Advanced Investment Memo (IC Memo)

MEMORANDUM

TO: Investment Committee FROM: TMT Research Team DATE: October 26, 2023 SUBJECT: LedgerLift (LLLT) – Long Idea: Undervalued Quality in Mid-Market AP Automation

1. Recommendation

Rating: LONG 12-Month Price Target: $68 – $74 Thesis: LedgerLift is a best-in-class mid-market spend management platform trading at a significant discount to its growth-adjusted peers, driven by an underappreciated combination of high net revenue retention (123%) and rapidly expanding operating leverage. We see a clear path to $3.00+ in free cash flow per share by 2028, implying a >40% upside as the market re-rates the stock from a "growth at a premium" to a "cash-flow compounder."

2. Business Overview & Competitive Advantage

LedgerLift provides B2B spend management and accounts payable (AP) automation SaaS for mid-market enterprises. Unlike legacy ERPs that are rigid and expensive, or point solutions that lack breadth, LedgerLift offers a unified workflow capturing 92% of revenue via sticky subscriptions.

Why it wins: The platform's "land-and-expand" motion is evidenced by a 123% Net Revenue Retention (NRR) rate. With low logo churn (6%) and high gross retention (94%), the product has become embedded in customer financial operations. Why now: The mid-market is undergoing a forced digital transformation to manage liquidity tighter in a higher-rate environment. LedgerLift's 18-month CAC payback and scalable 78% gross margins suggest the company is exiting the hyper-growth burn phase and entering a maturity phase characterized by significant free cash flow (FCF) generation, a narrative not yet priced into the current $46 share price.

3. KPI Quality Check

The unit economics support a premium valuation, though scrutiny is required on sustainability.

• NRR (123%): Excellent. Indicates strong upsell/cross-sell within the mid-market base. Risk: Is this driven by price hikes or true volume expansion? If macro softens, NRR could compress toward 110%.
• Churn (6% Logo / 94% Gross): Healthy for mid-market, where business failure rates are higher than enterprise. The gap between gross and net retention confirms expansion outweighs attrition.
• CAC Payback (18 months): Efficient. Below the 24-month threshold for healthy SaaS, suggesting marketing spend (34% of revenue) is highly productive.
• Concentration: Low risk. Top 10 customers represent only 16% of revenue, with the largest at 3%. This diversifies idiosyncratic client risk.
• Potential Red Flag: Services revenue (8%) carries low margins (~25%). While small, management must ensure this doesn't balloon to customize deals, diluting the overall 78% gross margin profile.

4. Valuation: DCF Scenario Analysis

Key Assumptions: Tax rate 23%; D&A 2.5% of Rev; Capex 3.0% of Rev; NWC investment 1.0% of incremental revenue. Current Equity Value: $8.74B ($46 * 190m shares). Net Cash: $1.4B. Current EV: $7.34B.

Metric ($m)	2026E	2027E	2028E	2029E	2030E
Base Case (WACC 10%, Term 3%)
Revenue Growth	21%	18%	15%	13%	12%
Revenue	$992	$1,171	$1,346	$1,521	$1,704
EBIT (Op Margin ~20-26%)	$198	$258	$323	$380	$443
Unlevered FCF	$165	$220	$285	$345	$410
Terminal EV					$6.05B
Implied Equity / Share					$69.50
Bull Case (WACC 9%, Term 4%)
Revenue Growth	25%	21%	18%	15%	13%
Revenue	$1,025	$1,240	$1,463	$1,683	$1,902
EBIT (Op Margin ~21-29%)	$215	$298	$380	$471	$552
Unlevered FCF	$180	$255	$335	$420	$505
Terminal EV					$9.80B
Implied Equity / Share					$89.20
Bear Case (WACC 12%, Term 2%)
Revenue Growth	16%	13%	11%	10%	9%
Revenue	$951	$1,075	$1,193	$1,312	$1,430
EBIT (Op Margin ~17-21%)	$162	$194	$227	$262	$300
Unlevered FCF	$130	$160	$195	$230	$265
Terminal EV					$3.45B
Implied Equity / Share					$44.10

