# How Datadog makes money

CXProWealth Business Lens · Datadog (DDOG) · Q2 FY2026

Read from the 10-Q for the period 2026-04-01 to 2026-06-30, filed 2026-08-06 with the SEC (accession 0001628280-26-054458): https://www.sec.gov/Archives/edgar/data/1561550/000162828026054458/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $1.1B (+35.6% on the year)
- Operating income: $5.5M (operating margin 0.5%)
- Net income: $44.6M (net margin 4.0%)
- Gross margin: 78.6%
- Free cash flow: $306.0M (27.3% of revenue)
- Cash conversion (operating cash flow / net income): 7.09x
- Capital expenditure: 0.9% of revenue

## Where the money goes (Q2 FY2026)

- North America → Revenue: $824.7M
- International → Revenue: $296.8M
- Revenue → Cost of revenue: $240.1M
- Revenue → Gross profit: $881.3M
- Gross profit → Total operating expenses: $875.9M
- Total operating expenses → Research and development: $478.0M
- Total operating expenses → Sales and marketing: $311.5M
- Total operating expenses → General and administrative: $86.4M
- Gross profit → Operating income (loss): $5.5M
- Operating income (loss) → Income before provision for income taxes: $5.5M
- Other income, net → Income before provision for income taxes: $46.3M
- Income before provision for income taxes → Provision for income taxes: $7.2M
- Income before provision for income taxes → Net income: $44.5M

## Where the revenue comes from

### Regions (Revenue - Schedule of Revenue by Geographic Area (Details))

| Member | Value | Share |
|---|---:|---:|
| North America | $824.7M | 73.5% |
| International | $296.8M | 26.5% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q2 FY2026 | Of revenue |
|---|---:|---:|
| Revenue | $1.1B | 100% |
| Cost of revenue | $240.1M | 21.4% |
| **Gross profit** | $881.3M | 78.6% |
| Research and development | $478.0M | 42.6% |
| Sales and marketing | $311.5M | 27.8% |
| General and administrative | $86.4M | 7.7% |
| **Total operating expenses** | $875.9M | 78.1% |
| **Operating income (loss)** | $5.5M | 0.5% |
| Interest expense | ($3.3M) | 0.3% |
| Interest income and other income, net | $49.5M | 4.4% |
| **Other income, net** | $46.3M | 4.1% |
| **Income before provision for income taxes** | $51.7M | 4.6% |
| Provision for income taxes | $7.2M | 0.6% |
| **Net income** | $44.6M | 4.0% |
| Net income attributable to common stockholders, basic | $44.6M | 4.0% |
| Net income attributable to common stockholders, diluted | $44.6M | 4.0% |
| Basic net income per share (in dollars per share) | $0 | 0.0% |
| Diluted net income per share (in dollars per share) | $0 | 0.0% |
| Weighted average shares used in calculating basic net income per share (in shares) | 356,253,000 |  |
| Weighted average shares used in calculating diluted net income per share (in shares) | 371,023,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2017 | $100.8M | -$3.0M | -$2.6M | $13.8M | $2.4M | $11.5M |
| FY2018 | $198.1M | -$11.0M | -$10.8M | $10.8M | $9.7M | $1.2M |
| FY2019 | $362.8M | -$20.1M | -$16.7M | $24.2M | $13.3M | $10.9M |
| FY2020 | $603.5M | -$13.8M | -$24.5M | $109.1M | $5.4M | $103.7M |
| FY2021 | $1.0B | -$19.2M | -$20.7M | $286.5M | $10.0M | $276.6M |
| FY2022 | $1.7B | -$58.7M | -$50.2M | $418.4M | $35.3M | $383.1M |
| FY2023 | $2.1B | -$33.5M | $48.6M | $660.0M | $27.6M | $632.4M |
| FY2024 | $2.7B | $54.3M | $183.7M | $870.6M | $34.7M | $835.9M |
| FY2025 | $3.4B | -$44.4M | $107.7M | $1.1B | $49.6M | $1.0B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +27.7% (year before +26.1%): steady
- Operating income: -181.7% (year before -62.2%): slowing
- Net income: -41.4% (year before +278.3%): slowing
- Free cash flow: +19.7% (year before +32.2%): slowing

