ServiceNow Inc (NOW) — Q1 2024 Earnings Call Transcript

Good afternoon, and thank you for joining ServiceNow's First Quarter 2024 Earnings Conference Call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer; Gina Mastantuono, our Chief Financial Officer; and CJ Desai, our President and Chief Operating Officer. During today's call, we will review our first quarter 2024 results and discuss our guidance for the second quarter and full year 2024. Before we get started, we want to emphasize that the information discussed on this call, including our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2023 10-K for factors that may cause actual results to differ materially from our forward-looking statements. We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill.

Thank you very much, Darren, and thank you, everyone, for joining today's call. ServiceNow's first quarter results were outstanding. We once again outperformed our guidance across all top line and profitability metrics. Subscription revenue grew by 24.5% year-over-year in constant currency. That's approximately 50 basis points above the high end of our guidance. CRPO grew 21% year-over-year in constant currency, 100 basis points above our guidance. Operating margin was over 30%, 150 basis points above our guidance. Even as Q1 is not traditionally a large quarter, we had 8 deals over $5 million in net new ACV, a 100% increase year-over-year. Four deals were over $10 million, which is a 300% increase year-over-year. ServiceNow is strengthening its position as the AI platform for business transformation. This is fueling strong performances for each of our key businesses. ITSM and ITOM were each in 16 of the top 20 deals. Security and risk, combined, were in 11 of the top 20. Customer creator and employee workflows were in 10 of the top 20 deals. GenAI adoption remained on a tear in Q1. Companies are leaning into GenAI as a powerful deflationary force to drive productivity. That's why NNACV for Pro Plus is record-breaking. In fact, it's the fastest selling offering in the company's history. Iconic brands are adopting ServiceNow's Now Assist AI as a standard for their GenAI road maps. This quarter, we expanded our long-standing partnership with Microsoft to include new generative AI capabilities while also integrating Now Assist AI and Copilot into employee experiences. Really exciting. Hitachi Energy is using case summarization with Now Assist for ITSM to resolve cases faster, saving millions. Equinix is deploying Now Assist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow and IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM's employees, customers and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies in IT service management helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional GenAI customer successes and a detailed road map at our Financial Analyst Day on May 6 in Las Vegas. From an industry perspective, the public sector continues to excel globally. Major transactions in Q1 included the government of Australia's health department and the government of Italy's IT division, Sogei; the government of Sao Paulo Motor Vehicle Department created an app on ServiceNow to give customers, in that case, citizens, a fast, transparent digital experience that handles requests in minutes. Our global footprint is booming. We're seeing a vast expansion in our most important geographies. This quarter, our Japan team signed the largest NNACV deal in its history. Novartis in Switzerland is implementing ServiceNow GenAI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow's single data model along with other partners to scale its IT services across the Middle East while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs. Suzuki, Tokyo Gas iNet, CAN Systems are all top deals signed in Q1. And this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about the geopolitics and economic policies among other things. ServiceNow's philosophy is simple. We focus on the things we can control, building great products, delivering great service for our customers and forging a winning culture where people can do the best work of their careers. And that's why we perform well when some others don't. It's also why our guidance, as you'll hear from Gina, remains ever strong. Let's talk about the demand environment for enterprise software. AI is not simply a fast-maturing technology. AI is a catalyst for business transformation. When I speak to CEOs all over the world, they