ESTC Q2 CY2026 Deep Dive: AI Adoption, Enterprise Expansion, and New Product Investments Drive Growth

Search AI platform provider Elastic (NYSE:ESTC) reported Q2 CY2026 results exceeding the market’s revenue expectations, with sales up 15.1% year on year to $478.1 million. Guidance for next quarter’s revenue was better than expected at $486.5 million at the midpoint, 0.6% above analysts’ estimates. Its non-GAAP profit of $0.70 per share was 19.9% above analysts’ consensus estimates.

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StockStory’s Take

Elastic’s second quarter results were met with a strong positive market reaction, as the company delivered revenue growth and profitability above Wall Street’s expectations. Management attributed the outperformance to robust enterprise demand, particularly among customers adopting AI-powered features and consolidating multiple use cases on the Elastic platform. CEO Ashutosh Kulkarni highlighted that over 37% of large enterprise customers are now utilizing Elastic for AI, a significant increase from last year. The company’s ongoing investments in search, security, and observability solutions—especially around AI-driven automation—were cited as major drivers behind this quarter’s momentum.

Looking ahead, management’s updated guidance is supported by continued acceleration in sales-led subscription revenue and expanding adoption of AI and observability offerings. CFO Navam Welihinda noted that pipeline strength, improved sales productivity, and healthy consumption activity are underpinning the outlook. The company expects further gains from its land-and-expand strategy, with cross-sell opportunities across security and observability, and sees additional upside as large customers deepen their commitments to Elastic’s platform. Kulkarni stated, “As AI adoption grows across the enterprise, we expect to continue driving acceleration of our business toward our midterm revenue and profitability targets.”

Key Insights from Management’s Remarks

Elastic’s management credited this quarter’s performance to strong enterprise adoption of AI features, increased multi-product usage, and enhancements in observability and security capabilities.

• Enterprise AI adoption surge: Management observed a significant jump in large customers using Elastic for AI, with 37% of the $100,000+ annual contract cohort leveraging these features, up from 21% last year. This cohort, representing 90% of sales-led subscription revenue, is expanding more rapidly and driving platform-wide growth.

• Observability product expansion: The launch of new metrics capabilities, including a columnar storage mode for time series data and native Prometheus ingestion, positioned Elastic to compete more effectively in the infrastructure monitoring space. Early customer feedback has been positive, with the new offering enabling cost-effective, unified monitoring across logs, metrics, and traces.

• Security momentum and federal wins: Elastic’s security solutions, such as attack discovery and integrated XDR (extended detection and response), continued to gain traction, particularly in the U.S. public sector. The company’s FedRAMP High authorization and rapid migration tooling facilitated swift adoption by government agencies and large enterprises seeking consolidated, AI-driven security operations.

• Flexible deployment models: Elastic emphasized its ability to deliver solutions across commercial cloud, on-premises, and air-gapped environments. This flexibility has resonated with regulated industries and international customers requiring operational and data sovereignty, further differentiating Elastic from competitors.

• Board transition and leadership: The company announced the departure of longtime board member Caryn Marooney and the nomination of Julia Liuson, former President of Developer Tools at Microsoft. Liuson’s experience in AI and infrastructure development is expected to support Elastic’s ongoing strategic execution.

Drivers of Future Performance

Elastic’s guidance reflects expectations for sustained growth, driven by enterprise AI adoption, product innovation in observability and security, and continued expansion within large customer accounts.

• AI and security demand: Management believes AI features and integrated security offerings will remain the primary drivers of customer expansion. High-value enterprise customers using AI are expected to contribute disproportionately to revenue growth as their adoption deepens across search, security, and observability use cases.

• Land-and-expand strategy: The company continues to focus on a land-and-expand sales approach, where initial wins in one solution area lead to cross-sell and broader platform adoption. Management expects this dynamic to accelerate, particularly as new capabilities in metrics, agent-based observability, and security are rolled out to existing clients.

• Margin and operational discipline: Elastic anticipates improvements in non-GAAP operating margin as it scales, with disciplined investments in both R&D and go-to-market resources. Management also highlighted ongoing restructuring and productivity initiatives aimed at supporting profitable growth, though noted some variability in net revenue retention as the business transitions to higher-value, multi-product engagements.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) further enterprise adoption and upsell of AI-driven features among large customers, (2) the impact and initial traction of Elastic’s enhanced observability and security offerings, particularly in regulated and public sector markets, and (3) the pace of gross margin expansion as product innovation and serverless deployments mature. Execution on cross-sell opportunities and customer migrations from incumbent platforms will also serve as key indicators of sustained growth.

Elastic currently trades at $103.77, up from $82.05 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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