## Operating figures stated in the filing

- Customers: 33,400 customers (as of 2026-06-30). "As of June 30, 2026, we had approximately 33,400 customers spanning organizations of a broad range of sizes and industries, compared to approximately 31,400 as of June 30, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers: 31,400 customers (as of 2025-06-30). "As of June 30, 2026, we had approximately 33,400 customers spanning organizations of a broad range of sizes and industries, compared to approximately 31,400 as of June 30, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers with ARR of $100,000 or more: 4,720 customers (as of 2026-06-30). "As of June 30, 2026, we had approximately 4,720 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 91% of our ARR, up from 3,850 customers as of June 30, 2025, representing 89% of our ARR." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers with ARR of $100,000 or more: 3,850 customers (as of 2025-06-30). "As of June 30, 2026, we had approximately 4,720 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 91% of our ARR, up from 3,850 customers as of June 30, 2025, representing 89% of our ARR." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of ARR from $100,000+ customers: 91.0% (as of 2026-06-30). "As of June 30, 2026, we had approximately 4,720 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 91% of our ARR, up from 3,850 customers as of June 30, 2025, representing 89% of our ARR." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of ARR from $100,000+ customers: 89.0% (as of 2025-06-30). "As of June 30, 2026, we had approximately 4,720 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 91% of our ARR, up from 3,850 customers as of June 30, 2025, representing 89% of our ARR." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using two or more products: 85.0% (as of 2026-06-30). "Approximately 85% of our customers were using two or more products as of June 30, 2026, up from approximately 83% a year earlier." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using two or more products: 83.0% (as of 2025-06-30). "Approximately 85% of our customers were using two or more products as of June 30, 2026, up from approximately 83% a year earlier." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using four or more products: 58.0% (as of 2026-06-30). "Additionally, as of June 30, 2026, approximately 58% of our customers were using four or more products, up from approximately 52% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using four or more products: 52.0% (as of 2025-06-30). "Additionally, as of June 30, 2026, approximately 58% of our customers were using four or more products, up from approximately 52% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using six or more products: 37.0% (as of 2026-06-30). "approximately 37% of our customers were using six or more products, up from 29% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using six or more products: 29.0% (as of 2025-06-30). "approximately 37% of our customers were using six or more products, up from 29% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using eight or more products: 22.0% (as of 2026-06-30). "approximately 22% of our customers were using eight or more products, up from 14% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Customers using eight or more products: 14.0% (as of 2025-06-30). "approximately 22% of our customers were using eight or more products, up from 14% a year earlier" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### Free cash flow far outruns a breakeven operating line

Free cash flow of $306.0M was 27.3% of revenue, against operating income of $5.5M, or 0.5%: cash and reported profit tell different stories.

Operating cash flow was $315.9M and capital spending $9.9M, leaving free cash flow of $306.0M. Operating income was $5.5M and net income $44.6M, so operating cash flow was 7.1 times net income. _(from the filing)_
This is not a one-quarter effect. In the last full fiscal year, free cash flow was $1.0B on revenue of $3.43B, or 29.2%, while the operating line showed a loss of $44.4M. _(from the filing)_
In subscription software a gap this wide usually comes from two places: pay in stock, which is an expense that uses no cash, and customers paying for annual plans before the service is delivered. Neither is free. Stock pay dilutes existing owners, and prepayments are service still owed. _(analysis)_
The dilution is visible in the share count: diluted weighted average shares were 371.0M, against 358.7M a year earlier. _(from the filing)_

### Interest on the cash pile earns most of pre-tax profit

Other income of $46.3M was 89.5% of pre-tax income of $51.7M, so reported profit currently tracks interest rates more than operations.