recognize this is a change moment. Over the past 15 years, enterprises have experienced a massive decentralization of technology governance. As every department became an IT buyer, the result was too many systems, too many apps, low data quality and high vulnerability to cybersecurity risk. Here's the key. Those decisions have been made. Even as CEOs want to consolidate onto strategic platforms for the long term, they also don't want to delay the potential of net new innovation in the short term. They want to derisk the past while getting immediate business value from AI. Process optimization is the #1 GenAI use case in the global economy today. This is why ServiceNow's strategic relevance as the AI platform for business transformation has never been higher. Every business workflow in every enterprise will be engineered with GenAI at its core. We are the single pane of glass that enables end-to-end digital transformation. At ServiceNow, we pride ourselves on being the living embodiment of an AI-run company through our Now on Now strategy. Every week that passes, the impact of our own Now on Now AI deployments continues to grow. GenAI deflection rates have doubled for both our employees and customers, and they are improving each and every month. Software engineers are accepting 48% of text-to-code generation. These are meaningful productivity improvements, and it's only the beginning. That's why IDC estimates an $11 trillion impact from AI in the next 3 years. It's also why businesses will spend more than $0.5 trillion on GenAI in 2027, according to IDC. So contrary to some opinions out there, we are witnessing the biggest enterprise software market opportunity in a generation. Business leaders are waking up to the fact that they have a fresh choice now. They can radically simplify the tech stack. We are entering a new frontier. We are in a race to put AI to work for people, and that's a race ServiceNow intends to win for our customers. There's a lot happening at ServiceNow that only heightens our optimism for the remainder of this year and beyond. Our recent Washington, D.C. platform release included very exciting new features for our customers. Now Assist AI for ITOM AIOps supercharges ServiceNow's market-leading solution, applying generative AI to speed up issue resolution. Sales and order management unites the sales order life cycles across the front, middle and back office teams on the ServiceNow platform. ServiceNow is also staying at the forefront of building innovative enterprise GenAI applications. As one example, Now Assist AI for Telecommunications Service Management, what we call TSM, which also uses NVIDIA AI, will boost agent productivity and build on our great partnership. It's also worth noting the ServiceNow research team is stacked with world-renowned AI experts helping our customers stay on the cutting edge. We're expanding our ecosystem capacity to meet growing customer demand. One example is our investment in platformation, a global IT consultancy and leading ServiceNow implementation partner, to enhance expertise and generative AI-enabled technology. And anyone who'd like to get the full story, I warmly invite you to join us for Knowledge 2024 in Las Vegas on May 7. In closing, I'll end how I began, the company is in a market-leading position. We have the product recognition from the industry analysts. All of them were showing up on all of the most admired company lists, and we're moving up the ranks every year. Those things are always encouraging, and we're proud of it all. But the biggest indication I can give you is qualitative. It's how our team feels about what we're doing together. This culture is different. It's rooted in ServiceNow's earliest days as a customer-obsessed company. We are ever-hungry, ever-humble. So when I'm told that over 1 million people applied to join us last year, I'm not surprised. When you have a galvanizing ambition to become the defining enterprise software company in the 21st century, people want to be a part of that. They recognize this is about more than technology. This is about helping people to know more, care more and do more. We'll continue on this mission in Q2. I'd like to thank all of you for the trust that you've invested in ServiceNow. We're going to keep working hard for you, and we're going to keep striving to honor our brand promise. The world works with ServiceNow. I'll now hand things over to our outstanding CFO, Gina Mastantuono. Gina, over to you.

