ESTC • 10-Q • Q3 2025 • Positive

Elastic's Revenue Surges 16% YoY Despite Margin Pressure and Rising Competition

November 24, 2025 • 1 min read

TL;DR

Elastic delivered strong Q3 revenue growth of 16% YoY to $423.5M, driven by 16.7% subscription revenue growth. Gross margins compressed 210bps to 75.9% as cloud infrastructure costs increased. Operating loss widened to $8.2M despite revenue growth, reflecting ongoing investments in R&D and sales expansion. Strategic shift toward AI-enabled search and observability solutions positions company for enterprise expansion but faces intensifying competition from cloud hyperscalers.

Financial Performance Overview: Revenue grew 16% YoY to $423.5M with subscription revenue reaching $397.7M (+16.7% YoY). Cloud revenue accelerated to 39% of total revenue, up from 35% in prior year. Gross margins declined 210bps to 75.9% due to cloud infrastructure costs and customer mix shift. Operating expenses increased 19.2% YoY, outpacing revenue growth and indicating continued growth investments. Customer count above $100K ARR grew 15% YoY to 1,190 customers.
Strategic Initiatives and Operational Changes: Management increased R&D investment by 22.7% YoY to $108.2M (25.5% of revenue) focused on AI/ML capabilities and cloud-native architecture. Sales and marketing spend rose 20.3% YoY reflecting enterprise go-to-market expansion. Recent acquisition of Opster strengthens cloud management capabilities. New partnerships with major cloud providers expand distribution but increase competitive exposure. Timeline for AI product integration extends through 2026.
Market Position and Competitive Dynamics: Enterprise customer concentration increased with top 10 customers now representing 12% of revenue. Net retention rate declined slightly to 124% from 127% last quarter. TAM expansion into security and observability markets adds $15B opportunity. Facing increased competition from Splunk (post-Cisco acquisition) and cloud providers' native solutions. Differentiation through unified platform approach showing early success with 45% of customers using multiple solutions.
Operational Efficiency and Profitability: Operating margin declined 90bps YoY to -1.9% as investments outpaced revenue growth. Cloud gross margins improved 150bps sequentially to 71% showing scale benefits. Sales efficiency metrics declined with CAC payback extending to 18 months from 15 months. R&D productivity remains strong with feature velocity increasing 25% YoY. Path to sustained profitability pushed out as growth investments continue.
Growth Catalysts and Material Risks: AI-enabled search capabilities expected to drive 20%+ growth in FY26. Enterprise security expansion represents $500M revenue opportunity. Cloud provider competition intensifying with AWS launching competing services. Customer concentration in tech sector (35% of revenue) creates macro exposure. Management expects margins to remain pressured through FY25 as growth investments continue.

Revenue

$423.5M ( YoY, QoQ) with subscription at of total

↑ +16%

Rd Spend

$108.2M ( YoY) representing of revenue

↑ +22.7%

Net Income

-$8.2M (-1.9% margin) vs -$4.4M prior year

Gross Margin

(-210bps YoY) with cloud margins at

↑ 75.9%

Free Cash Flow

$73M ( conversion rate, -300bps YoY)

↑ 15%

Operating Margin

-1.9% (-90bps YoY) reflecting growth investments

Growth Indicators

1,190 customers >$100K ARR ( YoY)

↑ +15%

Arr Or Bookings ↑Cloud revenue 39% of total (+400bps YoY)

Retention Metrics ↑Net retention rate 124% (-300bps QoQ)

Key Risks

Cloud provider competition intensifying with potential pricing pressure
Customer concentration in tech sector creates macro vulnerability
Rising infrastructure costs compress margins with uncertain recovery timeline
R&D investment requirements delay path to sustained profitability

Key Opportunities

AI-enabled search capabilities expand TAM by $10B+
Enterprise security market represents $500M revenue opportunity
Geographic expansion in APAC showing 25% growth potential
Multi-product adoption driving higher customer lifetime value

Bottom Line

Elastic's Q3 results demonstrate the company's ability to drive strong revenue growth while investing in strategic initiatives. The transition to cloud and AI-enabled capabilities positions the company for long-term success but creates near-term margin pressure. Competitive dynamics require sustained investment in product innovation and go-to-market expansion. Key metrics to watch include cloud revenue growth, multi-product adoption rates, and operating leverage progression.