Datadog (DDOG) sells software that helps companies monitor the performance and security of cloud applications.Its tools track servers, applications, software logs, and other systems behind cloud and artificial intelligence products.Datadog reported second-quarter revenue of $1.12 billion, up 36% from a year earlier.Adjusted earnings reached 65 cents per share. Both revenue and adjusted earnings exceeded analysts’ estimates.Datadog shares closed down 19.03% at $229.29 on Aug. 6 as investors weighed the earnings beat against the slower sequential growth implied by the company’s third-quarter forecast.Investors also received a new disclosure about Datadog’s largest customer.The company said the customer had reduced its usage, and Datadog included that reduction in its third-quarter and full-year forecasts.The unnamed customer is a leading AI company that recently signed a nine-figure renewal agreement and uses 17 Datadog products.Datadog did not disclose the customer’s name, how much its usage declined, or what caused the reduction.Regarding our largest customer, we have seen a usage reduction which is incorporated in our Q3 and full year 2026 guidance.The renewal confirms that the customer plans to continue using Datadog.Part of Datadog’s revenue still depends on how much monitoring service the customer actually consumes.A renewal does not fix all Datadog revenue at one amountDatadog sells subscriptions that allow customers to monitor cloud infrastructure, applications, security threats, and software performance.A customer’s bill can depend partly on how much data or computing activity Datadog monitors.Datadog’s annual report describes three main subscription arrangements:Revenue recognized evenly: The customer commits to an amount, and Datadog records the revenue evenly over the subscription term.Committed usage recognized as consumed: The customer commits to an amount, but Datadog records revenue as the service is used.Monthly usage: The customer pays according to the amount of service consumed during the month.Customers can also pay additional fees when their usage exceeds the amount covered by the subscription.A company can therefore renew a multi-year agreement but generate less near-term revenue if it monitors fewer servers, sends fewer software records, or consumes less capacity than Datadog expected.The nine-figure renewal protects the customer relationship, but it does not protect all revenue linked to actual consumption or usage above the contracted amount.Datadog did not reveal which billing arrangement applies to its largest customer.Investors therefore cannot determine how much of the contract is recognized evenly and how much depends on usage.
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Customers above $100,000 now generate 91% of ARRDatadog ended the second quarter with about 33,400 customers, an increase of only 200 from the first quarter.The number of customers producing at least $100,000 in annual recurring revenue increased by 170 during the same period.Datadog’s customer mix33,400: Total customers, up from 33,200 in the first quarter.4,720: Customers producing at least $100,000 in annual recurring revenue, up from 4,550.91%: Portion of annual recurring revenue generated by those larger customers, up from 90%.Low-120%: Datadog’s trailing 12-month net dollar-based retention rate.Annual recurring revenue, or ARR, measures the annualized value of subscriptions at a particular point in time.ARR includes contracted amounts and certain usage revenue, but it is not the same as revenue recognized under accounting rules.The net retention rate compares spending by the same group of customers with their spending one year earlier.A rate in the low-120% range means existing customers collectively increased their spending by slightly more than 20%, after reductions and cancellations.Related: Benchmark reboots its Datadog target as the AI super cycle buildsThe increase of 170 customers above the $100,000 threshold does not mean Datadog signed 170 new large customers.Some existing customers may have increased their spending enough to cross that threshold.Customers spending at least $100,000 now account for 91% of Datadog’s recurring business, giving their usage decisions greater influence over the company’s growth.Third-quarter guidance adds only $18.5 million from Q2Datadog expects third-quarter revenue of $1.135 billion to $1.145 billion.The midpoint of $1.14 billion would be about $18.5 million higher than second-quarter revenue of $1.121 billion.By comparison, second-quarter revenue increased by about $115 million from the first quarter.The third-quarter midpoint would represent approximately 1.7% sequential growth and 29% growth from a year earlier. These percentages are calculated from Datadog’s reported second-quarter revenue and third-quarter guidance.Datadog also increased its full-year revenue forecast to $4.45 billion to $4.47 billion.The company’s previous annual forecast was $4.30 billion to $4.34 billion.The new annual range is higher than Datadog’s May forecast, but it remains below the $4.69 billion analyst consensus reported by The Wall Street Journal.Related: JPMorgan resets SpaceX price target after earningsThe third-quarter range also indicates a much smaller increase from the immediately preceding quarter.Management said the $1.135 billion to $1.145 billion range already includes lower usage from the largest customer.Datadog has not disclosed how much ARR or recognized revenue comes from its largest customer.Third-quarter revenue will show whether growth from Datadog’s other customers is sufficient to offset that reduction.More AI:Nvidia just made a move Wall Street wasn’t ready forMicrosoft just took sides in AI policy fightOpenAI just disclosed something genuinely alarmingDatadog has not disclosed how much revenue is exposedDatadog has not provided four figures needed to calculate the direct financial effect:The customer’s share of Datadog revenue;The amount by which usage declined;The products that experienced lower consumption;The portion of the renewed contract tied to actual usage.The company has previously warned that large AI customers can expand rapidly and then reduce or optimize their usage.Datadog’s annual report says its AI-native customer group, including its largest customer, contributed about seven percentage points of year-over-year revenue growth in the fourth quarter of 2025.The filing also warns that AI-native customers may later optimize usage or renew on different terms.A customer can reduce monitoring consumption by running fewer workloads, lowering the amount of software data it sends, or replacing some third-party tools with internal systems.Datadog’s total customer count increased by only 200 during the second quarter.Slower customer additions leave more of the company’s growth dependent on existing customers increasing their usage and purchasing additional products.The low-120% net retention rate shows that existing customers as a group are still expanding.A decline in that rate would make reductions by large customers harder to offset.Datadog’s next report will show whether third-quarter revenue remained within the $1.135 billion to $1.145 billion forecast after a full quarter of lower usage.Revenue below $1.135 billion would miss a range that already includes the reduction from Datadog’s largest customer.Related: Jim Cramer sends strong signal to stock market investors