Datadog’s earnings beat could not offset its cautious fourth-quarter outlook

Strong quarter, lower near-term growth signal

Datadog’s third-quarter performance was strong, but the market focused on the limited growth implied by its fourth-quarter outlook. Revenue reached $1.197 billion, up 35.2% year over year and above the $1.1455 billion consensus. Non-GAAP EPS was $0.81, above the $0.6407 estimate, while non-GAAP operating margin expanded to 28% from 23%. Remaining performance obligations rose 38% to $3.85 billion, and operating cash flow and free cash flow were $290 million and $251 million, respectively.

The contrast between reported growth and forward guidance explains the sell-off. Shares traded at $190.47, down 13.63% from the previous close of $220.52, after Datadog guided fourth-quarter revenue to $1.19 billion–$1.20 billion, implying growth of 25%–26%. That midpoint of $1.195 billion is slightly below the third quarter’s reported revenue of $1.197 billion and near the roughly $1.20 billion analysts had expected.

Guidance raised, but expectations were higher

Datadog increased full-year revenue guidance to $4.515 billion–$4.525 billion from $4.45 billion–$4.47 billion. It also raised full-year adjusted EPS guidance to $2.73–$2.75 from $2.50–$2.54. Both revised ranges exceeded the cited consensus estimates, but the higher full-year outlook did not prevent shares from falling as the fourth-quarter revenue range implied slower sequential growth.

Morgan Stanley analysts Sanjit Singh and Adam Wood framed the central debate as whether Datadog can sustain growth of around 30% excluding its largest customer into 2027. The reviewed reporting does not establish a wider cloud-spending slowdown: Dynatrace, Datadog’s listed observability rival, reported 17% revenue growth and guided the following quarter higher.

Renewal pricing tempers AI-led growth

Management said Datadog had extended renewals with large customers, including large AI customers, while reducing pricing per committed volume. CEO Olivier Pomel said these extensions increased commitments but created short-term revenue headwinds. The same report said the fourth-quarter outlook included only the minimum commitment from Datadog’s largest customer, which had spent substantially more than that amount in the third quarter.

Excluding the largest customer, the report calculated implied fourth-quarter growth in the low-to-mid 30% range. Growth from non-AI customers reportedly accelerated for a fifth consecutive quarter to the high-20% range. These are conditional calculations based on the company’s guidance and commentary, not separately reported financial results, and they indicate that customer mix and renewal pricing may matter more to near-term growth than the headline quarterly revenue beat.

Cash generation remained strong, but some quality indicators softened

Datadog generated $290 million in operating cash flow and $251 million in free cash flow during the quarter. However, the free-cash-flow margin fell to 21% from 24%, while stock-based compensation reached $237.2 million. Billings grew 30%, slower than revenue, providing a counterweight to the otherwise strong operating results.

Datadog also reported about 4,860 customers paying at least $100,000 in annual recurring revenue, up 20% from approximately 4,060 a year earlier. Its net retention rate was roughly 120%, above the expansion rates cited for Dynatrace and Elastic, although the reviewed reports do not disclose enough contract-level detail to determine how much of the largest customer’s future revenue is contractually committed.

The next verifiable test is Datadog’s fourth-quarter execution: whether revenue reaches the guided $1.19 billion–$1.20 billion range while renewal pricing and the largest customer’s minimum commitment constrain growth as management indicated.

Industry and product implications