Netskope, Inc. Class A Common Stock (NTSK) Earnings

Management highlights

### Strategic Positioning for the AI Security Opportunity - The growing adoption of generative and agentic AI has massively expanded the enterprise attack surface, creating a large gap between the speed of AI adoption and existing security architectures. 90% of enterprise AI usage is ungoverned shadow AI led by business units, and the median enterprise now runs 60 distinct AI applications, creating urgent demand for comprehensive AI security. - NETSCOPE is uniquely positioned as an AI-native platform built with a unified common code base and high-performance New Edge Private Cloud network of over 120 global data centers, providing granular context and real-time inspection of AI traffic that legacy vendors cannot match. Proprietary anonymized traffic data collected over 10+ years creates a compounding competitive advantage that is difficult to replicate. - The company has deep strategic collaborations with major AI ecosystem players including Anthropic (Project Glasswing), OpenAI (Daybreak program), Google Cloud, NVIDIA, AWS, and Microsoft, cementing its role as a trusted security provider for the AI era. ### Product Innovation and Early Adoption - The company launched its full AI security product suite last quarter, including Agentic Broker (visibility/control for MCP agent transactions), AI Guardrails (protection against AI-specific threats), AI Gateway (policy enforcement for LLMs), and AI Red Teaming. This week, it launched the new AI Command Center (unified visibility, risk prioritization, and autonomous remediation for enterprise AI footprints) and AgentScope (autonomous AI agents to assist overstretched SecOps/NetOps teams). - The AI security product pipeline is the fastest growing in company history, with early closed deals with beta customers including a US fintech that purchased the full AI security suite and a large US bank that deployed AI Guardrails to protect sensitive financial data and meet regulatory requirements. - Existing core product adoption continues to grow, with increasing platform consolidation as customers replace disjointed legacy security and networking solutions with the unified Netscope One platform. Q1 saw multiple large competitive wins across financial services, utilities, telecom, and manufacturing, as well as expanded managed service partnerships including a new alliance with Deloitte for managed SASE. ### Operational and Organizational Updates - New logo ARR grew approximately 60% year-over-year, reflecting success landing larger deals and expanding platform adoption. Gross retention rate reached an all-time company high above the mid-90s, demonstrating strong customer satisfaction. - The company is currently scaling its go-to-market engine, with approximately half of quota-carrying sales reps newly hired and still ramping. Hiring is tracking to plan, with rep productivity expected to ramp in the second half of fiscal 2027. - Internal R&D productivity has accelerated dramatically due to AI-enabled development workflows, allowing the company to launch more than twice the number of major products year-to-date than its historical annual average. - CFO Drew DelMotto announced his planned retirement after more than seven years with the company. He will remain in the role through the search and hiring of a successor, then transition to an advisory role. The company will conduct a formal external search for a new CFO, and the planned transition does not change existing strategy or priorities.

Guidance

- **Q2 Fiscal 2027 Guidance**: Non-GAAP revenue is expected in the range of $213 million to $215 million, representing 25% year-over-year growth at the midpoint. Operating margin is expected to be between negative 14% and negative 15%, and net loss per share is expected to be 6 cents to 7 cents. Free cash flow is expected to improve relative to Q1 FY27, with Q1 representing the low point of the ongoing annual billing transition. - **Full Year Fiscal 2027 Guidance**: Management raised full year revenue guidance to a range of $879 million to $883 million, representing 24% year-over-year growth at the midpoint, with the upward revision exceeding the size of the Q1 revenue beat, reflecting increased confidence in demand and business momentum. - Full year gross margin is expected to be approximately 77%, operating margin is expected between negative 9.5% and negative 10%, and net loss per share is expected to be 18 cents. - Full year free cash flow margin is expected to be positive in the range of 2% to 4%, with positive quarterly free cash flow expected to return in the second half of the year following the completion of the annual billing transition. - ARR growth for the full year is expected to be within 1 percentage point of revenue growth, with net new ARR acceleration expected in the second half of the year as newly hired sales reps complete ramping and new AI products hit their stride.

