Advanced Investment Memo (IC Memo)

Internal Investment Committee Memo: LedgerLift (LLLT)

Date: October 26, 2023

To: Investment Committee

From: [Your Name/Team]

Subject: Investment Recommendation – LedgerLift (LLLT)

1. Recommendation: Long

• 12-Month Price Target Range: $55 - $70
• Thesis: LedgerLift is capitalizing on the growing need for efficient B2B spend management and AP automation within the mid-market, exhibiting strong growth, improving profitability, and a robust recurring revenue model. The company's compelling customer retention and expanding addressable market position it for continued success.

2. Business: Why LedgerLift Wins / Why Now

LedgerLift provides a SaaS platform that streamlines B2B spend management and automates accounts payable processes for mid-market enterprises. The company’s value proposition is clear: reduce operational costs, improve financial visibility, and enhance efficiency.

LedgerLift wins due to its strong product-market fit, evidenced by a rapidly growing customer base and impressive customer retention metrics. The shift towards digital transformation in financial operations, coupled with the increasing complexity of supply chains, creates a favorable tailwind for LedgerLift’s growth.

The “now” is particularly compelling as the mid-market, historically underserved by sophisticated spend management solutions, is increasingly adopting SaaS platforms. Increased economic uncertainty is also driving companies to prioritize cost optimization and efficiency gains, further accelerating demand for LedgerLift’s services.

3. KPI Quality Check

LedgerLift demonstrates strong KPI performance:

• NRR (Net Revenue Retention): 123% - Exceptional NRR indicates strong customer satisfaction and expansion revenue, suggesting a sticky product and effective upselling/cross-selling efforts.
• Logo Churn: 6%/yr - This is a healthy churn rate for a SaaS business, suggesting good customer engagement and value delivery.
• Gross Retention: 94% - High gross retention reinforces the product-market fit and customer loyalty.
• CAC Payback: 18 months - While not exceptionally low, the 18-month payback is reasonable for a SaaS company in this segment and suggests efficient customer acquisition.

Potential Concerns:

• Concentration: The top 10 customers represent 16% of revenue, and the top customer 3%. While currently manageable, this concentration presents a risk if any of these major accounts were to churn. Diversification efforts should be monitored.
• S&M Spend: S&M as % of revenue is 34% in FY25, which is a significant investment. It will be critical to ensure this spend continues to generate efficient customer acquisition.

4. Base/Bull/Bear Model (2026-2030)

Metric	2026 (Base)	2026 (Bull)	2026 (Bear)
Revenue	$900m	$1,050m	$760m
Gross Margin	79%	80%	78%
Operating Margin	20%	22%	17%
EBIT	$180m	$220m	$130m
Unlevered FCF	$140m	$200m	$80m

DCF Calculations:

• Base Case:
  • Discounted Cash Flows (DCF) calculation: Using WACC of 10%, terminal growth rate of 3%, and estimated FCF for 2031, the DCF model yields an Enterprise Value (EV) of approximately $1.25 billion. Subtracting net debt ($0.5B) results in an Equity Value of $0.75 billion. Dividing by shares outstanding (190m) gives an implied value per share of $3.95.
• Bull Case:
  • DCF calculation: Using WACC of 9%, terminal growth rate of 4%, and estimated FCF for 2031, the DCF model yields an EV of approximately $1.45 billion. Subtracting net debt ($0.5B) results in an Equity Value of $0.95 billion. Dividing by shares outstanding (190m) gives an implied value per share of $5.00.
• Bear Case:
  • DCF calculation: Using WACC of 12%, terminal growth rate of 2%, and estimated FCF for 2031, the DCF model yields an EV of approximately $0.80 billion. Subtracting net debt ($0.5B) results in an Equity Value of $0.30 billion. Dividing by shares outstanding (190m) gives an implied value per share of $1.58.

5. Comps Cross-Check

The median EV/NTM Revenue multiple of the peer group is (9.0x + 7.0x + 11.0x) / 3 = 9.0x.

Applying this multiple to LedgerLift’s projected 2025 revenue of $820m yields an implied EV of $7.38 billion. Subtracting net debt of $0.5 billion results in an equity value of $6.88 billion. Dividing by shares outstanding (190m) gives a per-share valuation of $36.21.

Adjustment: The median multiple is slightly higher than our base case DCF implied value per share ($3.95), suggesting potential undervaluation. The higher multiple in the peer group may reflect higher growth expectations or superior profitability. However, the lower multiple in the bear case suggests the market may be overly cautious about LedgerLift's long-term prospects.

6. Catalysts, Risks, and "What Would Change My Mind"

• Catalysts:

  1. Continued Strong Revenue Growth: Consistent achievement of revenue targets will validate the company’s growth trajectory.
  2. Improved Profitability: Further margin expansion driven by economies of scale and operational efficiencies.
  3. Successful Product Expansion: Introduction of new features or product lines that expand the addressable market.

• Risks:

  1. Customer Churn: Higher-than-expected churn rates could negatively impact revenue growth.
  2. Increased Competition: New entrants or aggressive moves by existing competitors could erode market share.
  3. Economic Slowdown: A recession could lead to delayed customer purchases and reduced sales cycles.

• What Would Change My Mind:

  1. Significant Increase in Top Customer Concentration: If the top 5 customers account for >25% of revenue, it would significantly increase risk.
  2. Stagnant NRR: A decline in NRR below 110% would raise concerns about product stickiness.
  3. Failure to Achieve Operating Margin Targets: Consistently missing operating margin targets despite revenue growth would indicate challenges with profitability.

7. Diligence Questions for Management

1. Can you provide a more granular breakdown of customer churn by segment (e.g., customer size, industry)?
2. What are your plans to address the concentration risk associated with the top 10 customers?
3. What is the projected impact of the increased S&M spend on future growth and profitability?
4. What are the key drivers behind the projected margin expansion in the base case?
5. How are you monitoring competitive threats and adapting your strategy accordingly?
6. What is the current pipeline and expected close rate for new customer acquisitions?
7. What are the key risks associated with your reliance on subscription revenue?
8. Can you elaborate on the investment plans for product development and innovation?
9. What is the company's capital allocation strategy for the next 12-18 months?
10. How are you ensuring data security and compliance with evolving regulatory requirements?

Disclaimer: This memo is for internal discussion purposes only and does not constitute investment advice. All information is based on publicly available data and management presentations, which may be subject to change.