Elastic's Q2 2026: Contradictions Emerge on AI Adoption, Sales-led Subscriptions, and Sales Capacity

Date of Call: November 20, 2025

Financials Results

• Revenue: $423M, up 16% reported / 15% constant currency YOY
• Gross Margin: Total gross margin 78%; subscription gross margin 82%
• Operating Margin: Non-GAAP operating margin 16.5% (Q2)

Guidance:

• Q3 FY2026 total revenue expected $437M–$439M (≈15% growth at midpoint; 13% CC)
• Q3 sales-led subscription revenue expected $364M–$366M (≈17% growth at midpoint; 16% CC)
• Q3 non-GAAP operating margin ~17.5%; Q3 non-GAAP diluted EPS $0.63–$0.65 (108–109M shares)
• FY2026 total revenue expected $1.715B–$1.721B (≈16% growth at midpoint; 15% CC)
• FY2026 sales-led subscription revenue expected $1.417B–$1.423B (≈18% growth at midpoint; 17% CC)
• FY2026 non-GAAP operating margin ~16.25%; FY non-GAAP diluted EPS $2.40–$2.46 (108–110M shares)

Business Commentary:

• Strong Revenue Growth and AI Adoption:
• Elastic N.V. reported revenue of $423 million for Q2 2026, representing 16% growth year-over-year.

• This growth was driven by robust demand for AI applications, with AI-related use cases contributing significantly to the increase in customer commitments.

  

• Sales Execution and Large Deals:

• The company signed over 30 commitments valued over $1 million in annual contract value, with 5 exceeding $10 million.

• This success was attributed to disciplined sales execution and strategic realignment of sales teams to focus on high-value opportunities.

• Impact of Government Shutdown on Revenue:

• Elastic experienced a 5% beat in Q2, with revenue coming in at $423 million, and guidance for Q3 was raised due to strong business momentum.
• The U.S. government shutdown in October caused some renewals to slip from Q2 to Q3, but this is expected to resolve in Q3 without impacting the company's long-term outlook.

• Cloud and Self-Managed Revenue Dynamics:
• Sales-led subscription revenue grew 18% year-over-year, with the company intentionally not providing a cloud versus self-managed breakdown due to a unified sales strategy.
• Elastic met customer needs across both architectures, with no internal distinctions between cloud and self-managed sales targets.

Sentiment Analysis:

Overall Tone: Positive

• Management said they "beat the high end of our guidance across all metrics" and "exceeded both the top line and profitability of that improved guidance." They raised full-year revenue guidance, highlighted 30+ deals >$1M and record multi-$20M wins, and noted continued strong consumption and CRPO growth, supporting an overall positive tone.

Q&A:

• Question from Matthew Hedberg (RBC Capital Markets): How are non-AI native customers performing—are they accelerating consumption due to AI focus?
  Response: Consumption is strong across non-AI-native customers too; large cloud commitments should translate into increased cloud and total revenue.

• Question from Matthew Hedberg (RBC Capital Markets): Billings lagged some metrics—why did billings trail CRPO/RPO?
  Response: Billings distribution was impacted by seasonality, an anomalous prior-year quarter and some renewals (notably self-managed) slipping into Q3 due to the government shutdown; underlying commitments and ACV growth remain strong.

• Question from Koji Ikeda (BofA Securities): On the new sales-led subscription guide, should we assume monthly cloud self-serve is flat and the guide implies cloud vs self-managed dynamics?
  Response: Monthly self-serve (SMB) is expected to be roughly flat; the sales-led guide reflects sales-driven commitments (cloud and self-managed) rather than monthly self-serve.

• Question from Koji Ikeda (BofA Securities): Sales-led sub growth was 18% vs 22% last quarter—excluding pricing, what explains the gap and any GenAI revenue contribution?
  Response: Net growth reflects multiple forces—new workloads, consumption changes and platform efficiency—so pricing alone doesn't explain the change; overall consumption remains healthy.

• Question from Sanjit Singh (Morgan Stanley): How has the go-to-market realignment impacted productivity and will you add sales capacity given momentum?
  Response: The go-to-market changes have materially improved productivity (fifth consecutive strong quarter); Elastic will continue investing in sales capacity and AI to capture momentum.

• Question from Sanjit Singh (Morgan Stanley): RAG adoption has friction—are there monetization opportunities outside RAG (e.g., Agent Builder)?
  Response: It's an 'and'—RAG is important but Elastic monetizes beyond RAG via Agent Builder and acquired Jina AI models, simplifying agent development and leveraging embeddings/rerankers to capture broader AI workloads.

• Question from Raimo Lenschow (Barclays): The quarter's beat felt smaller than historical—were there specific puts and takes or slippage?
  Response: They beat the recent guidance by $5.5M; the smaller beat vs longer-term history reflects expected quarter-to-quarter variability and renewal timing shifts, not weaker demand.

• Question from Raimo Lenschow (Barclays): On the big financial win, is this indicative of share-taking momentum in that sector?
  Response: Yes—two $20M+ security wins demonstrate Elastic's matured AI-driven security capabilities displacing incumbents and driving consolidation wins like CISA.

• Question from Robbie Owens (Piper Sandler): ESRA/GenAI penetration is 23% of $100k+ cloud customers—why isn't it higher given current GenAI activity?
  Response: The 23% metric is Cloud-only telemetry; self-managed GenAI adoption is additional and overall penetration is growing—with AI cohorts expanding faster than others.

• Question from Brian Essex (JPMorgan): Competitively in security, are wins displacing observability vendors or next-gen security platforms?
  Response: Elastic is displacing incumbents across security and observability; its data platform and AI features (attack discovery, ESQL, cross-cluster search) are key differentiators versus both legacy and next-gen vendors.

