It Reached The Software Companies Themselves

The original read was about buyers — companies cutting software spend to pay for memory. This is the other side of the ledger. The cost has now arrived inside the software vendors' own margins, at two companies in the same quarter, and in both cases it is growing faster than their revenue. Datadog reported Q2 revenue of $1.121 billion, up 36% and well past its own guidance. Underneath that, cost of revenue grew 44.7% — nearly nine points faster than revenue — pulling gross margin to 78.6% from 79.9%. Cloudflare, reporting the same day, posted revenue of $696.1 million, up 35.9%, with GAAP gross margin at 71.8% against 74.9% a year earlier. That is 310 basis points, and it follows a first quarter already down 210 basis points sequentially. The compression is accelerating, not stabilizing. Cloudflare attributed the Q1 portion to faster growth in lower-margin developer products and a higher allocation of network costs. Neither company builds chips. Neither buys memory. Both are pure software businesses whose product happens to run on cloud compute and storage, which is exactly the point. Observability ingests and retains enormous volumes of telemetry. Edge networking runs on servers in hundreds of locations. When DRAM, NAND and server DIMM prices rise, those costs do not stop at the hyperscaler — they get passed into the price of compute, and they land in the cost of revenue line at every company that rents it. This is what makes it different from the earlier evidence. Micron raising prices, Samsung extending the shortage to 2028, Qualcomm calling memory pricing unprecedented, Tim Cook calling it a hundred-year flood — all of those are companies that touch physical silicon. Datadog and Cloudflare are two removed from it and getting hit anyway. That is the definition of a cost passing through a supply chain rather than being absorbed at one node. The market has not priced it. Cloudflare rose 14.9% on the print. The headline was a beat on revenue, billings and guidance, and 310 basis points of gross margin does not fit in a headline. Datadog fell 19%, but on decelerating sequential guidance, not on this. In both cases the margin line was the least-discussed number in the release. One quarter at one company is noise. Two companies, same quarter, same direction, both accelerating, in the strongest growth quarters either has posted — that is a mechanism. Watch the next two prints. If gross margins compress again while revenue growth holds, the memory cycle has found its way into the part of the market that thought it was insulated.