Other income, net was $46.3M, against $41.6M a year earlier. The filing says the line consists of "interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities". Operating income of $5.5M was 10.5% of pre-tax income. _(from the filing)_
A year earlier the same line did even more of the work: other income of $41.6M covered an operating loss of $35.5M and left pre-tax income of $6.1M. Net income has since risen to $44.6M from $2.65M. _(from the filing)_
Read together, the jump in net income came mostly from the operating line turning positive, while the level of net income still rests on interest. If market rates fall, interest income would shrink and net income would lean on an operating line close to breakeven. _(analysis)_

### Expense discipline, not gross margin, lifted the operating line

Operating expenses fell to 78.1% of revenue from 84.2%, enough to turn a $35.5M operating loss into $5.5M of income despite a lower gross margin.

Research and development fell to 42.6% of revenue from 46.9%, sales and marketing to 27.8% from 28.9%, and general and administrative to 7.7% from 8.4%. Total operating expenses were $875.9M against $696.3M, while revenue rose 35.6% to $1.12B. _(from the filing)_
Gross margin moved the other way, to 78.6% from 79.9%. Cost of revenue took 21.4% of revenue, against 20.1% a year earlier. The filing attributes the decline primarily to increased spend with its third-party cloud infrastructure provider. _(from the filing)_
Against the previous quarter the picture is flatter: operating income was $7.3M then and $5.5M now. The year-on-year gain is real, but it has not yet become a rising trend. _(from the filing)_
Lower expense ratios did all the work this quarter, and they have limits. Research and development builds the products that customers expand into, so its share cannot fall indefinitely without cost. A gross margin that stops sliding would let more of the expense gains reach operating income. _(analysis)_

### Competitive edge

- **Customers keep adding products to one platform** Customers using eight or more products rose to 22% from 14%, so revenue grows inside existing accounts more than through new ones.
- **Engineering outspends selling by half again** Research and development of $478.0M was 153.4% of sales and marketing of $311.5M, a mix that self-serve adoption makes possible.
- **Growth needs almost no capital spending** Capital spending of $9.9M was 0.9% of revenue and 3.1% of operating cash flow, so nearly all operating cash became free cash flow.

### What to watch

- **The largest customer has begun cutting its usage** Usage pricing lets revenue fall without a cancellation, and the filing says the largest customer began reducing usage in the quarter after this one.
- **The cloud hosting bill is rising faster than revenue** Gross margin eased to 78.6% from 80.4% two quarters earlier, as cost of revenue, mostly rented cloud capacity, took a larger share of each sale.
- **A security vendor that has itself been targeted** Datadog holds customer data and sells security products, and the filing discloses earlier unauthorized access to some of its source code repositories.

## Investor view

**Datadog turned 27.3% of revenue into free cash flow this quarter while its operating profit stayed close to zero**

### How it makes money

Datadog sells subscriptions to a cloud platform that monitors customers' infrastructure, applications, logs, user experience and security in one place. The filing says it earns revenue "from the sale of subscriptions to customers using our cloud-based platform", and that services revenue has been immaterial. Revenue was $1.12B this quarter, against $826.8M a year earlier. _(from the filing)_
Pricing follows usage. A customer commits to an amount of usage, billed ratably or drawn down as used, and pays for anything above the commitment. The unit differs by product: hosts, containers, log volume, custom metrics. Revenue therefore rises with the size of the customer's own cloud estate, and the filing notes that "Our customers can expand their footprint with us on a self-service basis." _(from the filing)_
The main cost of delivering the product is rented computing. Cost of revenue, chiefly payments to third-party cloud infrastructure providers plus support staff, was $240.1M. That left gross profit of $881.3M, a gross margin of 78.6%. _(from the filing)_
Almost all of that gross profit is spent again. Research and development took $478.0M, or 42.6% of revenue; sales and marketing $311.5M, or 27.8%; general and administrative $86.4M, or 7.7%. Total operating expenses of $875.9M left operating income of $5.5M. _(from the filing)_
Revenue is concentrated in large accounts. About 4,720 customers with annual run-rate revenue of six figures or more were 14.1% of the roughly 33,400 customers, yet they carried 91% of annual run-rate revenue. _(from the filing)_

