Datadog (DDOG) Q3 2026 earnings review
Datadog sales jump 35%, but the fourth-quarter plan stalls
Datadog kept growing rapidly in the third quarter even as its biggest artificial-intelligence customer cut back on usage. Revenue for the cloud monitoring software maker jumped 35%, while slower hiring in engineering and sales lifted its operating margin, excluding one-offs, by nearly five percentage points. Chief executive Olivier Pomel raised the full-year outlook, but the fourth-quarter plan points to 25% growth and no sequential gain.
| Revenue | $1.20B +35% from a year ago |
|---|---|
| Operating margin, excluding one-offs | 28% +4.5 percentage points from a year ago |
| Customers with $100k+ annual recurring revenue | 4,860 +20% from a year ago (vs +23% in Q2) |
| Full-year revenue outlook | Raised $60M middle of the range: 31.9% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because the rest of the customer base absorbed the largest customer's step-down without a dip in total growth, and gross margin recovered from last quarter's cloud-hosting squeeze. One caution: the full-year revenue raise merely passes through the third-quarter beat, and calculated billings slowed to 30% growth by our math.
The question now is whether the fourth-quarter slowdown to 25% growth is routine caution or the start of broader customer cost-cutting. Either the non-AI customer base is strong enough to produce another beat near the company's 5% average, or slower billings and fewer new large customers mean demand is cooling. Fourth-quarter revenue and the backlog figure in the quarterly filing will tell.
🐂 Bull Case
Revenue Grew 35% Despite a Top Customer Cut
Datadog sells cloud monitoring and security software that bills customers based on how much data they process. Last quarter the company warned that its largest artificial-intelligence customer had renewed its contract at a lower usage rate starting in the third quarter. That warning led Datadog to forecast third-quarter revenue growth of about 29% from a year ago.
Actual sales grew 35.2% to $1.20 billion, nearly matching the second quarter's 35.6% pace. "We are seeing strong adoption across our platform as customers scale their digital operations and use of AI," chief executive Olivier Pomel said. Because total growth barely slowed when the largest customer stepped down, the rest of the customer base had to pick up the slack.
What to watch: the revenue growth rate for customers outside the AI group when the quarterly filing arrives. A reading in the high-20% range or better would confirm that everyday enterprise demand, rather than a few AI labs, carried the quarter.
Slower Engineering Hiring Lifted Operating Margins
Datadog's operating profit, excluding one-offs, rose 61.2% from a year ago to $334.3 million. That pushed its operating margin up 4.5 percentage points to 27.9%, the highest level in over two years and $69 million above the middle of its own plan.
- Research and development, excluding one-offs: 27.7% of revenue, down 2.7 percentage points from a year ago by our math
- Sales and marketing, excluding one-offs: 21.0% of revenue, down 1.1 percentage points by our math
- General and administrative, excluding one-offs: 4.6% of revenue, down 0.7 percentage points by our math
- Gross margin, excluding one-offs: 81.2%, up 1.6 percentage points from last quarter and even with a year ago
The rebound in gross margin — the share of sales left after cloud hosting costs — eases a standing concern after hosting bills pushed that figure down to 79.6% last quarter. Meanwhile, engineering and sales expenses grew slower than revenue.
What to watch: fourth-quarter operating margin against the 23.8% plan. Another multi-point beat would show that the lower cost structure is permanent rather than a timing pause in hiring.
Positives this quarter didn't test
Four standing growth drivers from prior quarters do not appear in the earnings release because Datadog reports them on the conference call or in its quarterly filing.
- Non-AI customer revenue growth: reached the high-20% range last quarter; the call remarks will show if that pace held.
- New-customer share of growth: rose to 30% of annual revenue growth in the second quarter; the filing's revenue note will update the split.
- Multi-product adoption: 58% of customers used four or more products last quarter; the call will show if consolidation continued.
- AI-lab training workloads: wins at hyperscaler AI labs were a call topic last quarter and are not broken out in the release.
🐻 Bear Case
The Fourth-Quarter Plan Points to Flat Sales
Pomel said Datadog is seeing strong adoption as customers scale their digital operations. Yet the company's fourth-quarter revenue outlook of $1.19 billion to $1.20 billion points to 25.4% growth from a year ago at the middle of the range, down from 35.2% in the third quarter.
From last quarter, the middle of that plan is $1,195 million, which is $2 million below what the monitoring software maker just earned in the third quarter. Datadog raised its full-year revenue forecast by $60 million at the middle of the range, after beating its third-quarter target by $57 million. By our math, the new fourth-quarter outlook is only $3 million higher than what the prior full-year plan already implied.
Because one quarter cannot settle whether other AI labs or regular cloud customers are also trimming their usage, the standing concern over customer concentration and usage digestion remains open. Datadog has beaten its quarterly revenue plan eight times in a row, by an average of 4.7% over the past year, so the outlook mixes caution with any real slowdown.
What to watch: fourth-quarter revenue against the $1.20 billion top of the range. A beat near the usual 4.7% average would keep annual growth above 31% by our math, proving the flat sequential plan was routine caution.
Billings and Large Customer Additions Slowed
While reported revenue held near 35% growth, the cash and customer indicators in the release moved down. Deferred revenue — cash customers have paid upfront for service not yet delivered — fell by $37.3 million during the quarter to $1.30 billion.
