DDOG — Q4 FY25 Earnings Review (WSM)

Date: 2026-04-06 Quarter: Q4 FY25 (Dec-2025) Earnings Date: 2026-02-10 Market cap: $41.9B | Run-rate P/S: 11.0x | Revenue growth: 29.2% YoY Atlas baseline: Read. Conviction 4/5. Agree on trajectory assessment; adding QoQ depth, prior-view reconciliation, and SBC granularity.

Verdict

The Dog is back. $953M at 29.2% YoY — four consecutive quarters of acceleration from the 24.6% trough — record bookings of $1.63B (+37% YoY), record $1M+ customer adds, and a structural 4.3% beat pattern that makes the 19% FY26 guide look absurd. I was bearish on DDOG in late 2022/early 2023 precisely because customer acquisition was stalling and growth was decaying at 53% rate. Every single concern I had has reversed. The $1M+ cohort is now growing at 31% — the fastest in available history — and non-AI-native revenue re-accelerated from 20% to 23%. This is not a one-trick AI pony. This is a platform compounder re-accelerating at nearly $4B run-rate. At 11x run-rate P/S with accelerating 29% growth, the market is asleep.

Thesis: Strengthening. Action: Initiate position.

The Numbers

Revenue QoQ Grid — The Alpha Table

Q4 FY25 at 7.6% QoQ is the best Q4 since FY23 (7.7%). Q2 FY25 at 8.6% was a breakout — best Q2 in the series by a mile. The trajectory is unmistakably UP.

7.6% QoQ annualises to 34%. That's not a 19% grower.

Incremental Revenue ($M)

Q4 FY25 added $67.5M sequentially. Record. For context, the average quarterly incremental in FY22 was $35.5M. In FY25 it was $53.9M — 52% more absolute dollars being added per quarter. At nearly $1B quarterly revenue, this is compounding at scale. Nuf said.

Revenue YoY % — Same-Quarter Comparison

FY24 was a year of stability (25-27% band). FY25 is a year of re-acceleration: each quarter stronger than the one before, culminating in the best YoY print (29.2%) since Q1 FY23 (32.7%). The inflection is real.

Margin & Profitability Grid

Non-GAAP op margin at 24.1% is back to the top of the FY24 range, despite management explicitly deprioritising margin expansion. Gross margin rock-solid at 80-82%. FCF margin of 30.5% produced a record $291M in the quarter. Rule of 40: 29.2% + 30.5% = 59.7. Exceptional.

SBC at 21.5% of revenue in Q4 is actually flat QoQ. FY25 SBC of $751M is 21.9% of revenue — effectively stable vs FY24 (21.2%). The dollar growth in SBC (32% YoY) looks alarming but that's driven by headcount +25% and share price appreciation. What matters: shares outstanding grew only 1.3% YoY (361M to 366M). Dilution is controlled. I'm watching this but it's a yellow flag, not red.

Beat Pattern Analysis

Five consecutive quarters of 3-5% beats, averaging 4.1%. If Q1 FY26 follows pattern: 956Mx1.04 = ** 994M**. That's 30.5% YoY vs Q1 FY25's $761.6M. If DDOG prints 30%+ growth in Q1 FY26, the stock re-rates. Hard.

Customer Metrics — The Reversal

This is where my prior bearishness gets demolished.

$100K+ ARR Customers

In Feb 2023, I wrote: "Where's that supposed customer growth acceleration?? I don't see it. Quite the opposite, actually." I was right — at the time. Q4 FY22 adds of 180 were flat, $1M+ customer growth had decelerated to 47% YoY. My concern was valid.

But look at FY25. 250 $100K+ adds in Q4 — the most since Q1 FY22. And 210 in Q3. The land motion that was broken is now accelerating. $100K+ customer YoY growth went from 11.5% (Q3 FY24) to 13.2% to 12.9% to 13.6% to 16.3% to 19.4%. Six consecutive quarters of customer growth acceleration.

$1M+ ARR Customers

$1M+ customers at 603 growing 30.5% YoY — growing faster than revenue. This is upmarket traction. 45 net adds in Q4, the most in the series. The enterprise flywheel is spinning faster, not slower.

