Netskope Inc (NTSK) Q2 2027 Earnings Call Transcript

And then as websites and AI applications adopt more and they support quantum, Netscope's ready, right? That site, when it supports it or that app, Netscope's going to be able to communicate with it using quantum resilient encryption. So it's future-proofing. It's now allowing people to meet their regulatory environments, and it's allowing people to use it now. And so that's really, for us, a key. We always want to skate to where the puck's going, and that's a good example of that. And so that'll help us, obviously, in proof of concepts, continue our high win rates, which are above 80 percent, when we get to a POC. That's probably a good way to look at it.

Excellent. And can you give us a little bit of an update in terms of the federal government space and some of the opportunities that you have with either FedRAMP High or some of your sponsoring agencies, as well as some new opportunities that are coming up, especially with zero trust programs with the government side?

Thank you. Yeah, great. Right. So we feel we're very well positioned for the federal market. For us, as you know, we became FedRAMP certified, FedRAMP high certified. We started building our federal team. We brought on our federal leader this year in the U.S. federal market. And then we've really just been ramping our sales team and building them. And so for us, federal is a small part, small piece of our business, but a very important growing one where we have a great platform for it. And so we feel really good about that and being able to serve both the commercial and beyond side of the federal for years to come.

Thank you. Please stand by for our next question. Ladies and gentlemen, we ask that you limit yourself to one question. Our next question comes from the line of Richard Poland with Wells Fargo. Your line is open.

Hey guys, thanks for taking the question. Sanjay, I'm just curious. I think the AI commentary in general about how it's progressing was really encouraging. I think you mentioned one third of the AI security pipeline is already entering kind of the POC phase and the general sales cycles, six to 12 months. I guess from the POC phase, is there typically, you know, a rough ballpark of how far into the six to 12 months we are and just kind of any visibility you might have into, you know, what the uplifts have looked like so far for the ones that have closed or just kind of contextualizing how the monetization side, while probably not too important yet, just any early indications you have on that side.

Thank you. Yeah, that's a great question. And we are seeing AI security wins. We talked a little about them in my opening. And so we are across financial services, we are across tech companies and and and beyond. So we're seeing good traction in people really adopting our security. But a lot of if you look, just look back, we really released our security products. We start releasing them in Q1 of this year. We released some more in Q2, like AI Command Center. And then we released even, you know, a related product, our data set command center this quarter, just, you know, three, four weeks ago. And when you think about a typical cycle for an enterprise, what they do is they evaluate. They look, okay, what's my problem? It's uncovering AI, understanding it. Let me evaluate something. They go to POC. And then what they do is they, in many cases for AI, they go ask for budget. It could be out of stream where they have a committee meeting every quarter and they ask, okay, I have to go get budget for this. It gets approved and then you move forward. That's just the normal enterprise sales cycle. And that really falls in that six to 12 month sales cycle process. And so for us, we converted and have converted some of our earlier beta customers because they got to look at it earlier, right? But really, we see some of that pipeline that has entered POC really in the back part of the year, right? More towards the end of the year where some of that's converting. We expect to convert some of our more beta customers and beyond in Q3. But we see that pipeline building. we see the POCs building, and then as a result, we see the AR building. And that's how I'd look at it. The last comment I'd make is AI security, for us, it's not a product. It is a part of our platform, and it's composed actually of multiple products. And so customers also over time will bite off pieces of it. And so for us, we're really building a big pillar of Netscope where you have many products over time. And as you grow in sophistication of AI security, you'll grow with Netscope. And our goal is obviously to release that functionality and new product well in advance when you need it. So that's a good way for you to think about it.

Thank you. Please stand by for our next question. Our next question comes from the line of Metal Marshall with Morgan Stanley. Your line is open.

Yeah, great. This is Ryan on Formida, and thanks for taking the question. Any additional details you could provide around the sale of the AI product portfolio and how that's impacting sales cycles? Are you seeing them compress as customers look to evolve their security stack much quicker or elongate given the potentially more complex cycle? Just any additional details there would be helpful. Thank you.

