Netskope, Inc.

Hello, and welcome to NETSCOPE First Quarter 2027 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Michelle Spover, You may begin.

Good afternoon and thank you for joining us today. With me on the call are Netscope CEO and co-founder Sanjay Barry and CFO Drew DelMotto. The press release announcing our financial results for the first quarter of fiscal 2027 was issued earlier today and is posted to our investor relations website at investors.netscope.com along with a supplemental presentation. Before we begin, let me remind everyone that certain statements we make on today's call are forward-looking, including statements related to our guidance for the second quarter and full 2027 fiscal year, market opportunity, growth prospects, sales ramping, competitive position, impact of AI, and demand for AI security. These forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Additionally, these statements apply only as of today, and we undertake no obligation to update them in the future. For a detailed description of risks and uncertainties, please refer to our SEC filings as well as our earnings press release. Finally, unless otherwise noted, all financial metrics we discuss on this call, other than revenue, will be on an adjusted non-GAAP basis. We will have provided reconciliations of these non-GAAP financial measures against the most directly comparable GAAP financial measures in our earnings press release. Now, let me turn the call over to Sanjay to discuss our business momentum and highlights for our Q1 financial performance.

Thanks, Michelle. Welcome, everybody, and thank you for joining us to discuss Netscope's first quarter of fiscal 2027 results. Our results demonstrate that as customers are continuing their digital and AI transformations, moving to leverage AI in the cloud, and readying themselves for the reality of a large amount of autonomous AI agents in their environments, Netscope is a mission-critical, innovative partner for now and the future. As customers look to solve these challenges, they understand that not all solutions are created equal and that legacy network and security products cannot fulfill today's modern requirements. With an exploding amount of data and a vastly widening attack surface, businesses are faced with a trade-off between security and network performance that has seemed inevitable in the past. With Netskope, as their trusted partner, they no longer have to make that trade-off. Our ability to deliver best-in-class networking, security, analytics, and AI With the unified common code base of our Netscope One platform built for the cloud in AI era, and our high-performance new edge private cloud is what differentiates us. It is why customers are choosing Netscope across SSE, SASE, AI security, and more, and sets us up well for our massive $336 billion market opportunity. I'll delve more into that in a bit, but let me first share a few highlights from our first quarter. We ended Q1 with ARR of $845 million, up 29% year-over-year, and our net new ARR of $34 million. Revenue grew 28% year-over-year to $202 million, ahead of our guidance. Our operating margin improved four percentage points year-over-year to negative 14%, also ahead of our guidance, and a reflection of our continued commitment to drive leverage in our model. Beyond the headline financial results, several operating metrics stood out. First, we had an exceptionally strong quarter with ARR from new logos, which in Q1 grew approximately 60% versus new logo ARR in Q1 last year, reflecting our continued success in landing larger deals and selling the breadth of our Netscope One platform. In addition to our success with new customers, we are also keeping existing ones very happy and partnering to chart their course to safe AI enablement and transformation. We have consistently operated with gross retention rates above the mid-90s, and our GRR continues to improve, with Q1 representing the highest in our company history. And finally, we continue to see broadening platform adoption by customers. The number of customers spending more than $100,000 in ARR grew 23% year over year, and 57% of our customers are now using four or more Netscope One products, up from 49% a year ago. On the execution front, we're continuing to hire sales reps and scale our go-to-market engine to capitalize on the significant opportunity ahead of us. Today, approximately half of our reps are either newly hired or still ramping, and I'm genuinely excited about the talent and energy this team brings. It's also worth noting that we're lapping a particularly strong Q1 upsell quarter last year, which included several outside seven-figure upsell deals that set a very high upsell bar for comparison. We expect the increase in our number of reps to be a meaningful driver of growth in the back half of the year as they continue to mature and hit their stride. I'm pleased with what our team accomplished in the first quarter, and I believe we're very well positioned to build on this momentum through fiscal 2027 and beyond. The underlying demand for our business and platform's unique ability to address customers' modern security, cloud, and AI needs is strong and growing, and recent investments in our Salesforce expansion are positioning us well to capitalize on our large opportunity. I now want to spend some time addressing