IOT - NYSE

Good afternoon, and welcome to Samsara's First Quarter Fiscal 2024 Earnings Call. I'm Mike Chang, Samsara's Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Chief Executive Officer and Co-Founder, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we'll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described more fully in our SEC filings. Any forward-looking statements that we make on this call are based on assumptions as of today, June 1, 2023. And we undertake no obligation to update these statements as a result of new information or future events unless required by law. During today's call, some of our discussions will include our first quarter fiscal 2024 financial results. We'd like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenue and revenue growth. Reconciliations of GAAP to non-GAAP financial measures are provided in our press release and investor presentation. We'll make opening remarks, dive into highlights for the quarter and then open up the call for Q&A. With that, I'll hand over the call to Sanjit.

Thanks, Mike, and thank you, everyone, for joining us today. Samsara delivered another strong quarter of durable and efficient growth. We ended Q1 with ARR of over $850 million, growing more than 40% year-over-year. We also achieved Rule of 40 for the third consecutive quarter. Samsara's vision is to empower the industries that power our world, and we continue to see strong adoption of digital transformation for physical operations. Large customer wins, in particular, are fueling our momentum. In Q1, we added a record 138 large customers, bringing us to a total of 1,375 customers with over $100,000 in ARR, growing 53% year-over-year. This includes Fortune 1000 companies with large and complex operations such as United Rentals, Iron Mountain and Werner Enterprises. Our customer feedback loop is central to our success. Samsara customers are the backbone of the global economy and are leaders in diverse industries like construction, field services, manufacturing and retail. During the quarter, I was on the road with our executive leadership team in the U.S. and Europe, meeting with some of our largest customers. Our technology is driving meaningful business impact for them, and they are asking us to double down on a few things. First, AI-based safety technologies to reduce risk across operations; second, digital workflows to increase efficiency for frontline workers; and last, more platform and data integrations to drive higher asset utilization in the field. We're hearing this across the board, not just in a single industry. In this current environment, our customers are prioritizing investments in solutions that help control costs and deliver rapid ROI by running smarter, safer and more efficient operations. Now I'd like to focus on how we are using AI to deliver rapid ROI and transform customer data into business impact. AI has been core to how we built our product over the last 5 years, and our data moat is one of our key competitive advantages. The more operational data we unlock and transform into powerful insights for our customers, the bigger the business impact. I'd like to bring this to life with a customer example. One of our customers is a global leader in storage and information management services that serves 95% of the Fortune 1000 and has more than 25,000 employees. They are focused on investing in software that delivers a high business impact and quick ROI. This organization uses our Vehicle Telematics application for asset location and maintenance and is expanding to our AI-powered Video-Based Safety application to improve workplace safety, reduce insurance premiums and lower corporate risk. Based on results from a pilot study, we anticipate our platform can help them achieve more than a 3x annual ROI, which is roughly a 4-month payback period. By improving their safety program, we expect to see a 54% reduction in safety events, a 91% reduction in mobile usage and a 97% reduction in no seatbelt usage. On top of reducing accidents and creating a safer work environment, they're also gaining a competitive advantage when recruiting talent in a challenging labor market. These types of results are always amazing to see, and we're excited about the opportunities where AI can unleash the power of data to deliver value for our customers. I'm amazed by the improvements AI has made on the safety, efficiency and sustainability of our customers' operations. The magnitude of AI's impact on the world of physical