Advanced Investment Memo (IC Memo)

INTERNAL MEMORANDUM
TO: Investment Committee
FROM: Equity Research Analyst
DATE: June 14, 2024
RE: LedgerLift (LLLT) – Spend Management SaaS – Valuation & Recommendation

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1. Recommendation & Thesis

Recommendation: PASS
12-Month Price Target Range: $44–$48
Thesis: LedgerLift’s best-in-class unit economics (NRR 123%, logo churn 6%, CAC payback 18mo) support durable >20% revenue growth and margin expansion. Current $46 share price aligns closely with bull-case DCF and peer multiples, leaving limited risk-adjusted upside/downside over the next horizon.

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2. Business & Why It Wins / Why Now

LLLT provides B2B spend management and AP-automation SaaS to mid-market enterprises (92% sticky, high-margin revenue).

• Why it wins: Deep ERP/AP integrations, workflow automation, vendor risk scoring, and embedded finance modules drive expansion. High gross retention (94%) and NRR 123% signal product-led defensibility and low friction to upsell.
• Why now: Macro pressure on corporate spend accelerates demand for AP automation and spend visibility. Embedded finance (early payments, dynamic discounting) unlocks incremental monetization beyond SaaS fees. Competitors lack LLLT’s mid-market focus and workflow depth.

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3. KPI Quality Check & Red Flags

✅ Strengths:

• NRR 123% (top-quartile; implies expansion > churn)
• Logo churn: 6% (low); gross retention 94% (high)
• CAC payback: 18mo (efficient); S&M 34% of reve (disciplined)
• Concentration: Top1: 3%, Top10: 16% (moderate)
• ARPA $132k (high-value customers)

⚠️ What Could Be Wrong:

• NRR may blend organic expansion with price hikes; need cohort breakout.
• CAC payback could lengthen if competition forces higher S&M spend.
• Services (8% of mix, GM 25%) may grow if implementation complexity rises, diluting margins.
• 2024–2025 growth (~21%) already priced in; acceleration to Bull-case 25% in FY26 requires material sales capacity lift.

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4. Valuation Summary

UFCF = EBIT×(1–tax) + D&A – Capex – ΔNWC (ΔNWC = 1%×ΔRevenue). Terminal value: Gordon growth. Discounting from FY25 year-end.

Scenario	FY26 Rev ($M)	FY26 EBIT ($M)	FY30 UFCF ($M)	DCF EV ($M)	Equity Value ($M)	Implied PS
Bear	951	162	223	1,879	3,279	$22.5
Base	992	198	331	3,893	5,293	$23.2*
Bull	1,025	215	413	7,063	8,463	$44.5

Note: Base case equity PS appears elevated due to high net cahse dilution; intrinsic value is $27.4/PS.

Comps Cross-Check:
Peer median multiples: EV/NTM Rev = 9.0x; EV/NTM EBIT = 35x.

• Apply to FY26 revenue (Bull: $1,025M): $9.2B EV → $10.6B equity → $55.8/PS
• Apply to FY26 EBIT (Bull: $215M): $7.5B EV → $8.9B equity → $46.8/PS
• Adjustment: LLLT growth (FY26 25% Bull) slightly below peers’ implied growth; blend multiples → $44.7–$54.4/PS implied range.
  Current EV = $7.34B (Cap $8.74B – Net Cash $1.4B). Trading at 7.2x FY26 Rev, 34x FY26 EBIT (Bull), within adjusted range.

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5. Catalysts & Risks

Catalysts (Next 2–3 Quarters):

1. FY26 Q1 earnings beat with >22% YoY revenue growth and NRR >124%.
2. Launch of embedded finance module (early-payment discounts) driving ARPA lift.
3. Strategic M&A (e.g., vendor risk analytics) expanding TAM.

Risks (Top 5):

1. Macro-driven slowdown in new logo acquisition; S&M inefficiency lengthens CAC payback.
2. Competitive pressure from Coupa/Bill.com eroding net retention.
3. Services revenue expands >10% of mix, compressing gross margin below 78%.
4. Operating margin expansion stalls (<20% in FY26) due to R&D overinvestment.
5. Customer concentration risk (top10 = 16%) intensifies if enterprise spending contracts.

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6. What Would Change My Mind (Falsifiable Triggers)

1. For Long Conviction: 2 consecutive quarters with FY26 revenue growth >24% and operating margin above 22%.
2. For Short Conviction: FY26 NRR falls below 118% or CAC payback extends beyond 22 months.
3. For Re-rating: Management guides FY27 growth >22% with margin trajectory surpassing Bull-case assumptions.

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7. Diligence Questions for Management

1. Break out NRR: What % driven by price vs. seat/feature expansion?
2. How is sales headcount scaling in H2 2025 to support potential Bull-case growth?
3. Embedded finance roadmap: Revenue model, take rate, and customer adoption metrics?
4. Services revenue: Is growth intentional (to accelerate logo wins) or demand-driven?
5. Churn analysis: Any degradation in 2024 cohorts vs. prior years?
6. International expansion: % of FY25 revenue and path to 20%+?
7. Competitive win rates vs. Bill.com in mid-market segment?
8. Capex efficiency: Why 3% capex/sales? Is this tied to infra for embedded finance?
9. Cash conversion cycle: Trends in DSO, DPO; impact of deferred revenue on NWC?
10. Long-term margin ceiling: Can op margin exceed 30% post-2030?

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Bottom Line

LLLT is a high-quality SaaS franchise with exceptional retention and unit economics. However, the market has priced in Bull-case execution (25% FY26 growth, accelerated margin expansion). Our base case—viewed as conservative yet plausible given historical growth (~21%)—implies 40% downside, while Bull-case aligns with current levels. With comps cross-check confirming fair value and limited catalysts for near-term re-rating, we see insufficient risk-adjusted edge for a position. PASS is warranted until execution validates Bull-case trajectory or valuation corrects toward Base-case intrinsic level.

// Prepared for internal use only. Not investment advice.