Elastic's Q1 2026 Earnings Call: Contradictions Emerge on AI Momentum, Cloud Growth, Sales Execution, and Public Sector Outlook

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

Date of Call: None provided

Financials Results

• Revenue: $415.0M, up 20% YOY (18% cc)
• Gross Margin: 79% non-GAAP, including ~1 percentage point one-time benefit from a $4M cloud infrastructure credit
• Operating Margin: 16% non-GAAP

Guidance:

• Q2 FY26 revenue expected at $415M–$417M (~14% YOY at midpoint; ~14% cc).
• Q2 non-GAAP operating margin ~16%.
• Q2 non-GAAP diluted EPS $0.56–$0.58 on 108.5M–109.5M diluted shares.
• FY26 revenue raised to $1.679B–$1.689B (~14% YOY midpoint; ~13% cc).
• FY26 non-GAAP operating margin ~16%.
• FY26 non-GAAP diluted EPS $2.29–$2.35 on 109M–111M diluted shares.
• Expect FY26 adjusted FCF margin to sustain FY25 level; Q2 FCF seasonally down q/q.
• Guidance includes benefit from May price increases; macro more stable than initially assumed.

Business Commentary:

* Strong Revenue Growth and AI Adoption: - Elastic reported 20% revenue growth for the first quarter, surpassing the high end of its guidance. - Subscription revenue, excluding monthly Elastic Cloud, grew by 22%, driven by strength in both cloud and self-managed offerings. - The growth was supported by ongoing demand for the company's highly differentiated Search AI platform and solid sales execution.

• Security Business Momentum:
• Elastic's security business saw a significant 33% of new and expansion wins from competitive displacements in Q1.

• This momentum is attributed to customers recognizing security as a data problem, leading to a shift towards AI-powered solutions.

• Serverless and Elastic Cloud Expansion:

• Elastic's serverless deployment is now generally available on all three major cloud hyperscalers.

• Early feedback suggests positive adoption, with the expectation that serverless will become the primary deployment method for Elastic Cloud in the future.

• Geopolitical and Customer Segmentation Strategy:

• The company's strategic agreement with the U.S. General Services Administration and progress on FedRAMP high certification are boosting interest among U.S. civilian and defense agencies.
• This is part of an effort to capitalize on federal government efforts to modernize and advance its infrastructure with innovative platforms.

Sentiment Analysis:

• Management: “delivering 20% revenue growth… surpassing the high end of our guidance.” CFO: “we are raising our fiscal 2026 revenue guidance.” CRPO grew 18% YOY to ~$956M. Non-GAAP operating margin was 16% and adjusted FCF margin 28%. Security saw one-third of new/expansion from competitive displacements; GenAI adoption expanding with >2,200 cloud customers and more $1M+ ACV GenAI customers added than the prior two quarters combined.

Q&A:

• Question from Matt Hedberg (RBC Capital Markets): How does GenAI usage impact customer spend/consumption and will serverless amplify this?
  Response: GenAI workloads are more compute/memory intensive, boosting consumption; impact varies by use case, and it’s an early but durable multiyear tailwind.

• Question from Matt Hedberg (RBC Capital Markets): Can you quantify the impact of the May price increases embedded in guidance?
  Response: Price increases lift the year-over-year baseline, but Q1 outperformance was primarily from consumption and commitments; quarter-over-quarter price effects are muted.

• Question from George McGreehn (Bank of America Securities): Rank growth across search, observability, and security given GenAI momentum.
  Response: Growth was broad-based: GenAI drove search while platform consolidation and security wins (one-third from displacements) provided additional strength.

• Question from George McGreehn (Bank of America Securities): Has model predictability improved since the CFO joined?
  Response: Sales-led subscription growth is consistently strong and predictable; consumption introduces some quarter-to-quarter variability.

• Question from Rob Owens (Piper Sandler): What unlocked the surge in competitive SIEM displacements and how do you sustain it?
  Response: Customers view security as a data+AI problem; Elastic’s data scale, AI (e.g., Attack Discovery) and EASE on‑ramp drive and should sustain displacements.

• Question from Raimo Lenschow (Barclays): What drove the reacceleration in self-managed growth?
  Response: Self-managed strength was broad-based across geographies and solutions, complementing cloud to fuel sales-led subscription growth.

• Question from Raimo Lenschow (Barclays): Does consumption pricing help monetize AI better than per-user models?
  Response: Yes—consumption tightly aligns price with usage and value of AI features, easing adoption and supporting growth as usage expands.

• Question from Mike Sikos (Needham & Co): How durable are competitive security displacements amid industry M&A?
  Response: There’s a secular shift to next‑gen, data-first SIEM; Elastic’s migration tooling and AI should support multi‑year share gains.

• Question from Mike Sikos (Needham & Co): How should we think about net expansion in the outlook?
  Response: They don’t guide NER; the raise reflects better macro and execution, and they expect strong expansion from existing customers.

• Question from Sandeep Singh (Morgan Stanley): Compare AI search vs SIEM opportunities—timing and growth impact.
  Response: SIEM/observability migrations take time but are ongoing; Elastic aims to capture a multi‑year replacement wave rather than a one‑off spike.

• Question from Sandeep Singh (Morgan Stanley): What are you assuming for U.S. federal into Q2?
  Response: Public sector has stabilized; no typical ‘federal flush’ assumed; guidance reflects this environment.

• Question from Kash Rangan (Goldman Sachs): What is Elastic’s unifying value proposition across businesses?
  Response: Elastic is a Search AI platform delivering best‑in‑class relevance and context over unstructured data, powering search, observability, and security.

• Question from Tyler Rodgers (Citi): What drove the step-up in $1M+ AI customers and strong CRPO?
  Response: Large customers are standardizing on Elastic as the AI runtime/context engine; deeper embedding across apps increases consumption and commitments.

• Question from Brian Essex (JPMorgan): Are you addressing efficient data ingestion/storage needs competitively?
  Response: Yes—high-scale ingest and low-cost storage via object storage tiers, lifecycle management, and LogsDB reduce log data costs materially.