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Datadog (DDOG) is under pressure today after reporting strong Q2 results this morning. The company beat EPS expectations, while revenue grew 35.6% yr/yr to $1.12 bln, also nicely above expectations. Its Q3 guidance for EPS of $0.63-0.65 on revenue of $1.135-1.145 bln also topped expectations, while DDOG raised its FY26 outlook. However, the Q3 revenue midpoint implies less than 2% sequential growth following an 11% increase in Q2, as its largest customer is expected to reduce usage beginning in Q3. The resulting slowdown appears to be driving today's selloff despite otherwise strong results.

• Demand: Revenue growth accelerated across DDOG's customer base. Its AI-native cohort continued to grow in both number and scale, while non-AI customer revenue growth accelerated to the high-20% range from the mid-20% range last quarter, reflecting healthy cloud migration, modernization, and AI adoption trends.
• Key Metrics: Billings increased 38% yr/yr to $1.18 bln, while RPO increased 43% yr/yr to $3.47 bln and cRPO grew approximately 40%. Adjusted operating margin also expanded 300 bps to 23%, with Q3 guidance implying a 23-24% margin.
• Customer activity: DDOG ended the quarter with approximately 33,400 customers, including 4,720 generating at least $100,000 of ARR, up 23% yr/yr. Enterprise new-logo bookings more than doubled, while customers added over the past year contributed about 30% of Q2's yr/yr revenue growth, up from 25% in Q1. Net revenue retention remained in the low-120% range.
• AI adoption: DDOG now serves more than 750 AI customers, including 31 spending over $1 mln annually and eight spending over $10 mln. Usage of its agent, LLM, and GPU monitoring products is also growing rapidly, while agentic activity increased sharply, with MCP tool calls rising more than 22-fold from Q4 2025.
• Outlook: DDOG fully de-risked its guidance for lower usage from its largest customer through year-end. The customer renewed a nine-figure deal and uses 17 DDOG products, indicating reduced consumption rather than a customer loss. DDOG also noted continued acceleration across its broader business.

Briefing.com Analyst Insight

While the sequential slowdown implied by Q3 guidance appears to be driving today's selloff, the quarter still showed healthy underlying demand. DDOG's AI-native customer base expanded in both number and scale, while non-AI customer growth also accelerated, showing that strength is broadening beyond a small group of AI leaders. Strong new-logo bookings, stable retention, and increased customer spending also point to continued enterprise adoption and platform expansion. The expected usage reduction from DDOG's largest customer creates a near-term headwind, but appears more customer-specific than indicative of broader weakness. Overall, the raised FY26 outlook and continued acceleration across the broader business reinforce DDOG's position as a key observability and security platform for increasingly complex cloud and AI workloads. With shares entering the report near all-time highs and having nearly doubled YTD, today's weakness also likely reflects some profit-taking after an otherwise strong quarter.