Datadog Stock Fell on a Beat: The Usage Pricing Risk

You open your brokerage app on November 4 and see the headline: Datadog beat every estimate. Revenue up 35%. Profit per share well above forecast. Then you look at the price, and the Datadog stock you own is down more than 10% before lunch.

That feels backwards, and it costs real money. A beat that sinks a stock tells you the market was reading a different number than the one in the headline. In this case it was one customer, one pricing model, and one line in the outlook.

This article walks through why Datadog fell after a beat, how usage-based pricing makes software revenue swing in a way subscriptions do not, and the three numbers you can check yourself before the next earnings call.

Why Datadog Stock Fell After Beating Estimates

Start with the scorecard. According to the company's earnings release filed with the SEC, third-quarter revenue was $1,197.1 million, up from $885.7 million a year earlier. Free cash flow was $250.6 million. Customers paying $100,000 or more a year rose 20% to about 4,860.

Those are strong numbers. The problem sat in the next line: fourth-quarter revenue guidance of $1.19 billion to $1.20 billion. For a company growing 35%, a forecast that matches or trails the quarter just reported is a stall.

Here is the math in plain terms:

• Low end of guidance: $1,190 million, about 0.6% below the third quarter.
• Midpoint: $1,195 million, roughly 0.2% below.
• High end: $1,200 million, about 0.2% above.

24/7 Wall St. reported the stock fell from a prior close of $220.52 to $196.03 in early trading, a drop of about 11%. If you held $5,000 of shares, that is roughly $555 gone before noon, on a quarter that beat.

So why would a growing company guide flat?

How Usage-Based Pricing Works

Most people picture software as a service as a flat monthly fee. You pay per seat, per user, or per plan tier, and the bill stays the same until the contract renews. That model makes revenue smooth and easy to predict.

Datadog works differently. It sells monitoring tools that watch servers, apps, and AI systems running on cloud computing infrastructure. A large share of what customers pay tracks how much they actually use: how many machines they monitor, how much log data they send, how many traces they store.

The minimum commitment floor

Big customers usually sign a contract with a minimum commitment. They promise to spend at least a set amount over the contract, often in exchange for a discount. If they use more than the minimum, they pay more. If they use less, they still owe the floor.

That structure creates a band. Revenue can float anywhere between the contractual minimum and whatever the customer's real usage happens to be. In a good year, usage runs far above the floor and revenue grows faster than contracts alone would suggest. In a bad year, it can fall back toward the floor with no cancellation at all.

What happened in the third quarter

On the earnings call, as summarized by MarketBeat's transcript highlights, CFO David Obstler said the company's largest customer reduced usage but "remained above its minimum contractual commitment." The fourth-quarter outlook "assumes revenue from that customer at its minimum commitment level."

Management also said some large AI customers renewed early and received better pricing in exchange for bigger commitments. That locks in longer contracts, which is good. It also lowers the price per unit of usage, which can trim revenue in the near term.

A Worked Example: When One Customer Moves the Whole Quarter

Datadog did not disclose how much that customer pays. So here is a simplified illustration, with made-up but realistic numbers, of how the mechanism works.

Say a monitoring company has a customer with a $40 million annual minimum commitment. During a busy stretch, that customer actually used $64 million worth of the product per year, or $16 million a quarter.

1. Peak usage: $16 million of revenue per quarter.
2. Customer optimizes: it cuts usage to $12 million a quarter. That is still above the $10 million quarterly floor, so nothing in the contract is broken.
3. Cautious guidance: management assumes the customer drops all the way to the $10 million floor next quarter.

Revenue from that single account just went from $16 million to a planned $10 million. That is a $6 million hole. If the rest of the business adds about $6 million in new revenue that quarter, total revenue comes out flat. A 35% grower can guide flat without a single customer leaving.

Datadog gave a version of this split. Excluding the big customer, management said fourth-quarter growth is implied in the low to mid 30% range. Including it, guided growth is 25% to 26%. The gap between those two numbers is the cost of one account moving toward its floor.

That is the trade usage pricing offers. You get faster growth when customers expand, and you take the full hit when they pull back.

Subscription vs Usage Revenue: Atlassian Shows the Contrast

Two days later, on November 6, Atlassian had a similar morning for a different reason. Investing.com reported the shares fell about 15.8% before the open after the company beat on both earnings and revenue. Adjusted earnings came in at $1.65 a share against a $1.43 estimate.