Thank you, Bill. Q1 set a strong precedent for the year ahead. Building on the momentum from Q4, our team delivered another exceptional outperformance. We surpassed all of our top line and profitability guidance metrics for the quarter. With GenAI conversations serving as a digital transformation catalyst, we see that momentum carrying into Q2. Turning to our results. In Q1, subscription revenues were $2.523 billion, growing 24.5% year-over-year in constant currency, exceeding the high end of our guidance range by approximately 50 basis points. RPO ended the quarter at approximately $17.7 billion, representing 27% year-over-year constant currency growth. We continue to see average contract terms increase year-over-year as the strategic importance of the Now platform has driven longer duration deals. Current RPO was $8.45 billion, representing 21% year-over-year constant currency growth, a 100 basis point beat versus our guidance. From an industry perspective, technology, media, and telecom was extremely robust, growing net new ACV over 100% year-over-year. Education had a fantastic quarter, growing nearly 50% year-over-year. Transportation and Logistics, Business and Consumer Services, and Retail and Hospitality also saw strength. Our renewal rate was a best-in-class 98% as the Now platform remains a strategic imperative for our customers' operations. We closed 59 deals greater than $1 million in net new ACV in the quarter, with 4 deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continues to drive more multiproduct deals as 15 of our top 20 deals included 7 or more products. We now have 1,933 customers paying us over $1 million in ACV. Additionally, the number of customers paying us $20 million or more grew over 50% year-over-year. In Q1, our GenAI products continue to see very healthy adoption. As Bill mentioned, our Pro Plus net new ACV to date continued the trend ahead of any new product family launched for the comparable period. Our GenAI products were in 7 of our top 10 deals, and we closed 7 deals over $1 million in ACV in the quarter, including wins at a second Wall Street bank, a leading cybersecurity firm, and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability, non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, OpEx efficiencies, and our top line outperformance. Our free cash flow margin was 47%, up 12 points year-over-year. We ended the quarter with a robust balance sheet, including $8.8 billion in cash and investments. In Q1, we bought back 225,000 shares as part of our share repurchase program, with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $787 million remaining of the original $1.5 billion authorization. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our guidance. In Q1, we initiated a program to hedge a portion of our foreign currency denominated revenues. The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incremental strengthening of the U.S. dollar has still resulted in FX headwinds compared to our previous guidance. Given our Q1 outperformance, we are raising our 2024 top line outlook to more than offset those moves. For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX. This raises a net increase of $3 million on a narrowed range of $10.560 billion to $10.575 billion, representing 21.5% to 22% year-over-year growth or 21.5% on a constant currency basis. We continue to expect subscription gross margin of 84.5%, operating margin of 29%, and free cash flow margin of 31%. Finally, we expect GAAP diluted weighted average outstanding shares of 208 million. For Q2, we expect subscription revenues between $2.525 billion and $2.530 billion, representing 21.5% to 22% year-over-year growth or 22% on a constant currency basis. We expect cRPO growth of 20.5%, both on a reported and constant currency basis. We expect an operating margin of 25%. Finally, we expect 208 million GAAP diluted weighted average outstanding shares for the quarter. In summary, Q1 was a great start to what we expect to be another tremendous year. Organizations are under more pressure than ever to maximize the benefits of their technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify. GenAI is only as powerful as the platform it's built on. The Now platform gives us deep insights with the remarkable ability to tailor AI outputs to the specific needs of our customers. Business users need AI to power actions across the enterprise. Our workflows are designed to do just that, delivering complete solutions to supercharge experiences, creating extraordinary value. You'll hear more about these experiences, our strategy, and long-term opportunities at our upcoming Investor Day on May 6, which will be webcast on our Investor Relations website. Finally, before moving on to Q&A, I want to thank all of our employees worldwide for helping make ServiceNow one of the Fortune 100 Best Places to Work yet again in 2024. ServiceNow's greatest asset is its people, and you all continue to make us, ServiceNow strong. Bill and I couldn't be prouder of this incredible team. With that, I'll open it up for Q&A.