the favorable industry tailwinds of a widening AI security gap and growing attack surface that are driving durable demand for Netskope, how we are uniquely solving problems for our customers, and how our innovation engine is revving at historic rates to extend our technology advantages and leadership. During the past few months, I've had countless discussions with CIOs and CISOs, including nearly 100 at RSA alone, a constant in every conversation is safely and compliantly adopting AI at enterprise scale. They're excited about AI's potential to dramatically improve productivity and efficiency. At the same time, they recognize that attackers now have access to the same technologies and can exploit vulnerabilities at unprecedented speed and scale. We are already starting to see adversaries leverage AI to exploit vulnerabilities, showing that the buried entry for attackers has largely disappeared. This makes defense in depth more critical than ever before. Every agent must be treated with least privilege principles under the concept of zero trust. And companies should apply data threat and moderation guardrails for employees for safe AI usage and data protection. The average global 2000 companies tracked in Netscope's AI index uses over 140 AI applications. Our AI index also shows that approximately 90% of AI usage is led by business units, not IT. And as a result, most of this activity occurs through shadow AI outside traditional governance controls. At the same time, AI is becoming a massive data generation engine. Netskope research indicates that for every gigabyte of data shared with AI tools, organizations may consume more than four gigabytes of AI generated content in return. With context and data as the most valuable commodity in today's digital world, generative and agentic AI becomes not just a technology challenge, but a complex security imperative that spans data, identity, real-time traffic, and governance. Organizations are facing a vast widening gap between the speed of AI adoption and the security architecture needed to adopt it securely. This is precisely what Netskope was built for. From inception, we architected Netskope as an AI native platform designed to understand the modern language and context of the internet, including API and JSON traffic, which is also the language of AI. As a result, while legacy vendors rely heavily on out-of-band inspection and post-event analysis, we understand the semantic context and intent behind them, enabling customers to apply granular dynamic policy controls without compromising user or agent experience or performance. Our platform intelligence has been forged over more than 10 years of processing real-world traffic across AI, web, cloud, private applications, and more. understanding it not just at the network layer, but at the deepest level of content and context, including APIs, data payloads, and behavioral patterns. The aggregate anonymized insights and data derived from that experience are embedded throughout our platform and represent a significant and compounding proprietary advantage that we believe is very difficult for existing or any new entrants to replicate. Our Netskope One platform unifies more than 25 security networking analytics and AI products through one engine, one console, one network, and one code base. Underpinning all of this is our New Edge Private Cloud, which runs Netskope's full stack of products at high speed and resilience with dynamic orchestration and our more than 120 data centers. With New Edge, we also deliver globally distributed and highly regulated customers the data sovereignty and regulatory compliance that they require. Importantly, the same architecture that differentiates us in SSE and SASE also distinctly positions us in AI security. We've talked about being the secure and fast on-ramp for everything enterprises access today. While that nature of that traffic is changing and the volume is growing exponentially, the highway it uses is the same. And no one understands that flow of traffic at a deeper level than Netskope does. In today's enterprises, AI-powered assistants connect enterprise systems through a range of pathways. from APIs and CLIs to Model Context Protocol, or MCP, which has quickly become the dominant standard for agent integrations. As enterprises move deeper into agentic AI adoption, the need for independent, real-time granular security enforcement becomes even more critical, and the opportunity for Netsco becomes even more compelling. The frontier model releases we've seen, including Anthropix, Mythos, and OpenAI's GPT-5.5, are genuine inflection points for the industry and will deliver real and important progress in upstream software, operating systems, browsers, and critical open source libraries. However, they do not touch the vector that is already active inside environments now. The data flowing through AI agents, cloud applications, and enterprise workflows that authenticate Azure users, operate at the privilege level of your people, and move sensitive information to destinations your security team has never reviewed. The security industry has spent years evolving security and network architectures to assume breach for human users. But that same rigor has not been applied to the AI agents now operating inside organizations. Our Netscope One platform is optimally positioned to solve