Datadog’s 35% growth gets an AI boost from Scout 1.0

Datadog, Inc. (NASDAQ:DDOG) is growing quickly enough to make its latest AI launch look like more than a product footnote. Third-quarter revenue rose 35% year on year to US$1.197 billion, while the observability and security platform generated US$290.0 million in operating cash flow and US$250.6 million in free cash flow.

Revenue growth reaches larger enterprise customers

The customer mix provided one of the clearest signals in the result. Datadog ended September with about 4,860 customers generating at least US$100,000 in annual recurring revenue, up 20% from roughly 4,060 a year earlier. The company says ARR is an operating metric based on annualised recurring run-rate, rather than GAAP revenue, so the two measures should not be treated as interchangeable.

Profitability also improved on a reported basis. GAAP operating income was US$74.7 million, compared with a US$5.8 million operating loss in the same quarter last year, producing a 6% operating margin. Net income reached US$118.3 million, or US$0.32 a diluted share, against US$33.9 million and US$0.10 a share a year earlier.

Adjusted margin remains well ahead of GAAP profitability

Datadog’s non-GAAP figures were considerably higher: operating income was US$334.3 million, equal to a 28% margin, and adjusted diluted earnings per share were US$0.81. Those measures exclude material costs, including US$237.2 million of stock-based compensation during the quarter, as well as employer payroll taxes on equity transactions, amortisation, acquisition costs and debt-issuance costs.

That gap is central to how the quarter should be read. The company is producing substantial cash and has US$5.2 billion in cash, cash equivalents and marketable securities, but the reported earnings picture remains meaningfully affected by equity compensation. Free cash flow was US$250.6 million, although its margin fell to 21% from 24% a year earlier as capital expenditure and capitalised software costs increased.

Scout 1.0 adds an AI product test

Datadog also introduced Scout 1.0, its AI Research team’s first specialised model. In preview, Scout powers Bits Investigation and is designed to investigate production issues, with the company saying it delivers frontier-model performance at a lower inference cost. That claim is company-reported and the announcement does not provide adoption, revenue or customer-outcome data, leaving commercial traction to be demonstrated.

Management said customers are scaling digital operations and deploying AI, while Datadog highlighted recognition from Forrester and Gartner in the AIOps and observability categories. Those endorsements may support the platform’s positioning, but the harder financial test remains whether new AI capabilities translate into broader deployments, larger contracts and durable retention.

Fourth-quarter guidance points to sustained expansion

Datadog expects fourth-quarter revenue of between US$1.19 billion and US$1.20 billion, alongside non-GAAP operating income of US$280 million to US$290 million and adjusted diluted earnings per share of US$0.69 to US$0.71. Its full-year revenue outlook is US$4.515 billion to US$4.525 billion, with non-GAAP operating income of US$1.095 billion to US$1.105 billion.

The filing does not disclose analyst consensus, so it is not possible to determine whether the quarter or outlook exceeded market expectations. The next substantive question is whether Datadog can preserve 35%-plus growth as its customer base gets larger, while narrowing the distance between adjusted performance and GAAP results and proving that Scout can move from preview technology into measurable customer value.