ESTC - NYSE

Good day, and welcome to the last Elastic N.V. Second Quarter Fiscal 2026 Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eric Prengel, GVP of Finance. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Elastic N.V.'s second quarter fiscal 2026 financial results. On the call, we have Ashutosh Kulkarni, Chief Executive Officer, and Navam Welihinda, Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides that are supplemental to the call can also be found on the Elastic Investor Relations website at ir.elastic.co. Our discussion will include forward-looking statements which may include predictions, estimates, and our expectations regarding demand for our products and solutions, and our future revenue and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call, and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides posted on the Investor Relations website, and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures, can be found in the press release and slides. Unless specifically noted otherwise, all results and comparisons are on a fiscal year-over-year basis. The webcast replay of this call will be available on our company website under the Investor Relations link. Our third quarter fiscal 2026 quiet period begins at the close of business on Friday, January 16, 2026. We will be participating in Barclays Global Technology Conference on December 10 and the Needham Growth Conference on January 14. With that, I'll turn it over to Ashutosh Kulkarni.

Thank you, Eric, and thank you everyone for joining us on today's call. Q2 was an outstanding quarter for Elastic N.V., driven by robust growth across the company with AI positively impacting all areas of our business. We beat the high end of our guidance across all metrics, delivering revenue growth of 16% and a non-GAAP operating margin of 16.5%. Our team drove strong execution, achieving sales-led subscription revenue growth of 18% with strength in both Elastic Cloud and our self-managed offerings. We also increased the number of customers spending over $100,000 with us to more than 1,600 at quarter end. The importance of data, especially unstructured data, is growing at an unprecedented rate as enterprises continue to expand their use of AI. The Elastic platform, with its ability to sift through and find relevant insights in terabytes of structured and unstructured data in real-time, is uniquely suited to address the need for context in this age of AI. This ability is driving the acceleration and adoption of the Elastic platform by organizations for their search, AI, observability, and security needs. In Q2, we secured significant customer commitments across all solution areas. We maintained strong momentum in Search and AI while also seeing an uptick in platform consolidation for security and observability, with an increasing number of customers migrating from legacy products to our platform. These factors led to an acceleration in the number of large deals we were able to secure this quarter. In Q2, we signed over 30 commitments valued over $1,000,000 in annual commitment value, with five representing over $10,000,000 in total contract value. Of these five deals, two were greater than $20,000,000, a new record this quarter. In Q1 2025, we strategically realigned our sales team to focus capacity on our highest value opportunities. This quarter marked the fifth consecutive quarter of disciplined sales execution, demonstrating our continued commitment to driving enhanced performance and consistency across the field. These increasingly larger commitments are exemplified by an 8-figure new logo deal where Elastic Security was chosen by one of the largest chemical manufacturers in the world. The company initiated a competitive search to replace its fragmented security tools and simplify its IT infrastructure, seeking an XDR platform that could deliver advanced threat protection and a 35% increase in operational efficiency. Elastic prevailed against multiple competitors. We demonstrated superior capabilities by detecting threats overlooked by all other solutions. The customer chose Elastic due to the proven effectiveness of our technology, our open ecosystem, and ability to scale across their global operations. With the customer now progressing towards an AI-driven SOC, we believe our AI features will enable them to realize even more ambitious efficiency targets. Building on our momentum in security, our leadership in next-gen SIEM led to a $26,000,000 commitment with CISA, the U.S. Federal agency responsible for safeguarding critical civilian infrastructure. CISA selected Elastic Security on Elastic Cloud for a unified SIM as a service offering that will help to secure U.S. Federal civilian agencies. This program will standardize security data collection, enabling real-time threat detection and rapid incident response across agencies, while leveraging our standards-based, highly efficient platform to significantly reduce costs associated with data access and retention. We architected our next-gen SIEM solution knowing that security is fundamentally a data problem, one our Search AI platform is uniquely suited to solve. Capabilities like attack discovery, eSQL, and cross-cluster search help analysts investigate incidents and correlate events across environments without manually aggregating data or switching contexts, accelerating detection, response, and forensic analysis. Our ability to overcome complex data challenges by unlocking the value of unstructured data is directly linked to our continuing success in generative AI. In Q2, we saw strong demand for our platform as an increasing number of customers adopted Elastic for developing semantic search and agentic applications. Our deep expertise in managing unstructured data, combined with our clear product differentiation and context engineering leadership, positions Elastic as the natural choice for building Gen AI applications. This has led to widespread adoption and successful deal closures across numerous industries, addressing a wide variety of use cases. For example, a global financial institution operating in over 100 countries expanded its use of Elasticsearch in a 7-figure deal. This customer leverages the full Elastic platform in a self-managed environment for hundreds of use cases. Their search capabilities continue to grow as they centralize unstructured data to power insights for customer and employee-facing applications. Previously, they attempted to leverage a hyperscaler's Copilot product, but it did not surface sufficient relevant results. Now they are using Elasticsearch as their context engineering platform paired with an LLM for their internal AI applications. Elastic's ability to ensure accurate context and relevance has improved their results, and they are preparing to move the application into production. Our leadership in context engineering and relevance is translating directly into significant Gen AI customer adoption. In Q2, new customer commitments with Gen AI continue to grow. We signed four Gen AI deals that included new business of greater than $1,000,000 in annual contract value. We now have over 2,450 customers on Elastic Cloud using us for Gen AI use cases, with over 370 of these amongst our cohort of customers spending $100,000 or more with us annually, representing nearly a quarter of our greater than $100,000 ACV customer cohort leveraging Elastic for Gen AI use cases. In another Gen AI win from Q2, a global supply chain software provider expanded its use of Elasticsearch in an 8-figure deal to leverage our AI and vector search features in an embedded fashion in their key products. The customer is now also expanding the use of our platform to support future agentic use cases. We are seeing customers expand their use of Elasticsearch to develop their own agentic workflows, and to further empower enterprises in adopting AI agents, we've recently introduced AgentBuilder. This new product builds on the Elastic Inference service and provides an out-of-the-box conversational experience, allowing users to interact directly with any data in Elasticsearch and extends our technology into a new frontier beyond the vector database. It embodies a truly relevance-centric approach rooted in context engineering, by enabling users to explore their data and assemble the necessary tools for quickly building AI agents with robust workflow capabilities. AgentBuilder dramatically simplifies the entire operational life cycle of agents, including their development, configuration, execution, customization, and observability, all directly within Elasticsearch. This powerful capability strengthens our moat of broader Gen AI differentiation, which is also helping us land deals in observability and security, as customers grow with Elastic because of our AI features. An increase in AI-based security threats fueled the large expansion deal with one of the world's leading investment management companies. They are deploying our AI capabilities to proactively combat evolving attacks. This customer expanded its use of Elastic Security to enhance runtime protection with integrated AI, a critical need for securing applications. Default LLM security controls alone were insufficient. The customer required a security solution capable of evolving with their unique requirements. Elastic's Automation First architecture provided them the ability to rapidly evolve to keep up with ever-changing security challenges. As bad actors grow in sophistication, leveraging Elastic's attack discovery and AI assistant allows their SOC to scale their capabilities and proactively address issues. We are seeing similar success in adoption of our platform capabilities across our observability solution. In one observability win from the quarter, a leading U.S. Municipal technology and innovation agency signed a 7-figure expansion deal for Elastic Observability. The agency is tasked with providing infrastructure as a service to all municipality offices. They launched a new project to unify the city's data in a first-class data environment to modernize operations and decision-making. They chose Elastic Observability as the foundational technology due to our flexibility, open architecture, and ability to deliver cost savings at scale through features like searchable snapshots. The agency is now leveraging our AI assistant, which helps them remediate and triage issues, reducing their reliance on external consultant services. Building on foundational components for working with observability data, we introduced Streams this quarter. Streams is an agentic AI solution that simplifies working with logs to help SRE teams rapidly understand the why behind an issue for faster resolution. Streams can automatically organize logs, find meaning and problems in logs by applying AI and the power of Elasticsearch to this unstructured, messy log data. In Q2, we introduced a steady set of new AI capabilities, including a number of features that improve our performance as a vector database. We introduced a managed inference service natively through Elastic Cloud. Inference at scale is incredibly important for vector search, semantic search, and GenAI workflows, and we provide our customers with an API-based inference service using NVIDIA GPUs with our vector database for low latency, high throughput inference. We also continue to improve our vector database performance with new functionality, including the release of Disk BBQ. Disk BBQ is a new disk-friendly vector similarity search algorithm that delivers more efficient vector search at scale than traditional industry-standard search techniques used in many other vector databases. And finally, we announced our acquisition of GINA AI. GINA AI has developed leading frontier-class multilingual and multimodal embedding and re-ranker models, helping businesses and developers build powerful search applications. As enterprises build AI agents and develop software in new ways, defining context and grounding LLMs remains essential. This is why we have invested for years in developing our own embedding models, re-ranker models, data chunking strategies, and more. GINA AI extends and accelerates this strategy. These advancements in AI and vector search are not isolated. They are integral to our overarching strategy of delivering a powerful and flexible platform. This commitment to innovation extends across our diverse deployment options, ensuring our customers can leverage the full potential of Elastic regardless of their preferred architecture, Elastic Cloud or self-managed. We continue to innovate, making our platform more capable across both cloud and self-managed deployment profiles. As part of this, we made AutoOps available for the first time to our self-managed customers. AutoOps simplifies cluster management through a cloud-powered service that processes telemetry for real-time issue detection and resolution, all while ensuring the underlying customer data remains within the self-managed deployment. It is these organic innovations and strategic acquisitions that give us the confidence to be the leading data retrieval and context engineering platform for the AI era. Just last week, IDC recognized Elastic as a leader in multiple Marketscape reports, including in the Worldwide Observability Platforms report and in the Worldwide General Purpose Knowledge Discovery for Search report. In the general-purpose knowledge discovery report, we had the strongest position of any vendor in the analysis. We are proud of this recognition, which affirms our unique ability to deliver a unified platform that solves the most complex data and AI challenges. In closing, our market opportunity is stronger than ever, driven by robust growth, clear GenAI leadership, and a unique platform built for this moment. Our foundational investments in search uniquely position Elastic to deliver AI to enterprises everywhere. I would like to thank our customers, our partners, and our shareholders for their continued trust and confidence in Elastic, and to our employees, thank you for your tireless spirit of innovation. And now, I'll turn it over to Navam to go through our financial results in more detail.