this problem because of both where we sit and what we can see. Most security and networking systems see that a connection is happening. Our new edge infrastructure sees what's deep inside it and brings deep context to it. All of this is backed by Netscope AI Labs, which develops more than 190 domain-specific models deployed throughout our products, applied where they can make the greatest difference across data protection, threat defense, AI security, and more. The pace of agentic AI adoption makes our role more essential every quarter. Every transaction, regardless of whether it originates from a person, a device, or an AI agent, needs to be inspected, governed, and controlled in real time at the point where it happens. This is what we do. across trillions of transactions for enterprises around the world. At Netskope, we've always believed defense is never about one layer, and the most important layer is the one closest to the data. Our Netskope Threat Labs data shows that the median enterprise is now running 60 distinct AI apps, and power users are interacting with more than 500. Sensitive data is flowing in and out at a pace and scale most security teams simply cannot see. Attackers have always wanted data And that data and real-time transaction problem, one where context matters, is growing more urgent by the day as AI adoption accelerates. The depth of our AI ecosystem involvement reflects how central Netskope has become to how the industry is responding to this moment. We have joined Anthropix Project Glasswind, in which we will use our Access to Cloud Mythos preview to identify vulnerabilities and harden our own defenses for our customers. In addition, We'll share our findings with the Glasswing Coalition and the security community. Our technology collaboration with Anthropic also includes integration with the Cloud Compliance API, connecting our unified data governance and compliance controls directly to cloud usage, giving shared customers real-time visibility, policy enforcement, and data security across their cloud deployments. Additionally, we're also a member of OpenAI's Daybreak program, using GPT-5.5 with trusted access for cyber. recognizing us, alongside a select group of security vendors, as a trusted defender of critical enterprise infrastructure for the AI era. In addition, we partnered with Google and introduced AI guardrails powered by Google Cloud TPUs and Vertex AI, enabling enterprises to deploy high-performance generative AI and agentic workflows with in-line safety checks and local data processing at scale. Our AI guardrail solution is also natively optimized to run on NVIDIA GPUs. And with Netscope products available on the AWS, Azure, and the Google Cloud marketplaces, wherever enterprises are building and running their AI workloads, Netscope is the security layer they can reach for. Now, let's dive deeper into our own rapidly developing AI security product suite. The combination of network reach, deep context, and content intelligence, and the ability to take dynamic action at the moment of risk is what allows us to detect sensitive data moving towards models or unauthorized agents and stop it. without slowing down valid users or agents performing valid actions or disrupting their workflows. This allows our customers to move beyond blunt block or allow decisions and instead give their organizations the confidence to embrace AI fully, what we call the AI fast lane. Last quarter, we announced the first four products of our AI security suite, all built on and extending the Netscope One platform. Our agentic broker provides visibility and control over all MCP transactions. AI Guardrails defends against AI-specific threats like prompt injection and jailbreak. And AI Gateway inspects and enforces policies across AI applications and LLMs. These products are priced per transaction, meaning each prompt and its response, making them straightforward to deploy and scale. The market response has been immediate. These new AI security products generated significant excitement, an early pipeline right out of the gate, translating into some initial early deals closed with beta customers. Among these early wins was a US fintech customer that expanded to purchase our full suite of AI security products, AI Gateway, AI Guardrails, Agentic Broker, and Red Teaming to solve the issue of legacy proxies lacking visibility, context, and control into AI traffic flows. We also expanded with a large US bank who is an early beta customer of the AI security products and deployed Netskope AI Guardrails for real-time visibility and control, DLP enforcement, user behavior analytics, and inline threat protection to prevent exposure of sensitive financial information, enabling them to safely adopt AI and meet strict regulatory and compliance requirements. While still early from a financial standpoint, since these solutions were just released this past quarter, we're extremely encouraged by customer engagement and response and the growth in our AI security product pipeline, which is the fastest we have seen for any new product category in our history. We've continued and will continue to innovate and broaden our AI solutions. Earlier this week, we announced the release of our AI Command Center, which brings end-to-end operational intelligence that broadens and unifies how customers discover AI, manage