### What shifted

Revenue rose 35.6% to $1.12B. North America grew 40.6% to $824.7M while International grew 23.6% to $296.8M, lifting North America's share of revenue to 73.5%. The filing attributes most of the increase to growth from existing customers rather than new ones. _(from the filing)_
Gross margin slipped to 78.6% from 79.9% a year earlier, and from 80.4% two quarters before. Cost of revenue rose to $240.1M from $166.0M, faster than revenue. The filing gives the reason: the decline came "primarily as a result of increased spend with our third-party cloud infrastructure provider costs." _(from the filing)_
Operating costs grew slower than revenue. Total operating expenses fell to 78.1% of revenue from 84.2%, led by research and development at 42.6% against 46.9%, and sales and marketing at 27.8% against 28.9%. The operating line moved from a loss of $35.5M to income of $5.5M. _(from the filing)_
Most reported profit came from the balance sheet, not operations. Other income, net was $46.3M, or 89.5% of pre-tax income of $51.7M. The filing says this line is mainly "interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities". Net income was $44.6M, against $2.65M a year earlier. _(from the filing)_
Customers went deeper into the platform. The share using eight or more products rose to 22% from 14%, and six or more to 37% from 29%. Large accounts carried 91% of annual run-rate revenue, up from 89%. _(from the filing)_

### Risks in the filing

Customers can leave or shrink. The filing states that "Our customers have no obligation to renew their subscriptions", and that some cohorts that ramp usage quickly "may in the future optimize their usage, or may fail to renew their subscriptions". It names the AI-native cohort, which includes the largest customer, as one such group. _(from the filing)_
The platform runs on other companies' clouds. The filing says "We outsource substantially all of the infrastructure relating to our cloud solution to third-party hosting services", so an outage, capacity limit or contract change at a provider could interrupt service. It adds that "any failure in optimizing our spend on third-party cloud services as we scale could negatively impact our gross margins." _(from the filing)_
Security is both the product and a liability. The company holds customer data and has been targeted before: it notified customers of unauthorized access to some of its source code repositories through compromised employee credentials, and it describes AI-assisted attacks as a growing threat. A breach could reduce demand and bring claims beyond its insurance. _(from the filing)_
Growth is expected to slow. The filing says "we expect that our revenue growth rate will decline in the future" as the business matures, and warns that economic uncertainty, tariffs and high interest rates can lead companies to cut IT budgets. Larger competitors may respond by lowering prices. _(from the filing)_
Two of these named risks are already visible in the numbers rather than hypothetical. The hosting cost risk shows in a gross margin that has eased for two quarters running. The concentration and usage-optimization risk shows in how much revenue sits with large accounts, and the filing has now tied it to a specific customer. _(analysis)_

## Founder view: mechanisms

### Land with one product, expand across many

Datadog lets a team start with one product that installs quickly and shows value the same day, then sells further products into the same account. Each added product reuses the agent already installed and the data already flowing, so the second and third sale cost far less than the first. As more teams rely on one shared view, replacing it means retraining all of them, which raises the cost of leaving. _(analysis)_

### Usage pricing rides customers' own growth

Charging per host, per container or per volume of data ties revenue to how much the customer runs, not to a seat count. When a customer's systems grow, revenue grows without a new sale. The same link works in reverse: when a customer trims its cloud estate or tunes what it sends, revenue falls at once. Fast-growing customers become large customers, which concentrates revenue. _(analysis)_

### Low-friction selling leaves room for engineering

Because the products install without consultants and developers can try them on their own, Datadog needs less sales effort per dollar of revenue than software that requires long implementations. It spends the difference on building products. Engineering, not selling, is its largest expense line, which keeps the catalogue growing and feeds the expansion mechanism. _(analysis)_

### Cash arrives ahead of reported profit

Customers on annual plans often pay before the service is delivered, and a large part of staff pay is in stock, which counts as an expense but uses no cash. Together they make cash generation far stronger than the income statement suggests. The cost does not vanish: prepayments are an obligation to deliver, and stock pay dilutes existing owners. _(analysis)_

## Member research

Signed-in members read, on the page: what Datadog's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Datadog 10-Q for the period to 2026-06-30: https://www.sec.gov/Archives/edgar/data/1561550/000162828026054458/ (2026-08-06)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02