• Question from Brian Essex (JPMorgan): Thoughts on recent acquisitions in the space—are they responses to Elastic's capabilities?
  Response: Such acquisitions validate the market and competitors' strategies, but Elastic believes its multi-year lead in data platform and AI functionality gives it a sustained advantage.

• Question from Tyler Radke (Citigroup): Have optimizations like Logs DB mostly been adopted, and will that enable sequential acceleration in cloud growth?
  Response: Optimizations improve efficiency and enable more workloads/migrations; however, the primary driver of cloud revenue is commitments converting to consumption—recent largest deals were cloud.

• Question from Tyler Radke (Citigroup): The $20M security deals—were those cloud?
  Response: Clarification: the two largest >$20M TCV deals were cloud (not necessarily both security).

• Question from Tyler Radke (Citigroup): Is ACV growth tracking above reported sales-led subscription growth?
  Response: Yes—ACV growth is stronger and sales-led subscription revenue trails because cloud revenue recognizes over time after commitments.

• Question from William Miller Jump (Truist Securities): Are use cases distributed similarly across cloud vs self-managed or do they skew?
  Response: Mix varies quarter-to-quarter; both cloud and self-managed are growing and the sales motion meets customers where they are—no structural change in mix trajectory.

• Question from William Miller Jump (Truist Securities): Monthly subscription ticked down—seasonal or other factors?
  Response: Monthly self-serve is mostly SMB and can be seasonal; expectation is that line remains broadly flat and isn't the focus of sales-led guidance.

• Question from Shrenik Kothari (Robert W. Baird): Are GenAI/embedded vector search workloads stickier and higher volume than traditional logs/metrics—how think about NRR impact?
  Response: GenAI workloads are more compute-intensive but are proving sticky and grow faster; Elastic sees broad production deployments across industries which supports strong expansion dynamics.

• Question from Shrenik Kothari (Robert W. Baird): How is NRR trending and what was it this quarter?
  Response: Net expansion rate is ~112%, stable, with gross retention also stable and cohort expansion trends intact.

• Question from Ittai Kidron (Oppenheimer): Of the 30+ >$1M commitments, how many were renewals vs new and were there quarter timing shifts?
  Response: Quarter timing shifts are normal and limited; among the five >$10M TCV deals: 2 security, 2 observability and 1 AI, and at least one >$20M deal was a new logo.

• Question from Ittai Kidron (Oppenheimer): Can you break out cloud vs self-managed performance against internal targets for the sales-led guide?
  Response: There is no internal cloud vs self-managed split—sales teams have unified quotas; the sales-led guide reflects overall commitments momentum and consumption rather than a cloud/self-managed breakdown.

• Question from Jacob Roberge (William Blair): How did the rest of federal business perform and how big was the shutdown-related term license impact in Q2?
  Response: U.S. public sector demand was strong; CISA closed before the shutdown; some renewals slipped into Q3 due to the shutdown but customers continued using the software and the orders will be processed in Q3—no lost business.

Contradiction Point 1

AI Workload Adoption and Impact on Consumption

It involves the impact of AI workloads on customer consumption, which is crucial for understanding revenue growth and customer engagement with Elastic's services.

Are you seeing strong consumption trends from AI-native customers? How do they impact non-AI-native customers? - Matthew Hedberg (RBC Capital Markets)

2026Q2: Strong consumption across the board, even in traditional businesses. Large commitments are turning into revenue over time. - Ashutosh Kulkarni(CEO & Executive Director)

How does increased use of Elastic for AI impact customer spending? - Matthew George Hedberg (RBC Capital Markets)

2026Q1: AI workloads tend to be more compute-intensive, impacting consumption positively. - Ashutosh Kulkarni (CEO & Executive Director)

Contradiction Point 2

Sales-led Subscription Revenue and Cloud Growth

It addresses the expectations and growth trajectories for sales-led subscription revenue and cloud growth, which are critical for assessing Elastic's financial performance and strategic direction.

Can you elaborate on the sales-driven subscription revenue guidance? What assumptions should we make regarding cloud growth? - Koji Ikeda (BofA Securities)

2026Q2: Sales-led subscription revenue is a critical metric for us. We expect cloud to grow, with the monthly self-serve revenue expected to be flat. - Navam Welihinda(Chief Financial Officer)

With productivity improvements, can sales capacity be increased? - Sanjit Singh (Morgan Stanley)

2026Q1: Given the productivity improvements, is there a case to drive more sales capacity? - Sanjit Singh (Morgan Stanley)

Contradiction Point 3

Sales Productivity and Capacity

It directly impacts the company's ability to drive revenue growth and meet sales targets, which are critical for investor expectations.

With productivity improvements, should we increase sales capacity? - Sanjit Singh (Morgan Stanley)

2026Q2: We're in an investment year, focusing on capacity in go-to-market and AI. - Ashutosh Kulkarni(CEO & Executive Director)

What is your assessment of current sales capacity and productivity? - Brent Thill (Jefferies)

2025Q4: We are comfortable with sales capacity and productivity. Continued hiring supports growth. - Navam Welihinda(CFO)

Contradiction Point 4

AI Customer Adoption

It involves company statements about AI adoption, which is a key growth area for the company and a focus of investor interest.

Why is the percentage of customers using Gen AI not higher? - Robbie Owens (Piper Sandler & Co.)

2026Q2: Penetration is growing, particularly in the $100K ACV cohort. AI workloads are growing faster, indicating increasing adoption and expansion. - Ashutosh Kulkarni(CEO & Executive Director)

Can you clarify the AI commitments for high-value customers? - Tyler Radke (Citi)

2025Q4: 25% of million-dollar customers use AI. Customers are using AI across various industries, not just customer support but also sales and legal. - Ashutosh Kulkarni(CEO & Executive Director)