Datadog reported Q2 2026 before the open on August 6. Revenue was $1.12B, up 35.6% year over year — the fourth consecutive quarter of accelerating growth. Non-GAAP diluted EPS was $0.65 against roughly $0.58 expected. Full-year revenue guidance went from $4.30–4.34B to $4.45–4.47B. Operating cash flow was $316M.
It is a clean beat on every line the market watches. The Rule of 40 score still went down.
The call, graded
We previewed this print on July 31 around one question: whether 30%+ growth was the new normal or whether Q1's 32% was a one-quarter standout flattered by an unusually strong bookings period.
| What we said to watch | What the print says |
|---|---|
| Whether 30%+ growth holds a second straight quarter | Held, and accelerated. 35.6% against 32.1% in Q1. |
| Street at ~$1.08B revenue and ~$0.58 non-GAAP EPS | Beat both — $1.121B and $0.65. |
| Whether the raised FY guide gets lifted again | Raised again, by ~$130M at the midpoint. |
| New-logo bookings momentum | Not disclosed. The release gives no bookings or billings figure this quarter — the metric the Q1 narrative was built on is simply absent. |
| AI-linked product traction | Bits Code, Bits Chat and Bits Agent Builder reached general availability; 100+ capabilities launched at DASH; Adaptive ML acquired. |
The reacceleration thesis is confirmed. A company at a $4.5B revenue run-rate is now growing faster than it was at $2.6B, which is not how this normally goes.
The score, recomputed
On our house definition — revenue growth plus free-cash-flow margin:
| Quarter | Revenue | Revenue YoY | FCF | FCF margin | R40 |
|---|---|---|---|---|---|
| 2025 Q2 | $826.8M | +28.12% | $184.9M | 22.36% | 50.49 |
| 2025 Q3 | $885.7M | +28.35% | $234.7M | 26.50% | 54.85 |
| 2025 Q4 | $953.2M | +29.21% | $318.2M | 33.38% | 62.59 |
| 2026 Q1 | $1,006.0M | +32.10% | $323.3M | 32.13% | 64.23 |
| 2026 Q2 | $1,121.5M | +35.64% | $306.0M | 27.28% | 62.93 |
Growth added 3.5 points. The cash margin gave back 4.9. The score fell 1.3 points in the best growth quarter Datadog has printed in years.
That is the metric working, not failing. The Rule of 40 exists precisely to stop you reading an acceleration in isolation, and this quarter it is the only headline number that noticed the cash half moved the other way.
Whose free cash flow, though
Datadog reported $279M of free cash flow. We store $306M for the same quarter. Both are correct, and the gap is worth naming.
Datadog's definition subtracts purchases of property and equipment and capitalized software development costs. Our house definition subtracts only purchases of property and equipment. The difference this quarter is $27.3M of capitalized software — against just $9.9M of physical capex. Datadog now capitalizes 2.8x more software than it spends on property and equipment.
| Q2 2025 | Q2 2026 | YoY | |
|---|---|---|---|
| Purchases of property and equipment | $15.2M | $9.9M | −34.7% |
| Capitalized software development costs | $19.6M | $27.3M | +39.5% |
Physical capex is shrinking; capitalized software is growing faster than revenue. On Datadog's own definition the score this quarter is 60.50, not 62.93 — the two definitions now disagree by 2.4 points, and the gap widens every quarter that line grows.
We use the house number for comparability across every company on this site. But when a single line item moves the score by more than two points and is compounding at 40%, the honest thing is to print both.
The 0% operating margin nobody mentioned
GAAP operating income was $5.5M on $1.12B of revenue. Operating margin, as the release itself states: 0%.
Non-GAAP operating income was $257M, a 23% margin. The entire distance between those two numbers is $220M of stock-based compensation — 19.6% of revenue, and 40x the GAAP operating income it sits above.
Two things about that are worth holding together:
- SBC is improving as a share of revenue: 21.8% a year ago, 19.6% now. Revenue is outgrowing the comp line.
- It is still the case that a company growing 36% with $5.0B of cash on the balance sheet reports essentially zero GAAP operating profit, and has done for years.
There is a quieter version of the same point in the capex table above. The $27.3M of software Datadog capitalized this quarter is five times its entire GAAP operating income. Costs capitalized rather than expensed sit on the balance sheet instead of the income statement; expensing that spend as incurred would have kept the GAAP operating line negative. The 0% margin is the flattered version.
Growth is guided to decelerate hard
Q3 revenue guidance is $1.135–1.145B. Against $885.7M in Q3 2025, that is +28.2% to +29.3% — a seven-point deceleration from the 35.6% just delivered.
Datadog habitually guides low and beats, so treat the level with suspicion. Treat the shape more seriously: after four quarters of acceleration, management's own number says the streak ends next quarter.
One more line under the headline. Customers with $100k+ ARR grew to 4,720 from 3,850, up 22.6% — a full 13 points slower than revenue. Growth is coming from existing large customers spending more, not from new customers crossing the threshold. That is a higher-quality kind of growth in the short run and a more concentrated one in the long run.
What to watch
The score's two halves are now moving in opposite directions, and the guide says the growth half turns next quarter. The question for Q3 is whether the cash margin comes back up when it does — because if the FCF margin holds near 27% while growth falls to 29%, the score lands near 56, and Datadog's four-quarter climb up the table reverses on both engines at once.
Revenue, free cash flow, gross margin and diluted EPS through 2026 Q2 are from our stored series, back-filled this morning from the 8-K Exhibit 99.1 (accession 0001628280-26-053829). Rule of 40 uses the house definition — year-over-year revenue growth plus free-cash-flow margin, where free cash flow is operating cash flow less purchases of property and equipment. Datadog's own free-cash-flow figure, which additionally nets out capitalized software development costs, is given alongside wherever it differs. The ~$1.08B revenue and ~$0.58 EPS consensus figures are Street numbers reported ahead of the print, not values stored in this repo.