operations is clear, and Samsara is positioned to be on the forefront of this technological revolution because of 3 unique competitive advantages. First, we continue to amass a massive operational data set -- data asset, approximately 6 trillion data points flow annually into our Connected Operations Cloud, and it continues to grow in size and sophistication. The combination of diverse assets and data types across different industries, geographies and customer sizes, makes our data asset truly unique. This allows us to train powerful AI models to unlock valuable insights for our customers. Second, we've invested in the infrastructure to rapidly deliver AI features. We've built capabilities to capture and curate structured and unstructured data, train and evaluate models and operate across tens of thousands of customers, both in our cloud and at the edge with IoT devices. And third, our product innovation is powered by incredible customer feedback loop. This allows us to identify our customers' most critical domain specific problems, capture ground truth data and partner with them to test, validate and ultimately deliver AI-powered solutions on our platform. We are also using data-driven insights to help our customers with their ESG goals. Focusing on the S in ESG for social impact is again all about safety. A top priority for our customers is getting their employees home each day to their families, especially as many work in dangerous physical environments. One of our customers, Liberty Energy, is a great example of this. Liberty is a leading North American oilfield services company. They use Samsara's Video-Based Safety for proactive driver coaching and to get enhanced visibility in the cab, which they feature in their most recent ESG report. They put millions of miles on their fleet of vehicles each year, making driving the highest risk activity they undertake. By using Samsara, Liberty realized a 50% reduction in vehicle accidents and saved $0.5 million in incident-related costs. Let's now turn to the E in ESG for environmental. Our customers are faced with the growing demand from their end customers, investors, employees and policymakers to have more sustainable operations. Lanes Group is a great example of a customer using Samsara to reduce emissions. Lanes is a leading waste water utility solutions provider and the largest independent drainage specialists in the U.K. In their most recent sustainability report, Lanes shared that using Samsara helped to reduce fuel consumption by improving driving behavior for their entire fleet. This allowed them to reduce overall carbon emissions even as their fleet continues to grow. It's also worth mentioning that Lanes adopted Samsara's Video-Based Safety and have decreased the frequency and severity of accidents. They lowered their insurance premiums and reduced the cost of each claim, generating an annual insurance savings of GBP 250,000 per year. We are committed to building a safer and more sustainable world together with our customers and are proud of the progress as we continue on this important journey. Our customer momentum reflects the large market opportunity for digitizing the world of physical operations. As we head into our next chapter of growth, I'm excited to announce Lara Caimi is joining Samsara as our first President of Worldwide Field Operations. She joins us from ServiceNow, where she served as Chief Customer and Partner Officer, and prior to that as the Chief Strategy Officer. I'm excited to welcome Lara to join us in the next phase of growth. I also want to share the news that our Chief Revenue Officer, Andy McCall, will be retiring at the end of the year and is staying on as an adviser until that time to help us with the transition. I've been fortunate to partner with Andy over the last 6 years as he's helped build the sales team at Samsara into a world-class organization. All of us at Samsara wish Andy the best in his well-deserved retirement. It's been another exciting quarter of durable and efficient growth for Samsara, and we are grateful for our partnership with our customers and the impact we're able to make together. I also wanted to thank all of our Samsarians, customers, partners and investors for joining us in making this journey to digitize physical operations possible. We're excited to continue our partnership at our second annual customer conference, Samsara Beyond from June 21 to June 23. I'll now hand it over to Dominic to go over the financial highlights for the quarter.

