Datadog's Growth Accelerates a Fourth Straight Quarter as Margins Slip
Datadog posted 36% revenue growth in the second quarter of 2026, its fastest pace in over a year, even as GAAP operating income slid to $5 million and free cash flow margin narrowed to 25%.
Datadog (DDOG) reported second-quarter 2026 revenue of $1.12 billion, up 36% from a year earlier, the fourth consecutive quarter in which the software company's year-over-year growth rate has accelerated. The cloud-monitoring software provider's growth climbed from 32% in the first quarter of 2026, 29% in the fourth quarter of 2025 and 28% in the third quarter of 2025.
The acceleration coincided with a step down in profitability. GAAP operating income fell to $5 million, or roughly break-even margin, from $7 million in the first quarter, the first sequential decline in GAAP operating income in the trailing four quarters even as revenue growth sped up. Non-GAAP operating margin held at 23%, little changed from 22% in the prior quarter but down from 24% in the fourth quarter of 2025. Gross margin also compressed, with the GAAP figure slipping to 79% from 80% a year earlier and the non-GAAP measure falling to 80% from 81%.
Research and development spending drove much of the pressure. GAAP R&D expense rose to $478 million, or 43% of revenue, from $387 million a year ago, with stock-based compensation within that line climbing to $131.7 million from $112.4 million. Free cash flow margin came in at 25% for the quarter, below the 29% and 31% implied by cash generation in the first quarter of 2026 and fourth quarter of 2025, respectively.
Customer growth told a more consistent story of acceleration. The number of customers generating $100,000 or more in annual recurring revenue reached approximately 4,720, up 23% from a year earlier, extending a climb from 21% growth in the first quarter, 19% in the fourth quarter of 2025 and 16% in the third quarter of 2025. Datadog stopped disclosing its count of customers spending $1 million or more annually, a metric that stood at 603 customers, up 31% year over year, when last reported in the fourth-quarter 2025 release.
Datadog acquired Adaptive ML, an AI and reinforcement-learning-from-human-feedback startup, paying $101.7 million in cash for acquisitions during the quarter. Goodwill on the balance sheet rose to $706.7 million from $530.6 million at the end of 2025, a 33% increase, and M&A transaction costs, a non-GAAP add-back category the company began flagging as material in mid-2025, rose to $2.0 million from $1.4 million a year earlier. Accounts payable roughly doubled to $313.5 million as of June 30, 2026, from $148.8 million at the end of 2025.
Despite the margin pressure, non-GAAP operating income rose to $257 million from $223 million in the first quarter and $164 million a year earlier, gains of 15% sequentially and 57% year over year.
Datadog guided third-quarter revenue to a range of $1.135 billion to $1.145 billion, implying growth of about 28% to 29% from the $886 million reported in the third quarter of 2025. The company raised its full-year 2026 revenue guidance to $4.45 billion to $4.47 billion, up from the $4.06 billion to $4.10 billion range it set when it first guided for the year in February 2026, a roughly $390 million to $400 million increase over two quarters. Full-year non-GAAP operating income guidance was raised to $1.01 billion to $1.03 billion from the original $840 million to $880 million, an increase of roughly $150 million to $170 million at the midpoint.