Thank you, Ashutosh Kulkarni. Good afternoon, everyone. As you may recall, we raised our guidance for the quarter during Analyst Day on October 9, and I'm pleased to report that we exceeded both the top line and profitability of that improved guidance. We saw continued broad-based demand and notable strength in commitments across all geos, supported by healthy consumption trends. As Gen AI adoption and platform consolidation continue to be top priorities for enterprises, we are seeing sustained momentum in demand for our platform, reflected in the continued customer momentum and expansion in our sales pipeline during the quarter. Our total revenue in the second quarter was $423,000,000, representing growth of 16% as reported and 15% on a constant currency basis. Our sales-led subscription revenue in the second quarter was $349,000,000, growing 18% as reported and 17% on a constant currency basis. This strong performance reflects the strategic advantages of the Elasticsearch AI platform in addressing critical consolidation and generative AI use cases. Our current remaining performance obligation, or CRPO, which is a portion of RPO that we expect to recognize as revenue over the next twelve months, remains solid. At the end of Q2, CRPO was approximately $971,000,000 and grew 17% as reported and 15% in constant currency over Q2 of the prior year. Our top-line metrics were driven by strong consumption, deal momentum, and traction with greater than 100 ks ACV customers, all three drivers supported by Gen AI tailwind. First, the primary driver of revenue was healthy consumption across solution areas. We saw steady consumption growth throughout the quarter, fueled by a strong demand environment, driven by solid organic consumption growth from existing customers as well as revenue from new customers. Second, deal momentum during the quarter was significant. As Ashutosh Kulkarni referenced, we saw an uptick in consolidation and Gen AI use cases, which led to overall strength in large deals. We closed over 30 commitments greater than $1,000,000 in annual contract value, with five of them representing greater than $10,000,000 in total contract value, and two of those greater than $20,000,000 in total contract value. The strength of this can be seen through RPO, which grew 19% in the quarter as reported and 17% in constant currency. Our deal momentum occurred globally in both enterprise and public sector segments. Despite the U.S. Government shutdown in October, the team closed a notable win with CISA, as Ashutosh Kulkarni noted earlier. In the second quarter, deal momentum continued and supported our expansion of enterprise accounts and high propensity commercial accounts. During the quarter, our greater than 100,000 annual contract value customer count grew approximately 13%, representing approximately 180 net new customers over the past four quarters. Quarter over quarter, we added approximately 50 net new customers, and we continue to see strong expansion from our existing customer base. GenAI is proving to be a powerful catalyst for customer expansion, with 23% of our greater than 100,000 cohort now utilizing Elastic for GenAI use cases, an increase from 17% just one year ago. We see significant headroom for customers to initiate their Gen AI journey and scale into a 100 ks annual contract value cohort. Even with our existing 100 ks plus Gen AI customers, adoption is in its early stages. Now, turning to second quarter margins and profitability, I will discuss all measures on a non-GAAP basis. Our commitment to balancing growth with disciplined spending translated to robust operating leverage and strong bottom-line results. We continue to focus on costs and efficiency in our business. We delivered subscription gross margins of 82%, total gross margins of 78%, and an operating margin of 16.5%. Our disciplined approach to costs, combined with increasing revenue, underpins our strong profitability and free cash flow generation. Regarding cash flow, adjusted free cash flow was approximately $6,000,000 in Q2, representing a margin of 6%. The second quarter is typically a seasonally low free cash flow margin quarter for us, and we manage and view adjusted free cash flow on a full-year basis. For fiscal 2026, we expect to sustain the level of adjusted free cash flow margin that we achieved in fiscal 2025. In October, during our Analyst Day, we announced a $500,000,000 share repurchase program as part of our capital allocation framework. I am pleased to say that we are already underway on our program and began returning capital to shareholders during Q2. During the quarter, we returned approximately $114,000,000 in cash to shareholders. This represents purchases of approximately 1,400,000 shares at an average price per share of $84.45. As I mentioned at our Financial Analyst Day, we expect to use more than 50% of our $500,000,000 authorized amount in fiscal 2026. Now for the outlook for the third quarter and the remainder of fiscal 2026. Starting this quarter, we will begin providing guidance for sales-led subscription revenue. As we detailed during our recent Analyst Day, and in the past two quarters, sales-led subscription revenue is a key metric for measuring our success with larger strategic and enterprise accounts and high propensity commercial accounts. Sales-led subscription revenue is the fundamental driver of our financial framework, and we incentivize our sales team to meet customers where they are, in cloud or in self-managed departments. The momentum we are building in this quarter is evident. Our sales pipeline is very healthy; it has grown throughout the year. Given the strength of our business, we are raising our full fiscal year 2026 revenue guidance. For 2026, we expect total revenue in the range of $437,000,000 to $439,000,000, representing 15% growth at the midpoint or 13% in constant currency growth at the midpoint. We expect sales-led subscription revenue in the range of $364,000,000 to $366,000,000, representing 17% growth at the midpoint or 16% in constant currency growth at the midpoint. We expect non-GAAP operating margin to be approximately 17.5%. We expect non-GAAP diluted earnings per share in the range of $0.63 to $0.65, using between 108,000,000 and 109,000,000 diluted weighted average ordinary shares outstanding. For fiscal 2026, we are raising our total revenue, which improves our expected non-GAAP diluted EPS. We expect total revenue in the range of $1,715,000,000 to $1,721,000,000, representing approximately 16% growth at the midpoint or 15% constant currency growth at the midpoint. We expect sales-led subscription revenue in the range of $1,417,000,000 to $1,423,000,000, representing 18% growth at the midpoint or 17% in constant currency growth at the midpoint. We expect non-GAAP operating margin for the full fiscal 2026 to be approximately 16.25%. We expect non-GAAP diluted earnings per share in the range of $2.40 to $2.46, using between 108,000,000 and 110,000,000 diluted weighted average ordinary shares outstanding. The diluted weighted average shares outstanding reflect only share buybacks completed as of October 31, 2025. In summary, I am pleased with our second quarter results. We remain on track with our execution this fiscal year and on track to achieve the medium-term sales-led subscription revenue target growth rate we laid out during our financial Analyst Day. Elastic stands uniquely positioned as we bring relevance to unstructured data and allow enterprises to transform data into value. Our opportunity continues to grow. With that, I'll open it up for Q&A.

Thank you. We will now begin the question and answer session. The first question comes from Matthew George Hedberg with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question, guys. Ashutosh Kulkarni, I want to start with you. I assume you're seeing strong consumption trends from your AI native customer base, but I'm curious if you could talk about the performance of your non-AI native customers. Are they seeing an increase or an acceleration in consumption due to sort of an increased AI focus within that customer base?

Yes, that's a great question. And yes, we are seeing that it's not just the AI native cohort, but we are seeing strong consumption across the board. Even in our traditional businesses, not just in search, but also in observability and security. Part of this is also that we are winning more and more commitments like I talked about in my prepared remarks. This was a remarkable quarter in terms of the number of commitments that we were able to secure, large commitments where customers are consolidating onto our platform for security, for observability. The five deals that we mentioned that were all greater than $10,000,000 in total contract value are all significant. I would expect that as deals like those, as customers start to consume, we are going to start to see the benefit of that in our cloud revenue and our total revenue. Just to bring everybody's attention to the fact that when we think about our business, we think about both cloud and self-managed. That's the reason why sales-led subscription revenue is such an important metric, and it came in at 18% this year. So very happy about it. Continuing to drive the momentum, consumption is strong, commitments are strong, we feel really good about the rest of the year.

That's really good to hear. And then maybe for Navam Welihinda, just a follow-up. All of your reported growth metrics were strong, including both CRPO and RPO, all kind of growing in the mid-teens or better. I'm curious though, billings isn't a key for you guys, but it did lag some of those focus metrics. Wondering if you could talk a little bit about why that was the case? Thanks.