Thank you, Sanjit. Q1 was highlighted by strong top line growth and continued operating efficiency improvements. Our durable and increasingly efficient growth demonstrates the large and growing opportunity for digital transformation across the world of physical operations. While global economic uncertainty persists, we exceeded our expectations for key top line and profitability metrics for a few key reasons. First, we have a subscription business model that produces highly predictable revenue, and we price subscriptions based on the number of physical assets versus headcount-based pricing, resulting in a lower risk of ACV contraction if our customers hiring slows or contracts. Second, our customers deploy Samsara to generate hard ROI savings and many experienced a quick investment payback period measured in months. And third, we primarily sell into the operations budget, which is generally large and nondiscretionary for our customers. Q1 ending ARR was $856 million, growing 41% year-over-year. Within this, we added $61 million of net new ARR, representing 24% year-over-year growth or 4 percentage points of year-over-year growth acceleration at a larger scale. Additionally, Q1 revenue was $204 million, growing 43% year-over-year. Several factors drove our strong top line performance in Q1. First, we continue to focus on serving large physical operations customers. We now have 1,375 $100,000-plus ARR customers, a record quarterly increase of 138 or 53% year-over-year growth. Our investments in serving the largest physical operations companies in the world continue to pay off. $100,000-plus ARR customers represent our fastest-growing cohort and make up 49% of total ARR, up from just 45% 1 year ago. Second, this was a strong customer expansion quarter. 60% of Q1 net new ACV came from expansions to existing customers, our highest quarterly mix ever and up from 51% in Q1 last year. 8 of our top 10 net new ACV deals in Q1 were customer expansions including a large $1 million-plus expansion to a leading national distributor of aftermarket automotive replacement parts. Three years ago, this customer landed with Video-Based Safety and telematics for just their heavy-duty vehicles which make up less than 5% of their entire fleet. And in Q1, the customer adopted Samsara across their entire light-duty fleet as well to improve driver behavior, reduce accidents and lower insurance costs. And third, while our core business drove most of our Q1 performance, we executed well across several new frontiers. For example, 15% of Q1 net new ACV came from non-vehicle applications, primarily from strength in equipment monitoring, which ended the quarter at approximately $100 million of ARR. Additionally, a record 17% of Q1 net new ACV came from non-U.S. customers, including a top 10 expansion for one of Canada's largest grocery retailers. And lastly, 83% of Q1 net new ACV came from non-transportation customers with particular strength in utilities, energy, field services, construction and public sector. In addition to delivering strong top line growth, we continue to focus on driving operating efficiency improvements across our business as we scale. Q1 gross margin was 73%, approximately flat from Q1 FY '23, and our gross margin has remained above 70% for 11 consecutive quarters. Q1 operating margin was negative 9% compared to negative 18% in Q1 of FY '23, an improvement of 50% or approximately 9 percentage points year-over-year, driven by leverage across all functions. This is our 12th consecutive quarter of improving both operating margins and operating profit year-over-year. In Q1, adjusted free cash flow margin was negative 1% compared to negative 36% in Q1 FY '23, an annual improved 35 percentage points or $49 million, primarily from improved operating leverage and continued working capital improvements. Efficient growth continues to be a priority as demonstrated by a 42% Rule of 40, our third consecutive 40%-plus Rule of 40 quarter. While we're pleased with this accomplishment, our goal is to continue making the necessary improvements that would allow us to achieve Rule of 40 consistently on a quarterly and annual basis. Okay. Now turning to guidance. For Q2 FY '24, we expect total revenue to be between $206 million and $208 million, representing between 34% and 35% year-over-year growth. Operating margin to be approximately negative 9% and EPS to be between negative $0.03 and negative $0.02, assuming 532 million weighted average shares outstanding. Based on our Q1 results and improved outlook for the remainder of FY '24, we're raising our full year revenue guidance to be between $866 million and $874 million or between 33% and 34% year-over-year growth. In addition to increasing our top line guidance, we continue to focus on operating efficiency improvements. As a result, we're also improving our full year operating margin guidance to negative 5% or an implied FY '24 operating income improvement of $16 million at the midpoint of guidance. And we expect EPS to be between negative $0.02 and $0.00, assuming 535 million weighted average shares outstanding for the full year. And finally, we included a few additional modeling notes in our shareholder letter. So to wrap up, we are very pleased with our first quarter of FY '24. We are digitizing the world of physical operations and helping our customers become safer, more efficient and more sustainable. We continue to be committed to driving durable growth, while also achieving operating efficiency improvements on our path to profitability. And with that, I'll hand it over to Mike to moderate Q&A.

