Datadog
DDOG · NasdaqFree 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.
Q2 FY2026, the quarter to Jun 30, 2026 · 10-Q filed Aug 6, 2026
- Operating margin
- 0.5%
- Net income
- $44.6M
- Free cash flow, quarter
- $306.0M
Largest source of revenue: North America, 73.5% of the total.
Where Datadog's money goes
- 01
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.
Why it matters
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.1
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.1
AnalysisIn 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.
The dilution is visible in the share count: diluted weighted average shares were 371.0M, against 358.7M a year earlier.1
- 02
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.
Why it matters
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.1
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.1
AnalysisRead 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.
- 03
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.
Why it matters
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.1
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.1
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.1
AnalysisLower 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.
Sources
- 1.Datadog 10-Q for the period to 2026-06-30 (the filing), Aug 6, 2026, read Nov 2, 2026
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Growth, profit and margin
Revenue went from $100.8M in FY2017 to $3.4B in FY2025, the operating margin from -2.9% to -1.3%, over 8 years.
- Revenue$3.4B
- Operating income-$44.4M
- Operating margin-1.3%
- Period
- Q2 FY2026
- Revenue
- $1.1B
- Operating income
- $5.5M
- Operating margin
- 0.5%
- Net income
- $44.6M
- Free cash flow
- $306.0M
Does the profit turn into cash?
Q2 FY2026: free cash flow of $306.0M against net income of $44.6M in the quarter.
- Operating cash flow$1.1B
- Capital expenditure$49.6M
- Free cash flow$1.0B
- Net income$107.7M
Capital expenditure is drawn below the axis as cash out. Cash conversion is operating cash flow over net income, shown in the tooltip for years with a profit.
Financial data and sources
How the revenue mix has shifted
Each breakdown the filing reports, as shares of revenue, for every period it restates.
Geographic markets
Revenue - Schedule of Revenue by Geographic Area (Details). The filing restates this breakdown for 1 period.
Click a member to isolate it across the years shown.
The figures
Margins, cash and growth for the period, each with what it was computed from.
Where revenue comes from
Every breakdown the filing reports for the period, with each item's share.
Geographic markets
| North America | $824.7M | 73.5% |
| International | $296.8M | 26.5% |
What it costs
The cost lines beneath operating income, each as a share of revenue, then the operating result.
Costs are reported by function: what it cost to make what was sold, then the expenses of selling, developing and administering.
| Cost line | Q2 FY2026 | Of revenue | Source |
|---|---|---|---|
| Cost of revenue | $240.1M | 21.4% | Source10-Q, us-gaap:CostOfGoodsAndServicesSold, as reported in the 10-Q filed 2026-08-06 |
| Operating income (loss) | $5.5M | 0.5% | Source10-Q, us-gaap:OperatingIncomeLoss, as reported in the 10-Q filed 2026-08-06 |
Operating figures the company states
From the text of the filing rather than its statements, each with the sentence that states it.
View source
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.
View source
approximately 22% of our customers were using eight or more products, up from 14% a year earlier
View source
Additionally, as of June 30, 2026, approximately 58% of our customers were using four or more products, up from approximately 52% a year earlier
View source
approximately 37% of our customers were using six or more products, up from 29% a year earlier
View source
Approximately 85% of our customers were using two or more products as of June 30, 2026, up from approximately 83% a year earlier.
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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.
View source
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.
The statements, as filed
The income statement, cash flow statement and balance sheet in the company's own order and words. Every line links to the filing.
Income statement20 lines, as presented in the 10-Q
Cash flow statement3 lines, as presented in the 10-Q
Year to date, as a quarterly filing reports it.
| Line | Q2 FY2026 | A year earlier | Change | Source |
|---|---|---|---|---|
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Amortization of deferred contract costs | $22.1M | $15.9M | +39% | Source10-Q, us-gaap:CapitalizedContractCostAmortization, as reported in the 10-Q filed 2026-08-06 |
| Statement of Cash Flows | ||||
| CASH AND CASH EQUIVALENTS—End of period | $435.0M | $489.0M | -11% | Source10-Q, us-gaap:CashCashEquivalentsRestrictedCashAndRestrictedCashEquivalentsIncludingDisposalGroupAndDiscontinuedOperations, as reported in the 10-Q filed 2026-08-06 |
| Supplemental disclosure of non-cash investing and financing activities: | ||||
| Stock-based compensation included in capitalized software development costs | $6.9M | $6.0M | +16% | Source10-Q, us-gaap:EmployeeServiceShareBasedCompensationAllocationOfRecognizedPeriodCostsCapitalizedAmount, as reported in the 10-Q filed 2026-08-06 |
Balance sheet30 lines, as presented in the 10-Q
About this data
- Source
- Datadog 10-Q, accession 0001628280-26-054458, filed Aug 6, 2026, read on Nov 2, 2026.
