ESTC Q2 Deep Dive: AI Tailwinds and Security Drive Outperformance and Upbeat Outlook

Search AI platform provider Elastic (NYSE:ESTC) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 19.5% year on year to $415.3 million. Guidance for next quarter’s revenue was better than expected at $416 million at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $0.60 per share was 43.4% above analysts’ consensus estimates.

Is now the time to buy ESTC? Find out in our full research report (it’s free).

StockStory’s Take

Elastic’s second quarter was marked by positive momentum, with revenue growth and profitability surpassing Wall Street expectations. Management cited robust demand for its search AI platform as a major driver, highlighting increased adoption from both enterprise and public sector customers. CEO Ashutosh Kulkarni pointed to successful platform consolidation and a surge in generative AI workloads as key contributors to the quarter’s strength, stating, “Our growth was supported by the ongoing demand for our highly differentiated search AI platform and our sales team's solid execution.”

Looking ahead, management expects ongoing demand for AI-driven data solutions and recent pricing adjustments to underpin elevated growth in the coming quarters. The company is particularly focused on expanding its footprint in generative AI, security, and observability use cases. CFO Navam Welihinda emphasized, “We expect net expansion to perform well over the next several quarters as well,” reflecting confidence in the ability to capture increased customer usage and deliver further operating leverage as AI adoption matures.

Key Insights from Management’s Remarks

Elastic’s management attributed the quarter’s outperformance to strong customer adoption in AI-related search, broad-based gains across solution areas, and the success of recent go-to-market changes.

• AI adoption accelerating: Management noted over 2,200 Elastic Cloud customers now using the platform for generative AI applications, with these workloads driving increased consumption due to their higher compute and memory requirements.
• Security competitive wins: About one-third of new and expansion security deals came from displacing existing vendors, reflecting Elastic’s success in positioning its unified SIEM and XDR solution as a data-centric, AI-powered alternative.
• Self-managed and cloud growth: Both self-managed and cloud offerings saw robust growth, with gains spread across geographies and customer segments. The company credited its revamped sales segmentation model for improved execution and customer expansion, particularly in the enterprise and mid-market.
• Public sector stabilization: The U.S. public sector, previously a source of volatility, showed signs of stabilization. The company’s agreement with the U.S. General Services Administration and progress toward FedRAMP high certification are building momentum in federal markets.
• Product innovation driving differentiation: New features like BBQ and ACORN-1 for vector search, along with the launch of the Elastic AI SOC Engine (EASE), enhanced performance and positioned Elastic as a preferred platform for organizations seeking scalable, AI-driven search and security solutions.

Drivers of Future Performance

Elastic expects continued growth as AI-driven workloads expand, security displacements persist, and recent pricing changes provide a durable revenue baseline.

• AI and search expansion: Management believes the company is still early in the AI adoption cycle, with organizations building more complex, data-intensive applications that increase reliance on Elastic’s search and vector database capabilities. These use cases are expected to drive ongoing consumption growth as customers embed Elastic deeper into their technology stacks.
• Security and observability tailwinds: The shift toward treating security and observability as data problems plays to Elastic’s strengths. The company anticipates continued competitive displacements and cross-sell opportunities, supported by recent product launches and a growing emphasis on platform consolidation.
• Pricing and customer expansion effects: The recent price increases in both cloud and self-managed offerings are expected to lift the revenue baseline year-over-year while disciplined sales execution and a focus on large enterprise and public sector customers should sustain net revenue retention and operating leverage.

Catalysts in Upcoming Quarters

In the upcoming quarters, the StockStory team will be monitoring (1) the pace of generative AI adoption among existing and new enterprise customers, (2) continued momentum in displacing legacy security vendors and expanding within the U.S. public sector, and (3) the impact of recent price increases on consumption trends and customer retention. Additionally, progress in serverless adoption and the scaling of new product features will be important indicators of Elastic’s ability to sustain differentiated growth.

Elastic currently trades at $103.48, up from $87.77 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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