Datadog Q2 Earnings and Revenues Surpass Estimates, Rise Y/Y

Quarter-over-quarter revenue growth of 11% marked the strongest sequential pace since the second quarter of 2022, with the company adding $115 million in sequential revenues, a record for Datadog. Revenue growth among non-AI customers also accelerated to the high-20% range year over year, up from the mid-20% range in the first quarter.

Q2 Details of DDOG

The company ended the second quarter with approximately 33,400 customers, up 6.4% from about 31,400 in the prior-year period.

In the quarter under review, Datadog had about 4,720 customers with an Annualized Run Rate (ARR) of $100,000 or more, up 22.6% from about 3,850 in the year-ago quarter. These customers generated about 91% of total ARR, up from 89% a year ago.

As of the end of the second quarter, 58% of customers used four or more products, up from 52% in the year-ago period. Furthermore, 37% of customers used six or more products, up from 29% a year ago, while 22% used eight or more products, up from 14%, and 13% used 10 or more products, up from 7% in the prior-year quarter. 

Datadog reported a trailing 12-month net revenue retention rate in the low-120% range in the second quarter, similar to the first quarter and up from about 120% in the year-ago period, while gross revenue retention remained in the mid-to-high 90% range.

New logo annualized bookings in the enterprise segment more than doubled year over year, and new customers continued to ramp faster, contributing about 30% of year-over-year revenue growth, up from 25% in the first quarter. Real User Monitoring surpassed $200 million in ARR and accelerated to more than 50% growth year over year at that scale.

Datadog's AI-native customer cohort continued to expand, with more than 750 AI-related customers as of the second quarter, including all of the top 10 AI leaders. The number of Model Context Protocol tool calls on the platform quadrupled sequentially and grew more than 22 times versus the fourth quarter of 2025. Management also disclosed that its largest customer reduced usage entering the third quarter, a development that has been incorporated into the company's third-quarter and full-year 2026 guidance; the customer renewed its contract with Datadog during the quarter.

Operating Details of DDOG

In the second quarter, non-GAAP gross profit increased 33.3% year over year, reaching $892.3 million. Datadog's non-GAAP gross margin was 79.6%, contracting from 80.9% in the year-ago quarter, primarily reflecting continued investment in new product innovation.

Research & development expenses on a non-GAAP basis grew 23.5% year over year to $325.1 million. Research & development, as a percentage of revenues, contracted roughly 290 basis points to 29%.

Sales and marketing expenses on a non-GAAP basis rose 30.2% year over year to $260.4 million. Sales and marketing expenses, as a percentage of revenues, contracted nearly 100 basis points to 23.2%.

General & administrative expenses on a non-GAAP basis increased 18.8% year over year, reaching $49.8 million in the reported quarter. General and administrative expenses, as a percentage of revenues, contracted roughly 60 basis points to 4.4%.

Datadog reported a non-GAAP operating income of $257 million, up 56.6% year over year. Its non-GAAP operating margin expanded to 23%, up from 20% in the prior-year quarter.

Datadog's Balance Sheet & Cash Flow

As of June 30, 2026, Datadog had cash, cash equivalents and marketable securities of $5 billion, up 4.8% from $4.8 billion as of March 31, 2026.

Operating cash flow was $316 million in the reported quarter, which declined from $335 million in the previous quarter but increased 57.9% year over year. Free cash flow during the quarter was $278.7 million compared with $291 million in the prior quarter and $165.4 million in the year-ago quarter, marking a 68.6% year-over-year increase, with a free cash flow margin of 25% compared with 20% a year ago.

Billings totaled $1.18 billion in the quarter, up 38% year over year, while remaining performance obligations were $3.47 billion, up 43% year over year. Current remaining performance obligations grew about 40% year over year.

Datadog's Guidance for Q3 & 2026

For the third quarter of 2026, Datadog anticipates revenues between $1.135 billion and $1.145 billion, representing 28-29% year-over-year growth. Non-GAAP operating income is expected in the range of $260-$270 million, implying an operating margin of 23-24%. Non-GAAP EPS is expected in the range of 63-65 cents.

For fiscal 2026, Datadog anticipates revenues between $4.45 billion and $4.47 billion, suggesting about 30% year-over-year growth. Non-GAAP operating income is expected in the range of $1.01-$1.03 billion, implying an operating margin of about 23%. Non-GAAP EPS is projected to be between $2.50 and $2.54.

Management noted that the full-year guidance already reflects the expected usage reduction from its largest customer; excluding that customer, the underlying business has shown five consecutive quarters of accelerating growth.

Zacks Rank & Other Stocks to Consider

Datadog currently carries a Zacks Rank #2 (Buy).

Kimball Electronics KE, Quantum QMCO and Lumentum LITE are among the top-ranked stocks that investors can consider in the broader Zacks Computer and Technology sector. Currently, Kimball Electronics sports a Zacks Rank #1 (Strong Buy), while Quantum and Lumentum carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kimball Electronics shares have inched up 1.8% in the past six months. KE is scheduled to report its fiscal fourth-quarter 2026 results on Aug. 13.

Quantum's shares have surged 96% in the past six months. QMCO is scheduled to report its fiscal first-quarter 2027 results on Aug. 10, 2026.

Lumentum shares have gained 48.9% in the past six months. LITE is slated to report its fiscal fourth-quarter 2026 results on Aug. 11.

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