Elastic (ESTC)

Search AI platform provider Elastic (NYSE:ESTC) reported Q2 CY2025 results topping the market’s revenue expectations, 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.

Company Overview

Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE:ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.

Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.

Elastic competes with various companies across its solution areas, including Splunk (owned by Cisco Systems), Datadog (NASDAQ:DDOG), and Dynatrace (NYSE:DT) in observability; CrowdStrike (NASDAQ:CRWD) and Microsoft's Azure Sentinel (NASDAQ:MSFT) in security; and Algolia, Lucidworks, and Google (NASDAQ:GOOGL) in search applications.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Elastic grew its sales at a 19% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Elastic reported year-on-year revenue growth of 19.5%, and its $415.3 million of revenue exceeded Wall Street’s estimates by 4.5%. Company management is currently guiding for a 13.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.5% over the next 12 months, a deceleration versus the last three years. Still, this projection is above the sector average and suggests the market sees some success for its newer products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Elastic’s billings punched in at $317.4 million in Q2, and over the last four quarters, its growth was solid as it averaged 17.9% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

This quarter, Elastic reported 1,550 enterprise customers paying more than $100,000 annually, an increase of 40 from the previous quarter. That’s a bit fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that Elastic will likely need to upsell its existing large customers or move down market to maintain its top-line growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Elastic does a decent job acquiring new customers, and its CAC payback period checked in at 47.3 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Elastic’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 112% in Q2. This means Elastic would’ve grown its revenue by 12% even if it didn’t win any new customers over the last 12 months.

Elastic has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

For software companies like Elastic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Elastic’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 75.3% gross margin over the last year. Said differently, Elastic paid its providers $24.74 for every $100 in revenue.

This quarter, Elastic’s gross profit margin was 76.7%, up 3 percentage points year on year. Elastic’s full-year margin has also been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Elastic’s expensive cost structure has contributed to an average operating margin of negative 2% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Elastic reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Elastic’s expanding sales gave it operating leverage as its margin rose by 7.7 percentage points. Still, it will take much more for the company to reach long-term profitability.

Elastic’s operating margin was negative 2.3% this quarter. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Elastic has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 20.2% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Elastic’s free cash flow clocked in at $104.2 million in Q2, equivalent to a 25.1% margin. This result was good as its margin was 10.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Elastic’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 20.2% for the last 12 months will decrease to 19.2%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Elastic is a well-capitalized company with $1.49 billion of cash and $594.2 million of debt on its balance sheet. This $900.2 million net cash position is 10% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Elastic beat analysts’ billings expectations this quarter. We were also glad its full-year EPS guidance exceeded Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed. Overall, this print had some key positives. The stock traded up 16.8% to $102.50 immediately after reporting.

Updated: November 16, 2025 at 9:10 PM EST

When considering an investment in Elastic, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

When it comes to Elastic’s business quality, there are some positives, but it ultimately falls short. First off, its revenue growth was strong over the last five years. And while Elastic’s expanding operating margin shows it’s becoming more efficient at building and selling its software, its healthy ARR growth shows it’s winning more long-term contracts with predictable revenue streams.

Elastic’s price-to-sales ratio based on the next 12 months is 5.5x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $119.78 on the company (compared to the current share price of $90.84).