality Check & What Could Go Wrong

• NRR (123%): Exceptional on the surface, indicating strong seat expansion and cross-selling. What could be wrong: NRR is a backward-looking metric. As the macro environment tightens and mid-market companies freeze hiring, seat-based expansion will stall. We expect NRR to aggressively mean-revert toward ~110%, dragging down top-line growth.
• Logo Churn (6%): Excellent for the mid-market, reflecting high product stickiness and the mission-critical nature of AP software.
• CAC Payback (18 months) & S&M (34% of Rev): 18 months is healthy, but spending 34% of revenue on S&M to achieve FY26 base growth of 21% signals deteriorating sales efficiency. What could be wrong: If growth is getting harder to buy, LLLT will have to choose between missing top-line consensus or sacrificing the operating margin expansion the Street is modeling.
• Concentration: Top 10 customers = 16%; Top 1 = 3%. Highly diversified, presenting minimal key-account risk.

4. Financial Projections & DCF Valuation (2026-2030)

Methodology & Key Steps:

• UFCF Calculation: EBIT * (1 - 23% Tax) + D&A (2.5% Rev) - Capex (3.0% Rev) - dNWC (1.0% of incremental Rev).
• Note: D&A minus Capex equals a net cash outflow of 0.5% of Revenue.
• Shares: 190m | Net Cash: $1.4B

Base Case (WACC: 10%, Terminal Growth: 3%)

Assumes steady deceleration in growth and moderate margin expansion.

Metric ($M)	FY26E	FY27E	FY28E	FY29E	FY30E
Revenue (21% -> 12%)	992	1,171	1,346	1,521	1,704
EBIT (20% -> 26%)	198	258	323	380	443
UFCF	146	191	240	284	331

• PV of UFCF: $870M
• Terminal Value (TV): $4,868M -> PV of TV: $3,022M
• Enterprise Value: $3,892M
• Equity Value (+ $1.4B Cash): $5,292M
• Implied Share Price: $27.85

Bull Case (WACC: 9%, Terminal Growth: 4%)

Assumes flawless execution, hyper-resilient NRR, and elite margin leverage.

Metric ($M)	FY26E	FY27E	FY28E	FY29E	FY30E
Revenue (25% -> 13%)	1,025	1,240	1,464	1,683	1,902
EBIT (21% -> 29%)	215	298	381	471	552
UFCF	159	221	284	352	413

• PV of UFCF: $1,068M
• Terminal Value (TV): $8,590M -> PV of TV: $5,583M
• Enterprise Value: $6,651M
• Equity Value (+ $1.4B Cash): $8,051M
• Implied Share Price: $42.37 (Still below current $46 price)

Bear Case (WACC: 12%, Terminal Growth: 2%)

Assumes macro-driven NRR collapse and stagnant margin expansion.

Metric ($M)	FY26E	FY27E	FY28E	FY29E	FY30E
Revenue (16% -> 9%)	951	1,075	1,193	1,312	1,431
EBIT (17% -> 21%)	162	194	227	263	300
UFCF	118	142	167	194	223

• PV of UFCF: $588M
• Terminal Value (TV): $2,274M -> PV of TV: $1,290M
• Enterprise Value: $1,879M
• Equity Value (+ $1.4B Cash): $3,279M
• Implied Share Price: $17.26

5. Comps Cross-Check & Disconnect

Fictional Peer Median Multiples: 9.0x EV/NTM Rev | 35.0x EV/NTM EBIT

Applying the median comps to our FY26 Base Case:

• EV/NTM Rev (9.0x): Implies an EV of $8.93B -> Equity Value of $10.33B = $54.37 / share.
• EV/NTM EBIT (35.0x): Implies an EV of $6.94B -> Equity Value of $8.34B = $43.92 / share.

Adjustment & Commentary: LLLT currently trades at ~7.4x NTM Base Revenue and ~37x NTM Base EBIT. While it looks slightly "cheap" on a peer top-line basis, the DCF proves that a 9.0x revenue multiple is fundamentally disconnected from the cash flows an 18-26% operating margin business generates. The market is pricing LLLT as if terminal margins will exceed 35% or terminal growth will stay >5%. As the market rotates from EV/Sales to EV/EBIT or EV/FCF, LLLT will re-rate downward toward the intrinsic $28 Base Case.

6. Catalysts, Risks, and Falsifiable Triggers

Catalysts for the Short (Downside):

1. NRR Deceleration: Upcoming earnings showing NRR dipping below 115% as seat expansion normalizes, destroying the "hyper-growth" narrative.
2. Margin Disappointment: Management is forced to keep S&M spend >30% to defend top-line growth, causing them to miss consensus FY26 EBIT margins.
3. Multiple Rotation: A broader market shift away from top-line SaaS multiples toward FCF yield, mechanically compressing LLLT's valuation.

Risks to the Short (Bull):

1. M&A Target: A legacy incumbent (e.g., Oracle, SAP, Workday) acquires LLLT at a premium to bypass internal R&D.
2. Capital Return: With $1.4B in net cash, management could authorize a massive share repurchase program, artificially supporting the stock price.
3. Pricing Power: LLLT successfully pushes through a 10-15% price hike without elevated churn, driving immediate flow-through to operating margins.
4. Macro Rebound: Aggressive interest rate cuts reignite mid-market software spend and systemically inflate SaaS multiples back to 2021 levels.
5. New Module Success: Faster-than-expected adoption of adjacent modules (e.g., payroll, treasury) accelerates ARPA well beyond $132k.

What Would Change My Mind (3 Falsifiable Triggers):

1. S&M expense drops below 28% of revenue while NTM revenue growth remains strictly >20% (proving superior, low-cost organic acquisition).
2. NRR remains >120% for three consecutive quarters despite a flat/down macro environment.
3. Management announces a credible path to >30% operating margins by FY27 without sacrificing product R&D.

7. 10 Diligence Questions for Management

1. With S&M at 34% of revenue and CAC payback at 18 months, how much of current growth is driven by new logo acquisition vs. seat expansion within the existing 6,200 base?
2. Can you unpack the historical 123% NRR? What percentage of that is pricing vs. seat expansion vs. new module cross-sell?
3. What is the structural ceiling for operating margins, and what specific efficiencies in S&M or R&D get you from 18% today to our modeled 25%+?
4. Services currently account for 8% of revenue at a 25% gross margin. Is there a plan to offload implementation to SI partners to boost blended gross margins?
5. You have $1.4B in net cash. What is the capital allocation priority? Are you looking at M&A, or is a share buyback on the table?
6. How are sales cycles trending for your mid-market enterprise customers compared to 12 months ago?
7. What module within the AP automation suite is seeing the highest attach rate, and how does its gross margin profile compare to the 82% subscription average?
8. With top 10 customers making up 16% of revenue, are you seeing any pricing pressure or discounting demands upon renewal from these larger accounts?
9. If macro conditions force your customers to reduce headcount, how protected are your contracts from down-sell (e.g., minimum seat commitments)?
10. How do you view the competitive threat from legacy ERPs attempting to bundle AP automation for free to defend their core ledgers?