- History
- From the SEC's XBRL company facts, the value from the latest filing that stated each period.
- Reading
- Paragraphs marked Analysis are CXProWealth's reading; everything else is the filing's own numbers and words, or a cited source.
- Version
- methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02
What holds Datadog's model up, and what could bend it
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.
The detail
Customers using six or more products rose to 37% from 29%, and four or more to 58% from 52%. The customer count rose to about 33,400 from about 31,400, while revenue rose 35.6%. The filing attributes most of the revenue increase to existing customers.1
AnalysisEach added product reuses the agent already installed and the data already flowing, so later sales cost less than the first. As more teams work from one shared view, replacing it means retraining all of them, which is why the advantage tends to hold.
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.
The detail
The filing states that "Professional services are generally not required for the implementation of our products" and that "Our efficient go-to-market model enables us to prioritize significant investment in innovation." Research and development was 42.6% of revenue; sales and marketing 27.8%.1
AnalysisLess selling effort per dollar of revenue frees money for new products, and new products feed expansion inside existing accounts. The loop holds while products keep installing without consultants; a shift toward long, negotiated enterprise rollouts would raise the cost of each sale.
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.
The detail
Operating cash flow was $315.9M and capital spending $9.9M, leaving free cash flow of $306.0M. In the last full fiscal year, capital spending was $49.6M against operating cash flow of $1.05B, or 4.7%.1
AnalysisThe reason is the hosting model: Datadog rents computing from cloud providers rather than building its own data centers, so the cost sits in cost of revenue instead of on the balance sheet. The same choice creates the hosting dependence listed among the risks.
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 detail
The filing says the AI-native cohort, which includes the largest customer, "contributed high single digit percentage points to the total Company year-over-year revenue growth" this quarter, and that this cohort "may in the future optimize their usage". It adds that the largest customer began reducing its usage in the following quarter.1
Revenue is concentrated: about 4,720 customers with annual run-rate revenue of six figures or more were 14.1% of about 33,400 customers, yet carried 91% of annual run-rate revenue, up from 89% a year earlier.1
AnalysisBecause customers commit to usage and pay for overages, a cut can reach revenue within months rather than at renewal. The next filings' split of growth between existing and new customers would show how far the rest of the base offsets it.
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.
The detail
Gross margin was 80.4% two quarters earlier, 79.2% in the previous quarter and 78.6% this quarter. Cost of revenue was $240.1M, or 21.4% of revenue, against $166.0M, or 20.1%, a year earlier.1
The filing says "We outsource substantially all of the infrastructure relating to our cloud solution to third-party hosting services" and that "any failure in optimizing our spend on third-party cloud services as we scale could negatively impact our gross margins." A provider outage or capacity limit could also interrupt service.1
AnalysisOne quarter cannot show whether this is a temporary capacity build for heavy AI workloads or a lasting shift toward data-hungry products that cost more to run. Successive quarters of cost of revenue against revenue would separate the two.
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.
The detail
The filing says the company notified customers of access by an unauthorized third party to a number of its source code repositories, arising from compromised employee credentials, and describes AI-assisted attacks as a growing threat. It warns a breach could reduce demand and bring claims beyond its insurance.1
AnalysisFor a monitoring and security platform, trust is part of the product. An incident would cost more than the cleanup: it would weaken the reason customers send their operational data to Datadog in the first place.
Sources
- 1.Datadog 10-Q for the period to 2026-06-30 (the filing), Aug 6, 2026, read Nov 2, 2026
Datadog, further in
Member research, then your own questions on ChatGPT.
What could change the outlook
What Datadog's numbers depend on from here, read from the filing: the conditions behind this period's margins and growth, and where a change would show first.
- What growth leans on after the largest customer's pullback
Which parts of the customer base carry growth from here, and which signals in the next filings would show whether the rest of the base fills the gap.
- Can the expense gains outrun the hosting bill?
How gross margin and operating expenses pull against each other, and what each would need to do for the operating line to move clear of breakeven.
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Have a question about Datadog?
Explore its profit drivers, competitive edge, risks, or your own investment and business questions with CXProWealth on ChatGPT.
- How much of Datadog's 35.6% revenue growth depended on the AI-native cohort, now that its largest customer is cutting usage?
- Why is Datadog's operating income only 1.8% of its free cash flow, and how do stock pay and prepayments explain the gap?
- What would lower interest rates do to Datadog's net income, given that other income was 89.5% of pre-tax income?
Business Lens describes Datadog from its own filings with the SEC. It is not a view on its shares, a target, or advice to buy, sell or hold anything; figures are as filed and may be restated by the company later. The filing, the dates and the version are under the financial data above.