First earnings report and software for the year, Bill, it's great to see the optimism. My question about AI is regarding when it will be more widely adopted, particularly in terms of sales cycles. Despite the challenging economic climate, can this lead to attracting more potential clients due to cost savings? Additionally, for Gina, I noticed it's still early in the year regarding cRPO and RPO, which seem to reflect some seasonality. Could you provide insight into what to expect for the rest of the year? Congratulations.

Thank you very much for the question, Kash. As I said, process optimization is the single biggest GenAI use case in the enterprise. Any process that exists in the enterprise today will be reengineered or engineered depending on how messy the process is with GenAI. Every workflow in every enterprise will be rethought. Just think about the sales process, for example, and the whole order to cash process, or think about employees and onboarding and training them and providing all the services to them. Think about agent productivity, which is something that we're obviously moving very quickly on where you can bypass the systems that don't integrate very well. Instead of having customers on hold or saying, 'I'll get back to you tomorrow,' you have real-time data where most of the cases are deflected by the virtual agent. If an agent is involved, they have the option of choice A or B, which one is more pleasing to the customer. Okay, you like B, you got B. And the case is closed. Think about managing complex cases across an enterprise where all those screens are open, and data is being processed instead of having spreadsheets and workarounds and emails and texts. Now you have everything done on one platform with full case information and case closure. From running a business in every department to building software, as I said, with the breakthrough on natural language tech turning into code, every single enterprise will run completely differently because of GenAI and our clean sheet platform.

Yes. And Kash, on your question around seasonality about the cRPO. So first and foremost, I'm really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold: one, strong net new ACV growth as well as higher early renewals. From a seasonality perspective, you'll remember, we talked about the Fed duration. So Q2 is slightly more impacted before it pops up again in Q3. We feel good about the trends that we're seeing. Again, we continue to be prudent in our guidance around early renewals, although we are seeing them stronger than we saw last year. From a guidance perspective and forecast perspective, we're continuing to be prudent there.

Bill and Gina, maybe even CJ. I wonder if you could just comment on the environment that you're seeing. I think in prior quarters, you've described it as after a pretty rough stretch, it started to stabilize in Q3 and stayed stable in Q4. Is that still the case in Q1? Were there one or two verticals that maybe lagged? Maybe some of the puts and takes about how the environment broadly felt.

So I would say, Karl, I would start first is the environment, and we shared this in January, Bill, Gina and I, remains pretty much the same from our perspective. What we mean by that is it's not 2021, specifically. It still takes many approvals and all the things that we discussed from a sales perspective in trying to get business validation done or a purchase being made. Pretty much, I would say that's a standard across industries and geographies. We are absolutely executing well within that environment given our promise of efficiency and automation, which resonates well, combined with our in-platform generative AI, which also resonates well because that is an accelerant to the productivity enhancements that an organization can make. So whether it's Wall Street banks, life sciences corporations, or governments, that story of automation, digital productivity enhancements via GenAI is resonating and helping us, despite the environment continuing to be the same.

I would just build on that, Karl, for your benefit on the budgets themselves. The budgets are going up. What I definitely see is the preference for GenAI now. I think we're ending one era in the enterprise and have begun another. We're entering a new frontier now where GenAI has opened up the eyes of the customer to say, there might be a different way of doing this. And that's creating real opportunity for us. CJ has it exactly right on the value-based economy, but I also see the budgets going up in IT and GenAI becoming more of a business imperative. If you can increase productivity, take costs out, and show that in a value case, the money will be spent, maybe different people approving it, but the money will still be spent. I also want to acknowledge some really great partnerships that we've achieved with Microsoft and IBM and NVIDIA. I look at great companies like Novartis rethinking the whole pharmaceutical process altogether with GenAI. There's so much goodness going on in this market. I feel that you're coming off a strong Q4 to have a great print like this in Q1 with the momentum going into knowledge. I don't think I've ever felt this good in the 5 years I've been here than I do right now during this call.

Bill, given your comments on Pro Plus net new ACV growth, are you seeing faster Pro Plus deal cycles relative to what you saw when the Pro was first launched? And is there anything you need to call out from a discounting perspective on Pro Plus relative to maybe some of your initial expectations?

Yes, Matt, I'll take that one. We are absolutely seeing faster Pro Plus adoption versus Pro. It's 2 quarters out, right? So it's early days, but we feel really good about the adoption curve. We've been talking about whether that adoption curve would be faster. We've posited that it would be, and that's certainly proving out to be the case. However, it’s early days. With respect to discounting versus initial expectations, we feel really good about the realized pricing, which has been very much in line with our initial expectations. We'll talk a lot more as you would expect at Investor Day about the overall GenAI opportunity for ServiceNow as well as where we are to date. But we feel very good about what we're seeing in the markets. Customers are leaning in. We talked about 7 deals in the top 10 that had GenAI in them, and significant deals over $1 million as well. So we're definitely seeing monetization happening already.