Note: FCF calculated as EBIT(1-Tax) + D&A - Capex - Change in NWC. Terminal Value discounted to present and added to sum of explicit period FCF to derive EV.*

5. Comps Cross-Check

Peer Median Multiples:

• EV/NTM Revenue: 9.0x (Median of 7.0x, 9.0x, 11.0x)
• EV/NTM EBIT: 35x (Median of 28x, 35x, 42x)

Application to LLLT (FY2025 Estimates):

• FY2025 Revenue: $820m. FY2026 Base Revenue: $992m.

• FY2025 EBIT: $147.6m (18% margin). FY2026 Base EBIT: $198m.

• Revenue Multiple Approach: $992m * 9.0x = $8.93B EV. Less Net Debt (-$1.4B cash) = $10.33B Equity. $54.30/share.

  • Adjustment: LLLT deserves a premium to the median (Peer C trades at 11x) due to superior NRR (123% vs. likely lower peer avg) and faster growth (21% vs. peer avg). Applying a 10.5x multiple yields $63.50/share.

• EBIT Multiple Approach: $198m * 35x = $6.93B EV. + Cash = $8.33B Equity. $43.80/share.

  • Adjustment: As margins expand to 26% by 2030, forward EBIT multiples should expand. Using FY2027 EBIT ($258m) at 35x implies $58.00/share.

Conclusion: Comps suggest a floor of ~$54, supporting the DCF base case of $69.50 if margin expansion is credited.

6. Catalysts, Risks, and Triggers

Catalysts:

1. Q4 Earnings Beat: Consensus likely underestimates operating leverage; a guide-up on FY2025 margins to >19% would trigger re-rating.
2. Strategic Partnership: Announcement of integration with a major ERP (e.g., NetSuite/SAP) could accelerate enterprise upmarket motion.
3. Buyback Initiation: With $1.4B net cash and strong FCF, a $500m authorization would signal confidence and boost EPS.

Risks:

1. Macro Slowdown: Mid-market clients may delay software renewals or reduce seat counts, impacting NRR.
2. Competitive Compression: Large incumbents (Coupa, Bill.com) could lower prices to defend share, compressing LLLT's 78% gross margin.
3. Implementation Drag: If services revenue grows faster than subscription to support complex deals, blended margins will suffer.
4. Talent Wars: Engineering saturation in the Bay Area could inflate R&D costs, delaying operating margin targets.
5. Data Security Breach: As a financial data handler, any breach would be existential for trust and retention.

What Would Change My Mind (Falsifiable Triggers):

1. NRR drops below 115% for two consecutive quarters.
2. CAC payback extends beyond 24 months indicating channel saturation.
3. Gross margin contracts below 75% due to services mix shift or hosting cost inflation.

7. Diligence Questions for Management

1. How much of the 123% NRR is driven by price increases versus module add-ons, and how sustainable is pricing power in a recession?
2. What is the specific roadmap to reduce S&M from 34% to <30% without stalling top-line growth?
3. Are there any contractual caps on price increases for your top 50 customers?
4. How does the 8% services revenue trend look over the last 4 quarters? Is it becoming more or less efficient?
5. What percentage of the pipeline is coming from inbound leads vs. outbound sales, and how has CAC trended by channel?
6. How exposed is the customer base to interest rate sensitivity (e.g., real estate, construction verticals)?
7. What is the current utilization rate of the platform's AI features, and is there a monetization strategy for them?
8. How do you benchmark your 6% logo churn against private competitors who may be subsidizing deals?
9. What is the strategy for the $1.4B cash balance beyond M&A tuck-ins?
10. If growth slows to 15%, what is the structural operating margin floor you can defend?