So if you look at AI security, for us, there are existing customers, and then there's obviously NetNew, and we go after both. And so if you're an existing customer, to adopt our guardrails and agentic broker, one of the beauties, we're an organically built platform, right? We built ground up. We release things when they're truly integrated, right? We don't just priceless integrate them. We actually integrate them in a common GUI, common policies, one data protection engine, one threat protection engine. That organic approach of being purely building properly a platform, that enables customers to adopt these products and implement them from a technical point of view in a very easy way. And so like the agentic broker and the guardrails, you can enable that. You actually, if you're deployed, for example, with our NextGen Swake product, you just enable it and you can try it out. And so that's the beauty of having it. It's a common GUI and DLP. And so that's one. There's the other set of products like the AI Gateway, where that's meant for east-west coverage of your AI traffic, maybe within your public cloud or your data center. Obviously, you're going to install that, right? And so you're going to deploy it. And so our goal is just make it as easy as possible. Make sure we cover north, south, east, west, and all one GUI common policies. So I think that makes it easier for customers to technically deploy. They still have their sales cycle, though, right, outside of that. But our goal is make the POC part as easy as you can.

Thank you. Our next question comes from the line of Brian Essex with JP Morgan. Your line is open.

Hi, thank you for taking my question. This is John on behalf of Brian. I just wanted to just touch on the CapEx part. You know, you mentioned the full year CapEx is now expected to be around 45% of revenue tied to new edge. So I'm just curious, is this step-up primarily demand-driven capacity, or, you know, is it a pre-build ahead of, you know, the anticipated agentic traffic? And just curious, as those traffic grow, should we assume the CapEx to scale with it, or would there be, you know, over time, would the architecture absorb the volume at a lower incremental cost?

Great question, John. You know, look, it's continued infrastructure investment. You know, we've seen, you know, again, we see strong demand going forward. We've always kind of said it'd be low single digits. I think we said somewhere between three and five. We're saying four and five, between four and five. So I think we're pretty consistent with what we've said all along. Quite honestly, you know, we've seen some growth, you know, some we're overperforming a little bit. And so just maybe it scales up a little bit of that. The ARR comes in before the revenue. So, you know, just think of that in that sense. So I think we're well within the, you know, the typical expectations, what we had. You know, the other considerations really aren't a factor as of yet. And, you know, we'll obviously update more on that front as we go forward.

Thank you. And please stand by for our next question. Our next question comes from the line of Shrenik Kothari with Baird. Your line is open.

Hey, guys, this is Zach on for Shrenik. Thanks for taking our question. So great to see NRR kick back up to 114% and 59% of customers now using four or more, 29% using six or more products. And so you guys, you know, offer still more than 25 products. So I guess the question is how should we think about the natural ceiling for NRR, especially as AI security, data security, SD-WAN, other modules mature? and does the breadth of the portfolio create a path back toward sustainably higher expansion or does the increasing enterprise scale naturally constrain NRR despite stronger dollar expansion?

Yeah, I think from an NRR perspective, we mentioned before, it can fluctuate quarter by quarter. The range we're kind of in, right, we have 113, 114, 115, that range which we've seen in the past quarters is, that's what we've seen historically. And while we don't guide on NRR, I think qualitatively, we know that with average customers having four or five products, we have a lot of ability to upsell for many, many, many years. Customers and enterprises, as you know, with a platform like ours, which is quite broad, they often will start with one or two core use cases, and then they'll grow the year after and the year after. And so we feel like what we have built with the platform and the number of products is just a durable, right, platform, which will grow with them. And AI security absolutely will be a part of that NRR in different timelines for different customers and verticals. But for us, it is a big pillar, and we feel really good about our position there, and that will help us drive expansion.

Thank you. Our next question comes from the line of Aiden Perry with Piper Sandler. Your line is open.

I realize things may still be early, but can you talk about how customers are responding to the transaction-based pricing on new AI products on the deployment sharing scale and are usage level supporting?

Yes. So on the transaction based pricing part, when you think about how we price, like take an example, the agentic broker, an agent, right, it's not a user. And so we try to price in the way that makes sense for what we're actually doing. And so if you think about the eugenic broken, it's covering agent transactions. And so we price by transaction. And I think a lot of what we'll see on the internet will be non-human. And as a result, perhaps user pricing, right, even just subjectively wouldn't make sense. And so for us, I think people get it. They get the transaction based pricing makes sense. That's how agents think, you know, they are used to for inference pricing tokens. Transactions are sort of a prompt and a response. And what we have been trying to do is make sure they have visibility into it so they can see how many transactions are happening. Right. And as a result, they have a sense of, okay, what's that going to look like when I buy? So I think the key is with your customers, just make sure that you're transparent, you're giving away to them to see it, and then price in what makes sense from a usage perspective. And so, yeah, I think the transaction model has been received well. You've seen some of our other products like AgentScope, which is our AI agents, separate than AI security. right we started releasing some of our ai agents like our dlp sec ops agent that's more outcome based pricing it's based on for example how many cases across the thousands or millions of dlp incidents do we create and find that you know needle in the haystack for you and that's the outcome you want and so for us we're committed to the models of transaction based and and for agent scope outcome-based pricing.

