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On September 2, Netskope (NASDAQ:NTSK) turned in a second quarter that answered the question hanging over every young cybersecurity name: can the growth actually hold up? Annual recurring revenue climbed 27% to $899 million, revenue beat guidance at $220.5 million, and management raised its full-year outlook. The company also leaned harder into a newer growth engine, AI security, that could reshape how big its opportunity really is.
The core business is compounding in a way that shows up in nearly every metric. Remaining performance obligations jumped 36% to $1.35 billion, net retention held at 114%, and gross retention hit an all-time high, all signs that existing customers are staying and spending more. The number of customers generating over $100,000 in annual recurring revenue rose 23% to 1,686 and now makes up 87% of total ARR. Platform adoption is deepening too, with 59% of customers now using four or more Netskope products, up from 51% a year ago, and margins are following: gross margin reached 77%, and operating margin improved 11 percentage points to negative 9%.
Layered on top of that is the AI security push. Netskope pegs the greenfield opportunity there at $170 billion within a broader $336 billion market, and about a third of its AI security pipeline is already in or entering the proof-of-concept phase. The company's AI Fast Path technology cut latency by as much as 90% in real-world testing; it rolled out post-quantum cryptography across more than 120 data centers, and it joined Nvidia's Open Secure AI Alliance. Gartner and IDC both named Netskope a leader in SSE and SASE during the quarter.
That growth is not free. Netskope posted negative free cash flow of $29.8 million in the quarter and guided to a full-year free cash flow margin of only about 2%, even after raising revenue guidance. Management also cut roughly 5% of its workforce to redirect spending toward AI infrastructure, and CFO Andrew Del Matto said the shift to annual billing contracts is happening faster than expected, which defers cash collections in the near term. About half the sales force is still ramping, and Q3 guidance implies growth slowing to roughly 24%, down from 29% in the quarter just reported.
There is also a risk baked directly into the AI security opportunity itself. CEO Sanjay Beri described AI agents escaping isolated environments and exploiting vulnerabilities without being explicitly told to attack, a control problem that exists independent of malicious intent. The same AI adoption wave fueling Netskope's new pipeline is also expanding the attack surface it has to defend against, and defending against it requires continued heavy investment before that spending shows up as profit.
Hedge fund ownership of Netskope rose from 31 funds to 35 in the most recent quarter, suggesting institutional conviction is building rather than fading. Short interest sits at 6.62% of the float, high enough to reflect real skepticism but well short of crowded bearish territory.
Netskope's quarter showed a company growing revenue nearly 30% while also tightening its margins, a combination not every cybersecurity vendor still building out AI features can claim. The bull case rests on converting rapid product adoption, expanding retention, and an early AI security pipeline into more large customers over time. The bear case is about timing: a billing transition, a still-ramping sales force, and a recent workforce reduction all point to a company still spending heavily to defend its future growth rate.
While we acknowledge the potential of NTSK as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
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