A question for Gina, please. Real nice results on RPO. I think this is the second quarter since we've seen significant outperformance there versus cRPO. Just curious what's driving that. And does it give you some visibility perhaps for cRPO to ramp from here given a potential ramping component in there?

Yes, it's a great point, and I did call that out. So RPO growth was 27% year-over-year in constant currency, which is a 300 basis points improvement versus last year. Yes, that is our longer-term backlog. So as you think more long term about the opportunity in ServiceNow, I couldn't be more excited about that. We are seeing the average duration growing. In fact, duration this Q1 is the largest it's been since Q1 of 2019. I feel really good about what that means for the mid- and long-term opportunity here for sure.

Bill, I wanted to ask a little bit about GenAI adoption within ServiceNow, you mentioned Now on Now, but in terms of just the GenAI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you've kept a pace. How is GenAI adoption changing or not changing your hiring plans more broadly and specifically in the engineering team?

This is CJ. I would say that we absolutely believe, and we have seen that GenAI is helping our software engineers code faster. It helps our software engineers code faster, whether they are junior or senior. They can leverage and continue to leverage generative AI. So I'll start with that, that it is increasing our engineering productivity and varies depending on how senior the engineer is. Number two, it helps us increase our innovation velocity. It’s both ways. Our engineers can innovate faster and customers can increase their workflow faster because of generative AI.

And one thing just to share with you, I expect someday we could do the earnings call where we're all in the same room together, and we'll take you through the living, learning lab of a GenAI-run company here at ServiceNow. Our Chief Information Officer, Chris Bedi, put out a very interesting LinkedIn post. Please take a look at it. Not only is he doing a great job, but if you think about ServiceNow, we have a financial system in ServiceNow, it's a system of record. We have one of them unlike many customers out there that have hundreds. We also have a CRM system and an HR system. But they are feeding the ServiceNow platform. All the data from those systems of record in terms of how we run this company, we run the whole company on ServiceNow. Now we have 20 different GenAI use cases across all the departments of the company.

Yes. I would just add, we are absolutely customer zero, 100% on all of our GenAI use cases. Deflection rates have doubled for both our employees and customers, and they're improving every month. It's really early days. So it's learning faster and faster. Software engineers are accepting 48% of text to code generation. There is the ability to see leverage in our R&D as we look to the mid- and long-term. So thank you for the question.

I have two questions, but I'll ask them as one. First, Gina, I don't know if this is for you or not, but acknowledge that the adoption does seem quite strong for the various GenAI offerings. How would you characterize it? And yet you're pointing to decelerating growth through 2024. What's not growing as well? If GenAI is getting great adoption, probably small dollar contributions. What's not growing as well?

Yes, we'll definitely give you a lot more details on all things GenAI at Investor Day, and that's in a week and a bit. The adoption curve is stronger than we've seen in any new product category launch, but that's starting from zero, right? So it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen. 24.5% revenue growth at the scale at which we are, the larger numbers is pretty incredible. We see continued traction across the board, whether it’s our technology workflows, customer workflows, or our creator workflows as well. Employees had a really strong quarter, customers had a really strong quarter, ITSM core remains healthy in 16 of our top 20 deals. ITOM was included also in 16 of the top 20 deals with 9 deals over $1 million, and security and risk in totality is still doing well. The great thing about having a platform with the breadth that ServiceNow has is that we continue to drive really, really good growth at our scale across the platform.

Yes. The only thing I would add there is every single workflow continues to grow double digits plus. We have no, hey, this has been taken out of x or this been taken out of y besides Gina individually calling out all our growth vectors, whether it's our core, which is ITSM and ITOM, or whether it's our growth from CSM and other products like AppEngine, all of them are continuing to grow very nicely, and they grew very nicely in Q1.