Thank you, Dominic. We will now open the line up for questions. [Operator Instructions]. The first question today comes from Matt Pfau with William Blair, followed by Matt Hedberg with RBC.

I wanted to just ask the really strong first quarter. Anything that was, I guess, non-normal in the quarter? And on the demand environment, it seems like it's holding up quite well, but any change there from the fourth quarter that you saw?

Matt, it's Dominic. I would say nothing really stands out as being unusual with Q1. Again, really strong customer demand. I think the hard and fast ROI and the early innings of digital transformation and physical operations really continue to drive strong customer demand. I would say that the buying environment is similar to kind of what we started to call it in the middle of last year, and that persisted into Q1. We're seeing really strong pipeline and conversion of the pipeline but the sales cycles remain a little bit more elongated than they were historically, customers wanting to do longer trials, wanting to really nail down the ROI analysis, running approvals higher up into the organization, but nothing that stands out terribly different than what we saw in Q4.

Our next question comes from Matt Hedberg with RBC followed by Alex

[Indiscernible] from RBC filling in for Matt Hedberg. So looks like a nice hire here with Lara. I'm going to see Andy staying on through year-end. Any more color around the change there? Why now? Is it just getting the right fit to scale to the next level?

That's exactly right. This is Sanjit by the way. We were excited to find Lara. We ran a search for several months. Andy you let us know well in advance about his plans to retire. And so we were able to run extensive search. What we love about Lara's background, she's been very customer-facing in her time at ServiceNow. She started out as a Chief Strategy Officer. She's later the Chief Customer Officer. She also saw them scale from roughly $1.5 million -- $1.5 billion -- sorry, $1.5 billion in ARR to over $7 billion. and so as we prepare for this next chapter of growth for Samsara, we thought she'd be a great asset to bring into the team.

I would just add one additional point on that. I think it's important to note that all of the senior leaders in the sales organization that are going to report into Lara in this role are folks that have been with the company for many years, some more than 5 years. And so we have a lot of continuity across all of the individual go-to-market functions that are going to report on to Lara.

Great. And then I appreciate the additional color around equipment monitoring ARR at $100 million. Nice to see that. Any more details there, growth rates, traction, et cetera? And then maybe anything else from a product perspective, this quarter to point out beyond those core safety and telematics products?

Nothing really to call out of it, and it's been continued progress on equipment monitoring. So that's now our third product category that's at or more than $100 million. I think we'll share a little bit more detail at our Investor Day coming up in a few weeks. But suffice it to say that equipment monitoring has been growing quite quickly, but we're seeing really good growth, frankly, across all of our different product categories.

Our next question comes from Alex

Can you guys hear me okay?

Yes...

Yes.

So I mean, look, a truly astounding performance in what is a tough macro where you're accelerating growth at scale, more large customers, more expansion on a year-over-year basis from existing customers. I guess is -- are you seeing something -- is there a new dynamic or trend developing? Obviously, sales cycles are still challenged, particularly on the larger side. But it's unusual, I would say, to see acceleration at the scale. So is it that you've hired a lot of reps over the course of last year that are starting to ramp? Is it something in the packaging and pricing that's coming to bear? Is it some new geography that you've opened up like? What's the story that you feel like is kind of driving this acceleration?

Alex, it's Dominic. So I think the real drivers are -- I would say there are some external factors and that really is -- it's just -- it was a very strong customer demand quarter in Q1, and we've seen that in the most recent quarters as well. And I think going back to my original point, we're selling into a little bit of a different budget here. We're selling into the operations budget for our customers, which tends to be pretty large, less discretionary than maybe some other budget categories. And customers are able to save money and drive really strong and hard ROI, and they're able to pay back their investment very quickly. And so in a challenging macroeconomic environment that has continued to play well. In terms of what drove the performance, I would say it was more tied to strong productivity. We called out it was a really strong large customer quarter, a record number of $100,000-plus customer adds at 138. It was a really strong expansion quarter. The new frontiers performed well. And so I would frame it more as strong productivity than a bunch of additional fully ramped sales capacity added.

Perfect. And then maybe just a follow-up Sanjit because we've already gone 3 questions and generative AI has not been mentioned. So in the spirit of keeping that going, I guess, if you mentioned how strong of a data asset you're gathering in the platform, 1 data model. As you look at evolving, particularly with the -- Lara coming on. As you look at the evolving product packaging and just general go-to-market, how important, how realistic is it to assume that there's some incremental monetization opportunities from kind of mobilizing some sort of generative AI functionality inside the product?

Sure. So Alex, AI is something we've been investing in now for several years. I think we really got into it about 5 years ago as we introduced our safety product, and it really was a breakthrough for us in terms of value for the customer. All of a sudden, they could go from not having to watch hours or hundreds of hours of video footage being able to surface safety incidents in their inbox and then coach their drivers and reduce their risk. So that showed us the power of AI. I would say generative is a new tool in the toolbox when it comes to AI, and we're continuing to invest there. As far as incremental monetization, we first think about how do we create a lot of value for our customers. And we run our customer feedback loop. We try to figure out what's useful to them, and that's where we invest. And then it comes down to how do we want to price and package it. We don't have any specific announcements to make today, but it is something we're looking at. And Jeff Hausman, who joined us last year as our Chief Product Officer, is very much looking at this to figure out how do we best align with the problems that our customers are trying to solve and then price and package appropriately.

Our next question comes from Kash Rangan with Goldman Sachs, followed by Sterling Auty with MoffettNathanson.

