Datadog lifts its outlook as its largest customer cuts usage
The quarterly beat accounts for most of Datadog's higher annual forecast. Its latest report also shows a pullback by the largest customer.
Datadog raised its annual revenue outlook after 35% quarterly growth, even as its largest customer reduced usage of its software. The company says that reduction could slow revenue growth.
The new annual sales range is $4.515 billion to $4.525 billion. Most of the increase reflects a third quarter that has already finished, rather than a large change in sales implied for the final quarter.
The largest customer pulls back
Datadog sells software that helps businesses monitor applications, infrastructure and related systems. Customers' spending depends partly on how much they use those services.
Its latest quarterly report says the largest customer reduced usage during the third quarter. That customer belongs to the AI-native cohort, a group of customers built around artificial intelligence. Together, they contributed high-single-digit percentage points to Datadog's 35% year-over-year revenue growth.
Where the forecast upgrade comes from
Research by Ticker Byline shows that third-quarter revenue exceeded the midpoint of Datadog's original forecast by $57.1 million. The annual forecast midpoint rose by $60 million, so about 95% of that upgrade was accounted for by the quarterly beat.
Actual quarterly revenue was $1.197 billion, compared with August's forecast of $1.135 billion to $1.145 billion. The annual range had previously been $4.450 billion to $4.470 billion.
Using the old annual midpoint, first-half sales and the original third-quarter forecast leaves about $1.192 billion for the fourth quarter. Using the new annual midpoint and actual nine-month sales leaves about $1.195 billion, an increase of roughly $2.9 million. The earlier figure is our calculation, rather than a previous explicit fourth-quarter promise.
Datadog's new fourth-quarter forecast is $1.190 billion to $1.200 billion. The strong completed quarter therefore coexists with a more restrained change in the sales implied for year-end.
Profit and cash behind the growth
Reported operating income was $74.7 million, compared with adjusted operating income of $334.3 million. Stock-based compensation of $237.2 million was the largest adjustment.
Operating cash flow was $290 million. After capital spending and capitalized software costs, free cash flow was $250.6 million. The Datadog profile tracks those profit measures, financial resources and completed acquisitions alongside the customer-usage question.