I wanted to ask you how you're seeing the momentum in terms of Standard to Pro migrations. We talked a lot about Pro Plus, but it seems that there's still a huge opportunity in terms of, I think, close to 50% of the installed base on Standard. Have you started to see an acceleration in those migrations? Can you just talk about the opportunity there?

First, I'll use, Tyler, one quick example that I was in a conversation at a bank, a very technical audience in their technology organization. They were still on ITSM Standard. Once they saw what we have done with Pro Plus, they actually bought both Pro and Pro Plus together. That is just amazing that they bought both technologies together, not just saying, 'hey, I'm going to go to Pro and then staircase to Pro Plus.' When I look at Pro and Enterprise in total, excluding Pro Plus on purpose, they grew nicely for ITSM, for CSM, and for our HR Service Delivery, three of our anchor businesses. Pro and Enterprise combined is still a high-growth business, and when you add Pro Plus, that allows us to achieve a $2.52 billion total and grow at 24.5%.

Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, can you give us a sense of how much of GenAI software spend is incremental today as opposed to perhaps coming from other areas of IT?

It's a really important question, Gregg. I believe that the IT budgets, in their own right, will go up on a standard rate basis as we've seen for many years. The business executives, however, are inserting their will into the generative AI revolution because the CEO is in a boardroom with her senior team sitting around a table with the Board of Directors, asking, 'Hey, what are you guys doing on GenAI?' They know now that they need to provide a story around this because this is similar to the internet and the mobile era. Everything is moving to GenAI. It's just a question of how quickly we get there. I believe that a lot of the business operating spend will transition to GenAI technology use cases that serve the business. What we're seeing is that organizations need to rethink their processes and find ways to operate at a lower cost. They've realized that having multiple systems is inefficient, and they are now aware that there's a more effective way to streamline their operations. That's why I believe that both IT budgets and business budgets will be moving towards GenAI applications, strengthening ServiceNow's position in the enterprise.

Bill, I'm curious how you're looking at the onboarding of talent into the ServiceNow ecosystem because we're being told that the demand for ServiceNow consultants is at a multiyear high. We're wondering if the economy can create those jobs quickly enough to keep up with the bookings that you're driving. Also, is there a pivot point where you would want to ramp up your hiring within ServiceNow to keep up with the top-line growth?

Yes. First of all, Mark, thank you very much. My compliments on the research that you put out. I read your email this morning, and you called the quarter exactly as it was. Super well done on your part, not surprising considering the great company you work for. Leadership is everything. We just hired a great leader who is leading our training initiatives globally, both internally and externally, world-renowned. She is going to drive not only a knowledge revolution within our company but also within the ecosystem. No, we're not going to build a services company here. We're very comfortable with the ecosystem and building out the ecosystem. We made a commitment with 'Rise Up with ServiceNow' that we've aimed to train 1 million people worldwide on the ServiceNow platform, and we're well on our way to achieving that goal. Our partners see the opportunity like never before, and they're investing significantly in ServiceNow to help drive our ambition forward.

I guess, Bill, I wanted to follow up a little bit to Mark's question because sales and marketing hiring in the first quarter was basically as many heads as you did the last 3 quarters of 2023. I know there's some seasonality to it, but is that you guys ramping hiring back up as you see more demand? Is it a certain type of salesperson that you need as you think of more AI-driven sales? Just help us understand what you saw in Q1 and the philosophy around it.

Yes, Samad, we see the biggest opportunity we've ever seen. We're doubling down. What you're seeing in our investments is a focus on building the best software in the world and selling the best software in the world. We have great leadership on both the engineering and go-to-market sides. We are increasing our strategic focus on our go-to-market initiatives. With various motions to market, there will be accountability and responsibility for specific numbers. Gina rightly pointed out that we manage the whole company on a rolling 4-quarter average pipeline. We have our GenAI use cases mapped to that pipeline based on their sales stage. This is how we drive financial performance and manage new hires. Please know that we operate a clean platform and run an efficient company. On the G&A side, we continue to maintain lean operations.