its risk, and autonomously remediate issues across the entire enterprise AI ecosystem. Our AI Command Center does three things. First, it provides complete visibility across an organization's entire AI footprint. AI lives and communicates on endpoints, networks, clouds, the internet, and private infrastructure. It's embedded in servers, consumed through third-party services, and woven throughout supply chains, making visibility a complex challenge. Our enhanced discovery capabilities extend visibility across our customers' entire AI landscape, capturing managed tools and shadow AI alike to identify AI operating inside and outside your security program. Second, it helps customers gain a real-time connected view of risk. Discovery alone does not tell you where risk lives. Netskope's AI Command Center unifies AI assets, data flows, and model connections across an enterprise into a single real-time view, giving security leaders the context to understand not just what AI exists in their environments, but how it behaves, what data it touches, and where exposure is greatest. And third, it guides customers to act on risks. Identified risks are automatically prioritized by recommending contextual policy optimizations, and providing remediation workflows to mitigate or remediate the identified risks. For security teams struggling to keep up with the speed at which AI can introduce risk to tools and data, this represents a fundamental shift from reactive tactical firefighting to preemptive policy-driven autonomous operations. We also recently unveiled AgentScope, an architectural foundation built into our Netscope One platform that allows organizations to deploy AI agents capable of running end-to-end security and networking workflows autonomously to assist SecOps and NetOps teams bogged down by capacity constraints, complexity, and manual triage. In our recent release announcing Agentscope, Anthropix, head of cybersecurity products, was quoted saying that Netscope Agentscope brings the platform data and SecOps expertise to apply it across security workflows. Agentscope is a strong example of how the two can help teams keep pace with today's threats. The first of six agent scope agents we released is a DLP AI SecOps agent, which evaluates millions of alerts and potential violations to find the needles in the haystack and bring forward a small set of meaningful contextualized risks in the system to the customer. It can then agentically triage, investigate, and drive remediation actions to dramatically reduce mean time to resolution for risks. During our beta trials, a global consulting firm that was generating over 14 million alerts and 2 million incidents per day was able to contextualize all that data into approximately 100 actionable cases for human review using the Netscope DLP AI SecOps agent, dramatically improving operational efficiency. We also introduced five more Netscope agents, including agents for digital user experience troubleshooting and insights, which distills millions of telemetry data points, including from the new edge network, into a clear view of digital health to proactively surface critical incidents, performance bottlenecks, and macro trends before they can impact workforce productivity. In addition, an agent for accelerating zero-trust migration and auditing, and a supply chain risk assessment agent for SaaS and AI apps. And finally, as data sovereignty becomes increasingly critical in the AI era, Netscope continues to enhance our new edge private cloud. We enable organizations to enforce local data processing for any type of traffic and entity generating it. Customers can define geo-based policies to control exactly where their security networking processing occurs, giving them increased sovereignty over their data wherever it flows. Through our new edge network spanning more than 120 data centers across every major region in the world, no other platform can match this combination of global reach and granular control. I talked a bit about the growing number of customers adopting Netscope's differentiated Netscope One unified platform. Let me share a few Q1 wins across some common use cases. During the quarter, we landed a seven-figure network and security modernization deal with a Fortune 500 US financial services company that showcased the breadth of our Netscope One security, networking, analytics, and AI platform. The customer purchased 15 Netscope products. The deciding factor for this competitive win was our ability to provide a modern platform with robust DLP controls that could be applied to multiple channels, endpoint, email, internet, cloud, data at rest in motion, as well as visibility into and control of AI usage. We also landed a leading utility company in Latin America that will use Netskope to modernize their infrastructure, enable secure and flexible remote access, improve data visibility and control, and enable zero trust at scale. In a competitive displacement deal, they chose Netskope over several other competitors for our unmatched depth and breadth of data protection across their expansive environment, which is key for meeting local data privacy laws. And a leading telecom and managed service provider, an APJ, chose Netskope for a large SASE branch modernization project. This customer purchased Netskope's SD-WAN appliances and SSE products for deployment