NRR and Retention

• NRR: ~120% (TTM) — first formal disclosure. Healthy.
• Gross retention: mid-to-high 90s — customers aren't leaving.
• Fortune 500: 48% are customers, median ARR <$500K — enormous expansion runway.

120% NRR with mid-90s gross retention means the average customer is growing spend 20-25% annually while almost none churn. That's a high-quality consumption model. The Goldman "deflationary architecture" bear case needs NRR to crack — so far, it hasn't.

Leading Indicator Divergence — Bullish and Widening

Bookings growing 37% vs revenue at 29% — an 8pp positive gap. This is textbook leading indicator divergence. Record bookings of 1.63Bwith18deals>10M TCV and 2 deals >$100M create a pipeline that de-risks the next 2-3 quarters of revenue. Per my framework, when 2+ leading indicators show acceleration vs revenue for 2+ quarters, the market is underpricing future growth.

No bearish divergence detected. Zero. Every indicator is either stable or improving. The non-AI-native revenue re-acceleration (20% to 23%) is the cherry on top — the base business is getting stronger independently of the AI narrative.

Conference Call — What Matters

CEO Pomel opened with confidence: "very strong" year, $953M, 29% growth, record bookings. This is how you want a CEO to open — specific numbers, no hedging. He raised non-AI-native re-acceleration unprompted — he knew the market's concern and pre-empted it. That's a management team controlling the narrative.

CFO Obstler on FY26 guide: "We model that business excluding our largest customer grows at least 20% during the year." This is the key sentence. It tells you:

1. There's one large customer (likely an AI hyperscaler) whose consumption is unpredictable
2. The guide is built around that customer contributing nothing incremental — a zero option
3. The base business ex-that customer is expected to grow 20%+
4. Any positive contribution from that customer is pure upside

This is classic guide de-risking. Management sandbagged. The 19% FY26 guide is the floor, not the ceiling.

Key data points from the call:

• 5,500+ customers using AI integrations (up from ~4,000 implied in Q3)
• ~650 AI-native customers, 19 at $1M+ ARR
• 14 of top 20 AI companies are DDOG customers
• AI SRE agent: 2,000+ trial and paying customers in first month of GA
• MCP server tool calls: 11x QoQ growth
• 400+ new features shipped in FY25

The AI product velocity is genuinely impressive. But I'm more excited about the non-AI-native re-acceleration because it proves the platform works independently of any single trend. AI is the turbocharger; the engine was already running.

My Prior View — Eating Humble Pie

In late 2022, DDOG was 9-15% of my portfolio. By Feb 2023, I'd trimmed to 5.8%. My concerns were:

1. "They don't seem to be landing enough new customers" — Customer adds had flatlined (1,000/quarter for three years), $100K+ adds were decelerating, $1M+ growth collapsed from 114% to 47% YoY.
2. "Growth decay at 53%" — Revenue growth was decelerating at an alarming rate.
3. "Why does the Dog get a pass but Crowdstrike does not?" — I questioned why I should hold DDOG at similar growth with lower FCF margins.

What's changed:

• Customer adds are re-accelerating: $100K+ adds at 250/quarter (highest since Q1 FY22), $1M+ adds at 45/quarter (record)
• Growth has re-accelerated for four consecutive quarters, from 24.6% to 29.2%
• FCF margin has expanded to 27% TTM ($915M annual) — much stronger than in 2022
• The platform now has three pillars each >$1B ARR and 20+ products vs maybe 10 in 2022
• AI creates structural demand that didn't exist in 2022

My 2022-23 concerns were valid at the time. The data justified caution. But the data has flipped entirely. The honest answer: DDOG went through a consumption headwind (the "cloud optimisation" cycle), came out the other side stronger, and is now re-accelerating at nearly 3x the revenue base. I should have been watching the customer metrics more closely in H2 2024 when the re-acceleration signals started appearing.

Valuation

10.1x EV/run-rate revenue for a company growing 29%, with 80%+ gross margins, 27% TTM FCF margin, and accelerating trajectory. This is cheap. Cheaper than CRWD (18.8x at 22% growth). In line with DDOG's own history only at its most pessimistic (2022 washout).