I would add that last year might have looked like we slowed down on sales and marketing, but there's a lot in that number, including operations and sales ops. We were focused even last year on continuing to hire quota-bearing salespeople. We're entering 2024 with the largest increase in ramping reps that we've had in a while. We feel good about demand and visibility into pipeline does look strong. Thus, we will continue our hiring of salespeople feet on the street.

By the way, Samad, when you show up, you'll notice that it will be a stunning Knowledge session. You'll see thousands more people than you saw last year. We just keep getting bigger and bigger. So get ready for the best Vegas show you've ever seen.

Bill and CJ, can you help us understand how important it is to have and release your own LLM, given the recent developments from Databricks and Snowflake?

It is extremely important, Patrick, is the simple answer. We are solving for three main things with our own LLMs. First, they are use case specific. ServiceNow has many use cases that are utilized by our customers, whether it's IT service management, customer service, ITOM, or any of our key product lines. Use case-specific models lead to higher accuracy and efficiency when running them, reducing overall cost. Secondly, these are smaller models that are efficient to run. Our gross margin guidance shows that we feel comfortable with the cost to run these models. And third, the end-user experience benefits from using smaller models, which leads to higher throughput and value. Having domain-specific LLMs is the right strategy for ServiceNow. We can run it in our cloud, ensuring customer data protection while delivering efficiency.

Bill, you both talked about the strong government across the world and are emphasizing international. I know the U.S. government is strong for you. However, Gina, you didn't mention it in the list of verticals that did well this quarter. Can you provide a little bit more detail about the U.S. federal government and what you expect for the rest of the year?

Absolutely, John. Thanks for the question. I didn't mention it because we had such great results in so many other industries and sectors. But our federal business also had a strong quarter, with its biggest Q1 ever, involving $8 million plus deals and net new ACV growth that accelerated. We hosted our largest Fed forum ever, with customers representing over $1 billion in ACV and triple the number of attendees at our executive circle and over 35 partner sponsorships. The federal business is strong, and our GenAI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. We're seeing early adopters exploring our domain-specific models, which offer enhanced security and can drive tremendous efficiency gains. Exciting themes lie ahead for 2024, and I feel positive about how our federal business will continue to perform, coupled with our public sector success.

This is Alex Zukin from Wolfe. You talked a lot about the interest and enthusiasm around Pro Plus, and it's clear that the interest level is there. Can you stratify or give a high-level sense of what percentage of your deals or pipeline for Q1 included Pro Plus? How does that compare to your expectations when you set out on this journey?

I'll take this one. The Pro Plus uptake by our customers is at a higher pace than Pro uptake was across ITSM and also CSM and HR, which are three major product lines for ServiceNow. In terms of demand, I can say that Pro Plus adoption in our top 10 deals in Q1 was quite strong. Customers are eager to turn on Pro Plus and collaborate with us to realize their productivity improvements. Our sales team is leveraging these success stories to convert other customers, thus boosting demand further.

Gina, I appreciate you squeezing me in. 47% free cash flow margin certainly stands out. Can you walk us through the drivers of that strength for Q1? Were there any one-time effects for us to consider? Additionally, how should we think about seasonality in free cash flow throughout the year?

Thanks, Michael, for noticing. We're really proud of the 47% free cash flow margin. Year-over-year, you need to remember that Q1 of last year was lower than normal due to the Silicon Valley Bank and regional bank crisis that occurred in that quarter. Even if you normalize for that, we are still significantly higher. This reflects our strong operating margins and improvements in working capital efficiency. Seasonality for free cash flow will typically follow the historical trends you've seen. The team has done an outstanding job on maintaining efficiencies.