Datadog Inc.’s shares closed 19% lower today after it posted quarterly results and guidance that topped expectations.

New York-based Datadog is a major provider of observability software. It also sells cybersecurity tools, a user experience monitoring suite and various related products. 

Several factors may be at play behind today’s stock selloff. Some investors may have decided to lock in their gains following a year in which Datadog’s share price rose more than 90%. A new disclosure about the company’s largest customer, an unnamed artificial intelligence provider, may have also factored into the selloff.

Datadog executives stated today that the customer in question recently renewed a nine-figure contract. Nevertheless, it plans to reduce its product usage this year by cutting user seats.

Datadog’s sales rose 36% year-over-year in the second quarter to $1.12 billion. The FactSet consensus estimate forecasted $1.08 billion. More than 40% of the company’s revenue came from customers who spend over $100,000 on its products per year. Datadog had about 4,720 such customers as of June 30, 870 more than a year earlier.

“Datadog delivered a strong quarter, with 36% year-over-year revenue growth, $316 million in operating cash flow, and $279 million in free cash flow,” said Datadog Chief Executive Officer Olivier Pomel.

The company says that more than half of its customers use at least four different products. According to Datadog, the large AI provider that renewed its contract uses 17 products. The observability provider regularly adds new tools to its software portfolio to maintain its revenue growth. 

The two latest additions to Datadog’s product lineup made their debut in June. Bits Agent Builder enables users to create AI agents optimized for tasks such as finding cybersecurity issues and troubleshooting outages. The Datadog Agent Console, the second new product that debuted in June, monitors how users interact with AI agents.

The company maintains its product release cadence by spending over 30% of its revenue on research and development. Occasionally, Datadog also invests in acquisitions. The company recently bought a startup called Adaptive ML Inc. to accelerate its internal AI development efforts. Adaptive ML developed tools that ease reinforcement learning projects.

Datadog delivered an adjusted operating income of $257 million in the second quarter, which breaks down to adjusted earnings of $0.65 per share. Analysts had expected $0.58 per share.

The company’s full-year guidance also topped the consensus estimate. Datadog expects to generate adjusted earnings of $2.52 per share at the midpoint on between $4.45 billion and $4.47 billion in revenue. Analysts expected adjusted earnings of $2.46 per share and $4.36 billion in revenue. 

Image: Datadog