Tuesday, Starboard Value LP, one of the largest shareholders of Dynatrace, Inc. (DT), announced that it has delivered a letter to the company's Chief Executive Officer, Rick McConnell, Chief Financial Officer, Jim Benson, and its Board of Directors.
The letter stated that Starboard believed enterprise adoption of AI should ultimately result in accelerating revenue growth for Dynatrace, along with opportunities to improve operating efficiency, driving higher profitability and cash flow.
Moreover, it noted that Dynatrace's consumption-based pricing model further strengthens its positioning and helps insulate the business from the risk of declining software seat counts as AI usage inside large enterprises increases.
The letter also discussed about Dynatrace's underperformance in the broader market, a broad-based technology index, the software sector, and its closest public peer, Datadog, over the last few years.
Additionally, it showed that Dynatrace's revenue growth has decelerated in recent years during a more challenging demand environment for software and as the business gained significant scale. However, Starboard does not believe this deceleration will continue and views recent KPI trends as early evidence of an eventual return to accelerating growth rates.
The activist investor believes that Dynatrace should be able to generate at least 40% incremental margins on future revenue growth. Additionally, it expects Dynatrace to target at least 500bps of adjusted operating margin expansion by fiscal year 2029.
Also, Dynatrace is expected to repurchase more than $2.5 billion of its shares over the next three years.
Overall, Starboard believes that if Dynatrace can execute on these opportunities, the company can generate more than $3.30 of free cash flow per share by fiscal year 2029, nearly double fiscal year 2026 levels.
Currently, DT is moving up 4.93 percent, to $37.38 on the New York Stock Exchange.
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