- Calculated billings (revenue plus the change in deferred revenue): $1.16 billion, up 29.9% from a year ago by our math, down from 38% growth last quarter
- Customers spending $100,000 or more in annual recurring revenue (ARR, the yearly value of subscriptions): about 4,860, up 20% from a year ago vs 23% last quarter
- Net new $100,000-plus customers added in Q3: about 140 by our math, down from 170 last quarter and 210 a year ago
These slower flows line up with the two-quarter plateau in remaining performance obligations (RPO, the total value of contracted future revenue), which is not yet readable because it lives in the quarterly filing.
What to watch: remaining performance obligations in the third-quarter filing. A third flat quarter near $3.47 billion would show that multi-year contract signings are lagging usage growth.
Stock Pay Absorbs Most of the Operating Profit
A wide gap remains between Datadog's results excluding one-offs and its standard accounting profit. In the third quarter, the company paid employees $237.2 million in stock-based compensation, equal to 19.8% of revenue by our math, plus $18.9 million in related payroll taxes.
Those stock grants left standard operating profit at $74.7 million, or 6.2% of sales, compared with 27.9% excluding one-offs. Because the software group does not buy back shares to offset employee grants, its weighted average diluted share count rose 3.6% from a year ago to 375.0 million, and the fourth-quarter plan assumes 379 million.
What to watch: stock-based compensation as a share of revenue in the fourth quarter. A drop below 19% would show that employee equity grants are finally scaling down with engineering headcount.
Scout 1.0 Moves Datadog Closer to Automated Fixes
Pomel said Datadog is "developing specialized AI models through our AI Research team, to help customers manage growing complexity and move towards autonomous operations". During the quarter the company introduced Scout 1.0, its first specialized AI model "for investigating production issues", which now powers its Bits Investigation tool in preview.
Datadog said Scout 1.0 runs "at a fraction of the inference cost" of general AI models, allowing earlier and more frequent automated checks that reduce on-call work for human engineers. That capability cuts both ways for the standing debate over AI agents: cheaper automated troubleshooting can attract more workloads, but if software resolves outages on its own, customers may need fewer human seats and fewer manual log queries.
What to watch: any disclosure on how Datadog prices Bits Investigation when Scout 1.0 leaves preview. Direct usage fees for automated investigations would prove the tool adds revenue rather than just saving customers engineering time.
💲 Other KPIs
Free cash flow — operating cash left after equipment purchases and capitalized software — rose 17.1% from a year ago, slower than the 35.2% revenue rise. Free cash flow margin slipped to 20.9% from 24.9% last quarter and 24.2% a year ago because customer receivables rose 44.5% from a year ago to $794.0 million.
Cash and marketable securities rose by $248 million from last quarter and $759 million since December. Against $986.6 million in convertible senior notes due in 2029, the cloud monitoring company holds $4.25 billion in net cash by our math, which generated $53.1 million in interest and other income this quarter.
Spending on property, equipment and capitalized software development equalled 3.3% of revenue in the third quarter by our math ($10.9 million in equipment and $28.4 million in software). That sits below the 4% to 5% full-year target range the company set earlier in the year.
🔮 Guidance
Raised by $3 million at the middle of the range versus what the prior full-year plan implied. The plan calls for 25.4% growth from a year ago and a 0.2% dip from the third quarter. Datadog has beaten its quarterly revenue midpoint eight straight times by an average of 4.7%; if the pattern holds, fourth-quarter revenue would grow 31.3% by our math.
Raised. The middle of the range moved up $60 million to 31.9% growth from a year ago, passing through the $57 million third-quarter beat. It is the third raise this year, and each move is smaller than the last: +$240 million, +$140 million, +$60 million.
New. The middle of the range ($285 million) points to 23.9% growth from a year ago and an operating margin of 23.8%, down 4.1 percentage points from the third quarter's 27.9% result. The observability provider routinely guides next-quarter margins several points below the quarter just finished.
Raised. Management lifted the middle of the range by $80 million to $1.10 billion, or 43.2% growth from last year, passing through the $69 million third-quarter beat and adding $11 million for the fourth quarter. It is the third raise this year: +$100 million, +$60 million, +$80 million.
New. The plan calls for $0.70 at the middle of the range, up 18.6% from a year ago and down $0.11 from the third quarter's $0.81, assuming about 379 million diluted shares.
Raised. The middle of the range rose $0.22 to $2.74, or 33.7% growth from 2025, assuming about 375 million diluted shares (one million fewer than the prior full-year plan). Third raise this year: +$0.28, +$0.12, +$0.22.
❓ Key Questions
What was the non-AI customer growth rate in Q3?
Revenue grew 35.2% even though the largest AI customer reduced its usage in the quarter. Knowing whether non-AI customer growth stayed in the high-20% range or accelerated above 30% tells investors how much the largest customer actually cut.
Did remaining performance obligations move off $3.47 billion?
Contracted backlog was flat around $3.47 billion for two straight quarters while calculated billings slowed from 38% to 29.9% growth in Q3. The quarterly filing's backlog note will show if multi-year contract signings stalled again.
How concentrated is the AI cohort beyond the top customer?
Datadog stopped disclosing the AI customer group's share of revenue a year ago, and its fourth-quarter plan implies growth slowing to 25.4%. Investors need to know if any other large AI labs face contract renewals in Q4.
How will Datadog charge for Scout 1.0 and Bits Investigation?
Scout 1.0 lowers the computing cost of running automated outage investigations. Management has not said whether automated investigations will carry a separate usage fee or whether they could reduce the number of human user licences customers buy.