Elastic's Q1 2026: Contradictions Emerge on AI Adoption, Public Sector Pressures, and Pricing Strategies

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $415M, up 20% YOY (18% cc)
• Gross Margin: 79% non-GAAP; includes ~1% one-time benefit from a ~$4M cloud infrastructure credit
• Operating Margin: 16% non-GAAP

Guidance:

• Q2 FY26 revenue: $415–$417M (~14% YOY, ~14% cc)
• Q2 FY26 non-GAAP operating margin: ~16%
• Q2 FY26 non-GAAP EPS: $0.56–$0.58 (108.5–109.5M diluted shares)
• FY26 revenue: $1.679–$1.689B (~14% YOY at midpoint; ~13% cc)
• FY26 non-GAAP operating margin: ~16%
• FY26 non-GAAP EPS: $2.29–$2.35 (109–111M diluted shares)
• Expect FY26 adjusted FCF margin to sustain FY25 level; Q2 FCF seasonally lower
• Guidance reflects benefit from May price increases

Business Commentary:

* Strong Financial Performance: - Elastic N.V. reported a 20% revenue growth for Q1 Fiscal 2026, surpassing the high end of their guidance. - Sales-led subscription revenue, excluding monthly Elastic Cloud, grew by 22%. - The growth was driven by the ongoing demand for their search AI platform and the solid execution of their sales team.

• AI and Search Growth:
• More than 2,200 Elastic Cloud customers are using Elastic for Gen AI use cases, with over 330 customers spending $100,000 or more annually.
• The number of million-dollar ACV Elastic Cloud customers using Elastic for Gen AI use cases more than doubled in Q1.

• This growth is attributed to Elastic's advanced search technology being instrumental in building generative AI applications.

• Security and Observability Expansion:

• In the security business, one-third of new and expansion wins came from competitive displacements in Q1.
• Elastic Security unified SIEM and XDR platforms, achieving a 100% score in AV Comparatives Business Security test.

• The momentum in security is driven by the increasing appreciation for treating security as a data problem and Elastic's leadership in defining the future of SIEM.

• Macro and Market Stability:

• Despite initial macroeconomic uncertainties, conditions did not deteriorate as expected, leading to an upward revision of fiscal 2026 revenue guidance.
• The U.S. public sector showed stabilization, and the team is fully primed to execute, particularly with the ongoing progress on FedRAMP high certification.
• The stabilization and focus on strategic initiatives position Elastic to capitalize on the federal government's infrastructure advancements.

Sentiment Analysis:

• Management reported an excellent Q1 with 20% revenue growth, surpassing guidance, non-GAAP operating margin of 16%, and raised FY26 revenue guidance. Demand from gen AI and platform consolidation was strong; security saw 1/3 of wins from competitive displacements. U.S. public sector is stabilizing. CFO: 'We exceeded the revenue and profitability metrics... positioned to enter Q2... from a position of strength.'

Q&A:

• Question from Matthew George Hedberg (RBC Capital Markets): How does AI adoption impact customer spend/usage, and how might serverless influence this?
  Response: AI workloads are more compute-intensive, boosting consumption; still early, but AI is a durable multi-year tailwind.

• Question from Matthew George Hedberg (RBC Capital Markets): Can you quantify the May price increase benefit in the outlook?
  Response: Price hikes lift the YOY baseline; Q1 overperformance was primarily execution/consumption with some price benefit; sequential impact is muted.

• Question from George McGreen (Bank of America Securities): How is growth mixing across search, observability, and security?
  Response: Broad-based strength; search led by gen AI; security accelerating with competitive displacements and platform consolidation.

• Question from George McGreen (Bank of America Securities): Has model predictability improved since the CFO joined?
  Response: Sales-led subscription execution is durable and predictable; consumption adds some quarter-to-quarter variability.

• Question from Robbie David Owens (Piper Sandler & Co.): What unlocked the step-up in security displacements and how do you sustain it?
  Response: Shift to data-first, AI-driven SIEM; EASE provides an on-ramp atop incumbents, easing migrations and enabling future displacements.