This on for Kash. I want to echo what Alex said around the quarter really, really strong quarter. Good to see. A couple of quick questions. The presentation noted that 83% of the net new ACV was from non-transportation customers. Was this due to more of a focus on those other verticals? Or was this due to the current weakness that's being seen in the transportation industry as a whole?

I think this is a trend that we've seen for a while now. I think we've called out in previous investor presentations. And if you look at it just on an overall ARR basis, the transportation segment is in the kind of low 20s percent. So this was even lower than that. And I think it just goes to the breadth and the horizontal nature of our platform, that this is really a solution set that's addressing many of the physical operations industries, and I think that, that's sometimes misunderstood by investors. And so we just wanted to make sure that we called out that we're really seeing strength across many of these other end markets more so.

Awesome. Okay. Good to hear. And then one more for me is reading through some of the transcripts from like J.B. Hunt and Werner, they both noted that they've had some pretty strong headwinds from insurance claims the last couple of quarters. So has that maybe altered the current selling motion to focus more on the money that can be saved with Video-Based Safety solutions and the benefits they might get from reduced insurance premiums there? Has there been any updates around that or adjustments to selling motions given that?

That's been a core part of our value proposition with the Video-Based Safety product for some time as exoneration, many times our customers get accused of accidents that they did not -- they were not involved with. And then also just being able to coach their drivers to reduce risk. So that's something that we've been selling into for a couple of years. And I think the examples you mentioned just highlight how valuable it is. And the cost is, by the way, can be hundreds of thousands or even millions of dollars. So it really is a significant source of ROI for our customers.

Our next question comes from Sterling Auty with MoffettNathanson, followed by Chris Quintero with Morgan Stanley.

I also want to go back to the idea of AI. And I think you alluded to the possibility of solutions that are more tailored to an industry. So kind of a vertical solution. What I'm wondering is does that suggest that Samsara will actually start to develop industry-specific specialized solutions built on AI? And if that's the case, what kind of time line should we think about before seeing something like that in the marketplace?

So Sterling, as Dominic mentioned earlier, we serve a pretty broad set of industries, and we try to find the kind of 80%, 90% commonality. I wouldn't expect us to have verticalized solutions by industry. In terms of how we're using AI, we are trying to find deeper insights in that data and again, save our customers' time, make it easier to get business value from this data and incorporate it into a bunch of other systems. So the way we think about highly specialized vertical software is to partner. We have over 230 partner integrations on our App Marketplace now. Our large customers use more than 6 of them. And that's a strategy that's worked really well for us. So it's very complementary. But our investment in AI is going to be a bit more across the board as opposed to any specific vertical industry.

That makes sense. And then, Dominic, one for you. You talked about pipeline. Just kind of curious, can you qualitatively just describe to us, what's happened to kind of pipeline coverage ratios over the last several quarters as you're kind of managing through these elongated sales cycles?

I think the pipeline coverage is held up relatively well and kind of in line with the historical trends. So we're not, again, necessarily seeing a big change in the overall pipeline coverage. And frankly, the conversion of that pipeline. The commentary, starting, I think, back in Q2 of last year was really more tied to the sales cycle length. And I think we've continued to do a very good job of building pipeline and converting that to drive the strong bookings numbers.

Our next question comes from Chris Quintero with Morgan Stanley, followed by Kirk Materne with Evercore.

This is Chris Quintero on for Keith. Congrats on another quarter, a strong results here. Following on the theme of asking about AI. I want to ask about your pricing model of charging based on a number of devices versus seats like a lot of software does. So kind of two-parter question. One, what are you seeing in terms of customers wanting to add more devices? And two, what do you think this means about your opportunity with AI given the kind of Q part of the P x Q equation is not as negatively affected?

Yes. I think we're seeing -- generally, when customers are expanding, a larger portion of the expansion is coming from phased rollouts to customers that are taking products that they already have and rolling that out to a broader number of assets. And in often cases, that can be more vehicles. And so we're seeing customers continue to grow and to expand in an environment where there's maybe a shortage of an ability to get certain assets and things like vehicles, being able to use our technology to optimize our utilization or extend the life of some of these assets has really also resonated with customers.