Segment performance

NETSCOPE does not break out separate product segment financial results for this quarter. Overall company results are as follows: Total ARR reached $845 million, growing 29% year-over-year. Net new ARR was $34 million, down from $39 million in Q1 FY26 due to tough year-over-year comparison to the prior year's outsized seven-figure upsell deals. Total revenue grew 28% year-over-year to $201.6 million, beating prior guidance. By region, revenue in the Americas grew 27%, EMEA grew 31%, and APJ grew 25%. Gross margin was 77%, up 3 percentage points year-over-year. Operating margin improved to negative 14%, up 4 percentage points year-over-year. Non-GAAP net loss per share was 6 cents. Remaining performance obligations grew 33% year-over-year to over $1.2 billion, with contracted future billings growing 71%. There are 1,600 customers generating over $100,000 in annual ARR, growing 23% year-over-year, with over 85% of total ARR coming from this customer segment. 57% of customers use four or more Netscope One products (up from 49% year-over-year), and 28% use six or more products (up from 23% year-over-year). Net retention rate was 113% for the quarter.

Risks & headwinds

- Forward-looking statements (including guidance, AI market growth, and product adoption forecasts) are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from expectations, as detailed in the company's SEC filings and earnings press release. - Currently low net new ARR reflects both a tough year-over-year comparison to the prior year's outsized seven-figure upsell deals and the ongoing ramping of half the company's sales force; there is risk that rep productivity does not ramp as expected or AI product adoption does not accelerate in the second half as forecast. - AI security adoption is in early stages, and it is unclear how quickly enterprise budgets for AI security will inflect or if customer demand will meet current expectations. - The CFO transition creates uncertainty, though the company plans to complete a search for a successor quickly and Drew DelMotto will remain in place through the transition. - SASE core security is at risk of commoditization, and new AI-native entrants or large existing competitors could put competitive pressure on pricing and market share.

Analyst Q&A

• Q: Given strong AI market growth and the positioning of other AI players, how can you be confident in NETSCOPE's AI product-market fit, given that net new ARR is at a multi-year low despite increased sales and marketing spend?

  A: NETSCOPE's AI security products were only just launched, and the company is well positioned to capture growth as security catches up to rapid AI adoption. The company maintains an over 80% win rate in proof of concept tests, gross retention is at an all-time high, and new logo ARR grew 60% year-over-year. Net new ARR is being held back by half of sales reps still ramping, so acceleration is expected in the second half as reps and new products hit stride.

• Q: How are new AI products priced, and what is your current competitive positioning in the market?

  A: New AI security products are priced per transaction (prompt and response), aligned with how customers consume the offering. AgentScope AI automation products use outcome-based pricing tied to the value delivered (number of incidents resolved). The company maintains an over 80% proof of concept win rate across all products, with the main priority being ramping the large cohort of new sales reps to capture more customer opportunities.

• Q: How has enterprise customer conversation shifted, and what are the top core SASE/security use cases customers are coming to NETSCOPE to solve today?

  A: The top use case is securing and accelerating distributed access for users, AI agents, and applications, with granular governance of data access and transactions for AI workloads. Other key use cases include modernizing third-party/contractor remote access infrastructure to zero trust models, unifying data protection across all environments including AI ecosystems, and consolidating legacy network infrastructure to leverage the New Edge private cloud network to reduce costs.

• Q: Are AI security customers still in evaluation phase, and when do you expect AI security budgets to meaningfully inflect?

  A: Most enterprises know they need to secure AI adoption, but the market is still in early stages with customers still learning best practices for AI security. NETSCOPE is already seeing the fastest growing product pipeline in its history for AI security, with meaningful adoption expected to ramp in the second half of fiscal 2027 as the market matures.