Growth-adjusted EV/Rev of 0.38 — for reference, anything below 0.5 for a high-gross-margin platform compounder is attractive. CRWD trades at ~0.85. NET at ~0.60. DDOG is the cheapest quality growth name in observability/security.

FY26 Guide — What It Actually Implies

Even without any guide raises through the year, a 4% structural beat on the annual guide gets you to $4.24B and ~24% growth. If they raise guidance each quarter (as they historically do), actual FY26 could land at $4.3-4.4B or 25-28% growth.

The FY26 non-GAAP op income guide of 840−880M (21% margin) is a deliberate step-down from 24.1% in Q4 — management choosing investment over margins. I'd rather they invest at this stage of the cycle. The right question isn't "why are margins going down?" — it's "are they investing in the right things?" With 400+ features shipped, AI SRE agent at 2,000+ customers in month 1, and geographic expansion, the answer is yes.

Key Risks

1. Largest customer concentration. One account influencing 3-4pp of full-year guidance. Not ideal, but management has de-risked by building the guide around zero incremental contribution. Any positive surprise is free upside.

2. SBC trajectory. $751M FY25, 21.9% of revenue. In absolute dollars, growing 32% YoY. But dilution is only 1.3% annually and SBC as % of revenue has been roughly stable at 21-22% for three years. Watch this — if it crosses 25%, it's a problem. For now, acceptable for a company at this growth rate.

3. Pricing friction. Scuttlebutt confirms host-based billing, custom metrics surcharges (up to 52% of bills), and dual log billing create genuine customer frustration. Grafana and SigNoz market directly against this. NRR at 120% with mid-90s gross retention says customers expand despite the friction — but this creates a vulnerability if an open-source competitor gets "good enough" at the enterprise tier.

4. AWS native tools. The most dangerous competitive vector. Goldman flagged this in their Sell/$113 thesis. AWS doesn't need to be better — just good enough and cheaper with zero integration friction. Counter-argument: DDOG's multi-cloud, multi-product platform creates switching costs that single-cloud tools cannot replicate.

5. FY26 guidance optics. 19% midpoint growth changes the narrative. The market may anchor to the guide rather than the structural beat pattern. Any quarter that beats by <3% validates the bears.

Key Catalysts

1. Q1 FY26 earnings (May 2026). A 4%+ beat on 956Mwouldyield 994M and 30.5% YoY growth. First 30%+ quarter since Q1 FY23. This is the re-rating catalyst.

2. Bookings conversion. $1.63B record bookings (+37%) should flow into revenue over the next 2-3 quarters, supporting sustained high-20s growth.

3. AI monetisation crystallisation. Quantified AI-specific ARR disclosure would shift the narrative from "observability company with AI exposure" to "AI infrastructure platform."

4. NRR stability through H1 FY26. Both Goldman and Morgan Stanley flagged NRR as the decisive metric. If 120% holds, deflationary bear case weakens.

5. Largest customer stabilisation. Guide zeros out this customer. Any positive consumption surprise flows directly to a guidance raise.

Thesis Update

Status: Strengthening (new initiation)

I haven't written about DDOG since early 2023 when I was trimming on customer deceleration and growth decay concerns. Those concerns were valid then. They are emphatically not valid now. Four quarters of revenue re-acceleration, record customer adds at every tier, record bookings growing 8pp ahead of revenue, and a valuation at 2-year lows while growth is at 2-year highs. The leading indicator divergence is textbook bullish.

What I need to see in Q1 FY26 to hold/add:

• Revenue >=990M (~30%+ YoY growth, implying beat pattern intact)
• $100K+ adds >=160 (seasonal trough, but above FY24's Q1 of 150)
• NRR >=118%
• Bookings disclosure maintained and stable/growing

What would break the thesis:

• Revenue <$960M (below guide — a miss would be devastating given the beat pattern)
• NRR dropping below 115%
• Bookings growth decelerating to <20%
• SBC crossing 25% of revenue

-wsm

(Not currently long DDOG — initiating research position. Analysis based on Q4 FY25 data.)

Analysis date: 2026-04-06. Data as of Q4 FY25 (Dec-2025). Price ~$119.50.