And if I can just add a little bit on that. Our customers really do think about their business in terms of their assets. So it's not so much seats and users, it's the assets. And then what we're doing is adding value through all the software, through all this data. So over time, we want to be more valuable to the customer per asset.

Excellent. And then Dominic, last quarter, you talked about how Q1 net new ARR should be seasonally weaker than previous years due to more of those kind of enterprise engagements, but actually came in better. So I want to better understand the dynamics there and if that changes your view on seasonality for the rest of the year.

Yes. Again, it was a strong Q1, I think, again, due to some of the external factors, the strong customer demand. And then we really did have strong internal productivity performance. And so I think that we feel that the seasonality should probably look like it has in previous years, though I think we recognize that there is a lot of macro uncertainty in front of us. And we did add a lot of hiring and sales capacity in FY '23 and so understanding how that sales capacity ramps and how productive it is as it becomes fully ramped, I think are things that we're watching out for in the back half of the year. But we're pleased with the Q1 results and the expected linearity for the rest of the year.

Our next question comes from Kirk Materne with Evercore followed by Derrick Wood with Cowen.

I'll echo, congrats on a nice quarter. I guess, Sanjit, just to start, I was curious if you could just talk about how you think about building out your own sort of application solutions on your data estate as data becomes a more essential element of AI. I was just kind of curious if that changes your thinking on what you all might want to do versus handing it over to partners in the App Marketplace. Can you just talk about that a little bit?

Sure. So you put your finger on it, which is the data is the most valuable part here. We are collecting an enormous amount of data. We talked about the 6 trillion data points. And it's not just GPS, it's not just video, but it's all kind of additional kind of business relevant data for our customers. The way we think about applications is really through the lens of what drives value for our customers, and that's how we've thought about pricing and packaging. Over time, if there are opportunities, if there are commonalities in other words, that many of our customers and prospects are asking us for, we would go there, again, kind of applying that 80/20 philosophy. But for now, we see a tremendous opportunity with the core apps that we offer today. So we're going to stay focused, but keep our ears open for additional expansion opportunities.

That's helpful. And maybe just one for Dominic. Dominic, you talked about expansion on the quarter. Was the expansion mainly just more assets getting covered? Or was it more products? I assume it's always a mix of both, but did it, I guess, ebb or flow one way or the other this quarter in a bigger way. The example you gave was obviously expanding sort of the asset base that's working with you all. Just curious if the product side of it was strong as well on the expand side.

Yes, it was. I mean it is a mix of both rollouts of the product across more assets as well as cross-sells of additional products. That happens every quarter. And the trend and the mix was similar in Q1 as previous quarters. It does skew more towards phased rollouts and an expansion upsell versus cross-sell, but we did see a healthy mix of both.

Our next question comes from Derrick Wood with Cowen followed by Michael Turrin with Wells Fargo.

Great. I hope you guys can hear me okay. I just wanted to ask about the hiring of a new head of field operations as you look to scale them to the next level. Is there anything you want to highlight in terms of potential go-to-market tweaks that you'd be looking at over the next few quarters?

I don't think at this point, again, this is just something that we're announcing today. And we've got a machine that's working really, really well. And I think we're really proud of the execution over our first now 6 quarters as a public company. And so I wouldn't expect any large and significant changes. We've got a solution that's working really well right now. And Lara will come in and kind of get up to speed and start evaluating and talking to customers. And obviously, we've got Andy on board through the rest of the year to help us with this transition.

Great. And given that Europe is such a big part of the TAM out there and you guys had a record percentage of new ACV from non-U.S. customers, it would be great to just hear about investments in Western Europe or even Canada, how they're tracking, what demand is like and how you're thinking about these international regions helping to contribute to incremental growth in the medium term?

Yes. I would just call it like we are seeing really good success in all of our international markets of Canada, Mexico and Western Europe, a record 17% of net new ACV coming outside of the U.S. I think we recognize that these markets are -- Western Europe, for example, is a larger market opportunity than the U.S., just in terms of the number of physical operations assets. And so our core business in the U.S. continues to be the biggest driver of growth and productivity. But we're definitely investing internationally, and you're seeing the higher growth leading to more net new ACV mix coming outside of the U.S. as well.

