The software sector fell broadly on Thursday as investors punished even strong earners, sending the iShares Expanded Tech-Software Sector ETF down more than 2% on the day.

DatadogDDOG

and FigmaFIG

both beat Wall Street's top- and bottom-line estimates for Q2 and still saw double-digit declines.

SalesforceCRM

, ServiceNowNOW

, WorkdayWDAY

, and CloudflareNET

also dropped. The sector has rebounded over 35% from its April low but remains down 3% year to date.

Investors have been worried all year that AI will disrupt software business models, and they're scrutinizing every earnings report for signs of trouble.

A major customer reducing usage

Datadog's drop was its largest in three years, even though it posted adjusted earnings of 65 cents a share on revenue of $1.12B. The stock had surged 108% in 2026 heading into the report, setting a high bar.

The real problem was the full-year revenue outlook. Datadog guided for $4.45B to $4.47B in annual revenue, which while an increase from prior guidance fell well short of analysts' projection. The shortfall traces back to one unnamed customer.

Datadog's CFO disclosed on the earnings call that a leading AI company which just signed a nine-figure renewal deal is cutting back on usage.

That reduction is baked into Q3 and full-year guidance. The customer uses 17 Datadog products, but management declined to name it or explain why usage was falling.

Evercore ISI analyst Kirk Materne called the stock reaction "a bit extreme," noting the company delivered solid results and remains "one of the best growth stories in software." Still, he acknowledged the street was hoping for more.

Figma's AI cost problem

Figma's issue was different but equally margin-focused. The design software company reported Q2 revenue of $370.1M, up 48% year over year and above its own guidance.

But GAAP operating expenses more than doubled to $426.9M, producing a GAAP operating loss of $117.3M versus operating income of $2.1M a year earlier. Cost of revenue more than doubled to $60.5M, and GAAP gross margin contracted to 84%.

The culprit is AI inference costs a.k.a. the expense of running user prompts through AI models. Figma isn't yet charging customers for AI features still in beta, meaning it's absorbing those costs directly. CFO Praveer Melwani warned gross margin will vary quarter to quarter as a result.

For Q3, Figma guided for $373M to $375M in revenue, implying 36% growth, a deceleration from Q2's pace. Both companies beat the numbers and still got punished.