Thank you. Our next question comes from the line of Ishan Shetty with T-Bank Capital Markets. Your line is open.

Hey, this is Ishan on for Airkey. Thanks again for taking the question and apologies in advance for the background noise. Sanjay, how do you view the current competitive landscape in SaaS today? And particularly, do you think demand right now is healthy enough to support multiple scale vendors over the long term. And then just maybe a quick follow-up to that. In the competitive bake-offs, what are some of the primary reasons customers are choosing Netscope over competitors? And conversely, where are you seeing competitors win against Netscope? Thanks again for taking the question and congrats on the quarter.

Yeah, thank you. If you look at SASE, we have 25 press products. They span everything from how to govern cloud and on-prem databases and to cloud firewalls, to digital experience management, to enterprise browsers. I mean, if you think about the word SASE, it keeps expanding. More and more is being put into SASE. In fact, there used to be like 20, 30 of the vendors that you're consolidating now, right, into SASE. And so really, the way I think more about it is one of the biggest markets in security and networking was data and network security, right? And you used to buy boxes and appliances and different data protection systems and different VPNs and different edge firewall. And all of that sort of is being converged and consolidated for simplicity, modernized from a security perspective, right, into SASE. And so, yes, absolutely. SASE is a durable, I think, long-term market, supports multiple vendors, given especially what you're doing as you're converging so many things. In addition to that, you look at what we are talking about for some of this call, AI security. Well, okay, well, is that really part of just SASE? Is that a totally new market? and we think about it as a pillar, right, that's even outside of SASE. And so for us, we know we have a very durable, long, good kegger market in SASE. We're a leader. You saw that in all the analyst reports. SASE itself keeps growing in terms of what it encompasses. And so you get more and more TAM as SASE naturally subsumes more and more markets. And then we've entered AI security, which is a completely new TAM and a massive TAM. And then you have AgentScope, which is our AI agent. So look, we don't lack for TAM for a long, long time. And as always, to be blunt, in security and networking, most CIOs you talk to, they don't want one platform for all of security and networking, right? They don't. They want a few that are open. And that's what we're committed to, being an open platform that converges many different systems, but integrates with the others, like your EDR, like Renounce for CrowdStrike, for example, some new integrations, and beyond. And so we feel really good about that for the future and now.

Thank you. Our next question comes from the line of Tay Kidron with Hoppenheimer & Company. Your line is open.

Hi, this is Nolan Genevine on for you, Tay Kidron. Thanks for taking my question. I just kind of wanted to double click on some of the commentary around the Salesforce ramping. I think you had said earlier that roughly about 50% were ramped at this point and, you know, expecting that to improve through the year.

Can you maybe just confirm, is that an increase sequentially when we think about the percentage of ramped reps and any more color there would be great? the second half of the year uh if you just take us take back to like last year and towards the end of the year we started investing uh obviously in new reps uh and ramping them we started there in amia uh and apj and you've seen the growth obviously in those regions and then uh later on in nam right because obviously we were getting some of the leadership pieces in nam uh for the next level of scale done last year. And that will result in an increased number of fully ramped reps. That's probably a better way to think about it. And over time, just continue to grow our capacity. Now, in addition to that, we also announced, for example, in our earnings call just earlier, the Catalyst program for managed services. That's just another sign of, well, we're continuing and growing our partnerships as well. Yes, we're growing more feet on the street and more reps and more SEs, and we're ramping them, and that capacity is coming alive later in the year and next year, but we're also expanding our partnerships, and that's very important to us. The AI partnerships, Anthropic, for example, we talked about the Amazon partnership. We talked about the NVIDIA Open Secure AI Alliance. We talked as well about our partnerships with MSPs, SPs, SIs. all of those are also big pieces of our strategy and plan as we ramp and grow our go-to-market team, right? With such a great win rate, it's natural that we do that.

Thank you. Ladies and gentlemen, I'm Sean. No further questions in the queue. I would now like to turn the call back over to Michelle for closing remarks.

Thank you. And thank you everyone for joining us today. We're pleased with our Q2 results and the momentum we're seeing across the business. We remain focused on helping enterprises with their cloud and AI transformation journeys, driving continued innovation across our robust platform, and executing against a significant opportunity ahead of us. We appreciate your continued support and look forward to speaking with many of you over the coming weeks and months. With that, we'll close the call. Thanks again.

That concludes today's conference call. Thank you for your participation. You may now disconnect.