Our next question comes from Michael Turrin with Wells Fargo, followed by Jim Fish with Piper Sandler.

Okay. Great. Just on a similar line from some of the prior questions, Q1, especially strong to start the year, the customer expansion activity and the mix also stands out. So just any additional commentary you can add to help us square what drove stronger expansion, especially into Q1, if there's anything from a go-to-market or product side you put in place? Or just any other observations around what's working there and how you might expect that mix between that and expansion to trend going forward?

No. I think that our primary goal is to grow ARR as fast as we can, and we don't necessarily run the business to specifically go after new logos versus expansions. If you recall from Q4, it was a really strong new logo quarter and outpaced expansions and in this quarter kind of flips back the other way. New logos were still really strong in terms of the overall number of logos added in the average deal size for new customers. It's just that expansions were stronger. There was no kind of changes to go-to-market or incentives or any of the kind of sales playbook to accomplish that. And we've seen that kind of flip back and forth.

Great to have that interplay at your disposal. Just if you can remind us, Dominic, the delta between operating margin and free cash flow margin, if there's a thumbnail on what that's mainly a function of and you have some commentary around how you're expecting that to trend longer term in the letter. If you could just kind of spell that out well for us as well, it's helpful.

Yes. I mean I think the biggest driver is obviously the working capital dynamics. And if you -- I mean, you go back a year ago, I think free cash flow was like 18 percentage points below operating margin, and that was really driven by the challenges in the global supply chain. And now I think in this quarter, we were 8 percentage points better on free cash flow than operating margin. So it's clearly flipped back the other way. And the biggest driver in the difference is the working capital optimization, and we had a really strong collections quarter, and we continue to see improvements in supply chain and hardware availability. I expect these things to move relatively in line with each other. In Q1, we were a little bit better on working capital. But as you're thinking about it going forward, I think within plus or minus 5% of each other, but kind of moving together is what I would expect.

Our next question comes from Jim Fish with Piper Sandler, followed by Junaid at Truist.

Thanks for the question. Nice quarter. Really wanted to go about the expansion here going back to the prior couple of questions ago. Obviously, you guys have talked about that particularly strong. It kind of implies that NRR possibly uptick here. And I know Dominic, last quarter, we talked about that you expected net retention rates to be a little bit lower than where we were last fiscal year, and I get it's only 1 quarter, but does this quarter -- is this a quarter changing view on that, that we could actually see retention rates finish similar to where we were last year just given the strength and expansion you're seeing right now on your installed base?

I would just -- we really at the beginning of each year, we're setting out a target for the year in terms of what we expect our net retention rate to be. And in Q1, we were above it. In quarters where more net new ACV comes from expansions, it definitely helps on the net retention side. And yes, we were above our target for Q1, and we feel good about being able to stay above that for the rest of the year.

Makes sense. And then on the productivity side, again, it sounds like you're extremely happy with where you're at. Is there -- are you guys disclosing where overall head count is? I know you don't want to give quota reps, but where are we at with total head count at this point? And how are you thinking about the hiring environment with the upside you're seeing right now, the pipeline strength kind of balanced against kind of the macro in other spaces at this point that you're not really seeing hit you guys at this point?

Yes. I think what we've shared is we grew overall head count approximately 40% last year in FY '23 and the growth rate will be lower in FY '24, and we're kind of on track for our targets through Q1. Hiring environment remains good. I think overall, new hires in our attrition rate and frankly, employee sentiment and all of those things are working really well right now, frankly, probably as good as we've ever seen. And so a lot of good hiring momentum right now.

Our last question today comes from Junaid with Truist.

This is Junaid Siddiqui from Truist. You've done an excellent job adding large customers to the platform. But as you attract more of these large customers, is there a fear that these elongated sales cycles will become more of a headwind going forward than in the past?

I don't think so. I think we have a number of large customers where we're able to convert them in months, maybe in a couple of quarters, and we have some large customers where it could be a multiyear sales cycle. And it's been pretty consistent over the last few quarters. We did again see it elevate kind of in the middle of last year. But across the board, across all customer segments, it's been pretty consistent over the last few quarters. And I think we're always going to have some quick converts, and we'll likely always have some elongated sales cycles. But it's something that we're definitely monitoring just given the overall economic volatility.