Atlassian sells mostly seat-based subscriptions, so it does not have Datadog's usage swing. Its problem was a slowing growth rate in the outlook. Cloud revenue grew 31% in the quarter, and the company guided to about 27% next quarter. Investors had paid a premium price for the faster number.

Put the two side by side and a pattern appears:

• Usage-based revenue can fall quickly when customers optimize, but it can recover just as quickly when their workloads grow.
• Seat-based revenue slows more gradually, but a slowdown tends to stick, because it reflects fewer new seats and smaller renewals.
• In both cases, the stock prices the outlook, not the quarter. A beat on old numbers rarely offsets a cut to future ones.

Software stocks also carry high valuations relative to their current sales. When a company is priced on years of fast growth ahead, a small change to next quarter's growth rate shifts the whole projected path. That is why a few percentage points of slower growth can wipe out 10% or more of the share price in a morning.

Three Numbers to Check Before You React

You do not need a terminal or an analyst subscription to read the next report better. Earnings releases and call summaries give you everything below for free.

1. The forward outlook against the last quarter

Compare next quarter's guided revenue to the quarter just reported. Flat or down sequential guidance at a fast grower is the single biggest red flag, whatever the headline says. Then compare it to the analyst consensus, which is what the price already reflects.

2. Customer concentration

Look for any mention of a largest customer, a top-ten share, or an exception called out in the guidance. When management splits growth "excluding" one account, that account is large enough to move the total. That is the same risk you carry when a handful of names dominate your portfolio, a problem we covered in our look at why your index fund is not as diversified as you think.

3. Net revenue retention

Net revenue retention measures how much an existing group of customers spends this year compared with last year. A rate of 120% means $100 of revenue from last year's customers became $120. Datadog said its trailing rate was in the low 120% range, roughly unchanged from the prior quarter, with gross retention in the mid to high 90s.

Read those two together. Stable retention plus a weak outlook usually points to one-off optimization rather than customers leaving. Falling retention plus a weak outlook is a much more serious signal, because it means the existing base is shrinking its spending broadly.

What This Means for Your Money

If you own Datadog directly, the question is whether the largest customer's pullback is temporary. Management's own numbers point both ways. Retention held steady, its count of AI customers rose past 850, and the full-year revenue outlook of $4.515 billion to $4.525 billion was raised. Against that, the guidance plans for no recovery from the big account, and any further cuts to AI pricing would weigh on revenue per customer.

If you own software through a fund, these moves matter more than they look. Large funds hold dozens of software names, and a wave of beat-and-drop reactions across the sector can pull a tech-heavy portfolio lower even when the underlying companies are growing. Before adding more, check how much of your total portfolio sits in one sector, and run your own growth assumptions through a compound interest calculator to see how much a slower rate changes your long-term number.

Either way, do not sell or buy on the headline alone. Wait for the call summary, find the outlook, and check the three numbers above. Most of the story in a beat-and-drop is in the paragraph nobody quotes.

Frequently Asked Questions

Why did Datadog stock drop after earnings?

Datadog beat third-quarter estimates, but it guided fourth-quarter revenue to $1.19 billion to $1.20 billion, roughly flat with the quarter it just reported. The outlook assumes its largest customer, which cut usage, pays only its contractual minimum next quarter.

What is usage-based pricing in software?

Usage-based pricing charges customers according to how much of the product they consume, such as data processed or servers monitored, rather than a flat fee per user. Revenue grows faster when customers expand and falls when they cut back, even without cancelling.

Why do stocks fall even when a company beats earnings?

Share prices reflect expectations for future results, not the quarter just finished. If the outlook is weaker than investors expected, the lower future path outweighs the beat. Datadog and Atlassian both fell in early November for this reason.

What is a good net revenue retention rate for a software company?

Anything above 100% means existing customers are spending more each year, so the company grows even before it signs anyone new. The higher the rate, the less growth depends on new sales. Datadog reported a trailing rate in the low 120% range in its latest quarter.

The Bottom Line

Datadog did not lose a customer. It lost some of one customer's usage, and the way it bills turned that into a flat quarter on paper. Atlassian, with a different model, fell the same week because its growth rate is easing.

The lesson carries to every software report this season. Read the outlook before the headline, ask how revenue is billed, and check whether one name can swing the total. The next time a beat turns red on your screen, you will know where to look.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.