DDOG Q2 Deep Dive: AI Customer Growth, Product Expansion, and Guidance Raise

Cloud monitoring software company Datadog (NASDAQ:DDOG) reported Q2 CY2025 results topping the market’s revenue expectations, with sales up 28.1% year on year to $826.8 million. On top of that, next quarter’s revenue guidance ($849 million at the midpoint) was surprisingly good and 3.7% above what analysts were expecting. Its non-GAAP profit of $0.46 per share was 12.8% above analysts’ consensus estimates.

Is now the time to buy DDOG? Find out in our full research report (it’s free).

StockStory’s Take

Datadog’s second quarter was defined by strong customer adoption of its cloud monitoring platform, particularly among AI-native businesses. Management credited higher usage growth from both existing and new customers, with AI-native companies contributing a rising share of revenue. CEO Olivier Pomel pointed to “rapid usage growth with their [AI-native customers’] products,” as well as steady demand across other customer groups. The quarter also saw increased product adoption, with a notable uptick in multi-product usage and strong traction for security offerings. Despite surpassing analyst expectations, management acknowledged the potential for volatility in usage patterns among large AI customers.

Looking ahead, Datadog’s updated guidance reflects expectations for continued momentum in AI-driven observability and security. Management emphasized the role of new autonomous AI agents, expanded product capabilities, and ongoing cloud migration as central to future growth. CFO David Obstler noted, “We continue to believe that adoption of AI will benefit Datadog in the long term,” while also highlighting the company’s focus on driving further gross margin improvements through internal cloud efficiency. However, leadership cautioned that the expansion of large AI-native customers could introduce usage variability in the coming quarters.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to rapid growth in AI-native customer segments, ongoing product innovation, and broadening enterprise adoption, while also highlighting potential future volatility linked to contract renewals.

• AI-native cohort growth: Datadog saw accelerated growth from AI-native customers, who now represent a larger share of revenue than in prior quarters. This segment contributed about 11% of revenue, up significantly from the previous year, with Pomel noting, “There are hundreds of customers in this group…including 8 of the top 10 leading AI companies.”
• Security suite traction: The company’s security products surpassed $100 million in annual recurring revenue, growing at mid-40% year-over-year. Management cited strong adoption among large enterprises but acknowledged room for deeper, standardized deployments across these organizations.
• Multi-product adoption: Customers continued expanding their usage of Datadog’s platform, with increasing numbers adopting four, six, or more products. This trend was especially pronounced in enterprise contracts, where consolidation of observability tools and incident management drove larger deals.
• Platform innovation: The June DASH user conference brought over 125 product and feature launches, including autonomous AI agents for security and operations, enhanced AI observability, and new developer tools. Early customer feedback on these releases has been positive, particularly for Bits AI agents and Flex Logs.
• Operational investments: Datadog increased investments in R&D and sales capacity, supporting both product expansion and go-to-market reach. Obstler highlighted that new sales hires are becoming productive, and international markets are seeing greater investment intensity.

Drivers of Future Performance

Datadog expects its growth trajectory to be shaped by broadening AI adoption, continued product development, and operational efficiency initiatives.

• AI-driven demand expansion: Management believes ongoing AI adoption across industries will fuel observability needs, with more customers incorporating AI workloads into cloud environments. The company expects next-generation AI observability and autonomous agent products to drive incremental revenue as enterprises move into production with AI applications.
• Security and product breadth: The expanding security suite and broader platform capabilities are expected to unlock additional cross-sell opportunities, especially as Datadog focuses on deeper, enterprise-wide deployments. Management sees the consolidation of observability and security tools as a catalyst for larger, multi-product deals.
• Margin improvement initiatives: Datadog is prioritizing cloud efficiency projects and internal FinOps practices to enhance gross margins and manage operating expenses. Obstler indicated that ongoing optimization, particularly in cloud usage, should benefit margins through the remainder of the year, although ramped investments in R&D and sales will continue.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will monitor (1) the pace at which traditional enterprises adopt AI observability solutions, (2) the success of new AI agent and security product deployments in driving multi-product deals, and (3) progress on margin improvement from cloud efficiency projects. We will also track Datadog’s ability to expand internationally and the impact of any contract renegotiations with large AI-native customers.

Datadog currently trades at $129, down from $137.04 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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