• Question from Raimo Lenschow (Barclays Bank PLC): What drove the reacceleration in self-managed growth?
  Response: Broad-based contributions across geos and solutions alongside strong cloud, reinforcing sales-led subscription growth.

• Question from Raimo Lenschow (Barclays Bank PLC): Does consumption pricing help monetize AI vs peers struggling with AI pricing?
  Response: Yes—consumption aligns price to usage/value, simplifying adoption and supporting growth as AI usage expands.

• Question from Michael Joseph Cikos (Needham & Company, LLC): How durable are competitive security displacements amid industry changes?
  Response: Secular migration to next-gen, data-first SIEM; features like Attack Discovery, Auto Import, and EASE support a multi-year tailwind.

• Question from Michael Joseph Cikos (Needham & Company, LLC): How is net expansion embedded in guidance?
  Response: They don’t guide NER; outlook reflects better macro and price effects; expect healthy expansion from existing customers.

• Question from Sanjit Kumar Singh (Morgan Stanley): Compare AI search ramp vs SIEM replacement impact on growth.
  Response: SIEM/Obs replacements require migrations that span quarters; Elastic aims to capture share over several years.

• Question from Sanjit Kumar Singh (Morgan Stanley): What are assumptions for U.S. federal into Q2?
  Response: Sector has stabilized; Q2 historically lacks a 'federal flush'; guidance reflects stability without outsized year-end surge.

• Question from Kasthuri Gopalan Rangan (Goldman Sachs Group, Inc.): What unifies Elastic’s strategy across AI search, security, and observability?
  Response: Elastic is a Search AI platform for context/retrieval across all data types; superior relevance powers all use cases.

• Question from Howard Ma (Guggenheim Securities, LLC): Did search growth continue to accelerate, and is AI driving observability cross-sell?
  Response: Search remains strong on AI tailwinds; AI enhances competitiveness in security/observability; still early in adoption.

• Question from Howard Ma (Guggenheim Securities, LLC): Outlook on sales capacity/productivity after GTM changes?
  Response: Sales productivity and capacity additions are working; supports durable sales-led growth and optimism for the year.

• Question from Tyler Maverick Radke (Citigroup Inc.): What drove the step-up in CRPO and $1M AI cloud customers?
  Response: Larger customers are committing to Elastic’s AI capabilities; deeper embedding in AI apps increases consumption.

• Question from Tyler Maverick Radke (Citigroup Inc.): Were price increases similar across monthly, annual, and self-managed?
  Response: Yes—broad increases across cloud and self-managed as part of normal course as functionality expands.

• Question from Brian Lee Essex (JPMorgan Chase & Co): How are you addressing efficient data ingestion and storage in security?
  Response: Elastic enables massive-scale ingest and low-cost storage via object storage tiering and LogsDB compression, reducing TCO.

• Question from Jacob Roberge (William Blair & Company L.L.C.): Status and remaining opportunities in GTM transition?
  Response: Enterprise/strategic focus and greenfield coverage are paying off; long runway with current segmentation model.

• Question from Jacob Roberge (William Blair & Company L.L.C.): Early feedback on serverless and migration progress?
  Response: Serverless GA across all three hyperscalers; expanding regions this year; expect it to become the primary deployment over time.

• Question from Brent John Thill (Jefferies LLC): Why guide to mid-teens growth after 20% in Q1?
  Response: Raised full-year outlook on stable macro and Q1 beat while remaining prudent; reflects improved confidence.

• Question from Brent John Thill (Jefferies LLC): What drove your emphasis on security this quarter?
  Response: Momentum is building via multi-quarter displacement motion, aided by migration tools like Auto Import and EASE.

• Question from Patrick Edwin Ronald Colville (Scotiabank Global Banking and Markets): Was the price increase ~5%, and how should we adjust underlying growth?
  Response: ~5% is a rough magnitude but varies by discounts; it lifts the YOY baseline; Q1 strength mainly execution/consumption.