in over 5,000 managed sites for hundreds of customers who will migrate away from legacy SD-WAN and firewall solutions onto Netskope's advanced SASE offerings. We won this deal over several competitors for our ability to deliver both advanced SD-WAN and SSE. And finally, a large manufacturer chose Netskope to modernize its infrastructure, protect against advanced threats, prevent data loss, improve visibility into and control of AI usage, and address security needs globally. In a competitive bake-off, Netskope outperformed two direct competitors for this deal, which included our full SSE suite, endpoint DLP, enterprise browser, digital experience management, and remote browser isolation products. These and many other wins demonstrate our customers are gravitating towards Netsco for our ability to modernize their security and networking infrastructure, eliminate the burden of disjointed legacy and first-generation cloud security solutions, consolidate vendors onto a unified platform, and migrate to our high-performance private cloud as they adopt more AI and cloud. This also applies to our growing ecosystem of telcos and MSP partners, who are using Netskope products as the foundation for a variety of managed security service offerings for thousands of businesses around the world. In Q1, for example, we expanded our alliance with Deloitte to include a managed SASE service for enterprise customers, seeking to transform their infrastructure, modernize security and networking, and drive secure AI adoption. As AI transforms every industry and operating model, we also are transforming how Netskope itself operates. When we founded the company, we architected our platform to be AI native. Today, we're applying that same philosophy internally, particularly in R&D. AI is accelerating how we work across the entire development lifecycle, from how we identify customer needs and prioritize roadmap to how we architect, develop, test, and iterate on solutions. Projects that historically required large teams and extended timelines can now move significantly faster, allowing us to respond to customer needs more rapidly and bring platform-expanding products to market at a pace that would not have been possible before. To put this into context, historically, Netscope launched two to three major products annually. Less than halfway through this year, we've already delivered more than double that pace. This is what it means to be a truly AI-native company, not just building for the AI era, but running in it. In closing, I want to leave you with a few takeaways. First, the durable tailwinds of digitization, the move to cloud, and the transformational impact of AI mean customers no longer have the option of compromising on security of performance. Every entity generating traffic, users, devices, and AI agents needs to be governed and protected in real time, wherever they are. They are turning to Netsco to relieve them of that burden, and we are uniquely built to do it. Second, the AI ecosystem we have built including Anthropic, AWS, Google Cloud, Microsoft, OpenAI, and more, reflects how central Netskope has become to enterprises safely adopting AI. That trust is not easily replicated. Third, our new edge network and data sovereignty capabilities give us a structural and global advantage that is increasingly a requirement in the AI era, not a nice to have. And lastly, we're well on our way to scaling our go-to-market organization to capitalize on the massive opportunity the AI super cycle has created. Our hiring is tracking according to plan, and we expect productivity to ramp and deliver further benefit from these investments in the second half of the year. We are very encouraged by our strong pace of innovation and the excitement building around our platform expansion and new AI security products. The plumbing of the AI era is being laid right now. Our strategy is built for the long haul, and as the market catches up to the reality of the AI super cycle, Netscope is primed to be the foundation they stand on. We are only just getting started on our journey. not just as a public company, but in building what we believe can be a legendary company. Before I turn the call over to Drew, I'd like to share an update regarding our long-term succession planning. As we announced today, Drew, working closely with me and the rest of our board, has announced his intention to retire following more than seven years with Netsco. I want to thank Drew for his partnership, leadership, and many contributions. During his tenure, he has played a critical role in helping us scale to where we are today, including leading the company through its recent IPO, strengthening our financial and strategic foundation, and building a world-class finance organization. We will be initiating a formal search for an exceptional financial leader to help guide our next phase of growth. Importantly, Drew remains fully committed to Netscope and will continue serving as Chief Financial Officer through the search process and hiring of his eventual successor, and will transition to an advisory role for Netscope thereafter. This planned transition does not change our strategy, our priorities, or our confidence in the opportunities ahead. I look forward to continuing to partner closely with him over the months ahead. With that, let me now turn the call over to Drew.