Samsara Inc. (IOT) Q1 2024 Earnings Call Transcript

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.

Thank you, Mike, and thank you all for being here today. Samsara had another impressive quarter characterized by sustainable and efficient growth. We finished Q1 with an ARR exceeding $850 million, marking over 40% growth year-over-year. Additionally, we achieved the Rule of 40 for the third straight quarter. Our goal at Samsara is to empower the industries that sustain our world, and we are witnessing strong adoption of digital transformation in physical operations. Significant customer acquisitions are driving our momentum. In Q1, we secured a record 138 large customers, bringing our total to 1,375 customers generating over $100,000 in ARR, reflecting a 53% year-over-year increase. This includes Fortune 1000 companies with complex operations such as United Rentals, Iron Mountain, and Werner Enterprises. Customer feedback is crucial for our success. Samsara's clients are essential to the global economy and lead in various sectors like construction, field services, manufacturing, and retail. During the quarter, I traveled with our executive leadership team through the U.S. and Europe to meet some of our largest clients. Our technology is creating significant business impacts for them, and they are asking us to focus on certain areas. First, they want AI-driven safety technologies to mitigate risks in their operations; second, digital workflows to enhance efficiency for frontline workers; and lastly, improved platform and data integrations to increase asset utilization in the field. This feedback is consistent across multiple industries. In the current market, our clients are prioritizing investments in solutions that help manage costs and provide quick ROI through smarter, safer, and more efficient operations. I'd like to highlight how we are leveraging AI to provide rapid ROI and convert customer data into business outcomes. AI has been integral to our product development over the last five years, and our robust data capabilities are a key competitive advantage. The more operational data we harness and transform into actionable insights, the greater the business impact. For instance, one of our clients is a global leader in storage and information management that serves 95% of the Fortune 1000 and has over 25,000 employees. They prioritize software that yields high business impact and swift ROI. This organization utilizes our Vehicle Telematics application for tracking assets and maintenance and is expanding to our AI-based Video-Based Safety application to enhance workplace safety, reduce insurance costs, and minimize corporate risk. Based on a pilot study, we expect our platform can help them achieve over a 3x annual ROI, with a payback period of approximately four months. By enhancing their safety initiatives, we forecast a 54% reduction in safety incidents, a 91% drop in mobile usage, and a 97% decrease in seatbelt violations. Beyond preventing accidents and fostering a safer work environment, they are also gaining a competitive edge in attracting talent in a tough labor market. Witnessing these results is always impressive, and we are thrilled about the potential of AI to unlock data's power for our clients. The advancements AI has achieved in improving safety, efficiency, and sustainability in our customers’ operations are significant. The impact of AI on physical operations is unmistakable, and Samsara is positioned to lead in this technological evolution due to three unique advantages. First, we are continuously building a vast operational data set—around 6 trillion data points flow into our Connected Operations Cloud annually, and this number is growing in size and complexity. The mix of diverse assets and data across various industries, regions, and customer sizes makes our data repository truly distinctive. This enables us to develop advanced AI models that generate valuable insights for our clients. Second, we have invested in the infrastructure necessary to swiftly deliver AI features. We've established capabilities for collecting and organizing both structured and unstructured data, training and assessing models, and operating across tens of thousands of customers, both in our cloud and at the edge using IoT devices. Third, our product innovation thrives on a strong customer feedback loop, which helps us identify our clients’ most pressing, domain-specific challenges, gather ground truth data, and collaborate with them to test, refine, and ultimately deliver AI-powered solutions on our platform. We are also leveraging data-driven insights to assist our clients in achieving their ESG objectives. Focusing on the social aspect of ESG revolves around safety. A primary goal for our customers is ensuring their employees return home safely each day, particularly since many work in high-risk physical environments. One such client, Liberty Energy, exemplifies this commitment. As a leading oilfield services company in North America, they employ our Video-Based Safety for proactive driver coaching and enhanced visibility in the cab, a feature highlighted in their latest ESG report. With millions of miles covered by their fleet annually, driving represents the highest risk activity they engage in. By utilizing Samsara, Liberty achieved a 50% reduction in vehicle accidents and saved $0.5 million in costs related to incidents. Now, let's discuss the environmental aspect of ESG. Our customers are increasingly challenged by demands from their end users, investors, employees, and regulators for more sustainable operations. Lanes Group serves as an excellent example of a client employing Samsara to reduce emissions. As a leading wastewater utility provider and the largest independent drainage specialist in the U.K., Lanes reported in their most recent sustainability report that using Samsara improved driving behavior across their fleet, leading to reduced fuel consumption and, consequently, overall carbon emissions, even as their fleet expands. Furthermore, Lanes adopted our Video-Based Safety and experienced a decrease in the frequency and severity of accidents, resulting in annual insurance savings of GBP 250,000. We are committed to fostering a safer and more sustainable world alongside our customers and take pride in the progress made on this vital journey. The momentum we are experiencing with our customers showcases the substantial market potential for digitizing physical operations. As we enter the next stage of growth, I'm pleased to announce that Lara Caimi will be joining Samsara as our first President of Worldwide Field Operations. She comes to us from ServiceNow, where she served as Chief Customer and Partner Officer and previously as Chief Strategy Officer. I am enthusiastic about Lara joining us for our next growth phase. Additionally, I want to share that our Chief Revenue Officer, Andy McCall, will be retiring at the end of the year but will remain an adviser until then to assist with the transition. I have been fortunate to collaborate with Andy over the past six years as he helped shape Samsara's sales team into a world-class organization. We all at Samsara wish Andy the very best in his well-deserved retirement. It has been another exciting quarter of sustainable and efficient growth for Samsara, and we appreciate our partnership with our customers and the impact we are able to achieve together. I also want to thank all of our Samsarians, customers, partners, and investors for being part of this journey toward digitizing physical operations. We look forward to our continued collaboration at our second annual customer conference, Samsara Beyond, happening from June 21 to June 23. Now, I will hand the call over to Dominic to review 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 non-discretionary 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% one 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. Eight 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 the 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 for questions. 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 Zukin with Wolfe.

It appears there has been a significant hire with Lara. Will Andy remain with us until the year-end? Can you provide more details about the reason for this change? Why is it happening now? Is it simply about finding the right fit for growth?

That's exactly right. This is Sanjit by the way. We were excited to find Lara. We ran a search for several months. Andy 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 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, etc.? 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 Zukin with Wolfe followed by Kash Rangan with Goldman Sachs.

Can you guys hear me okay?

Yes...

Yes.

The performance has been remarkable in a challenging macroeconomic environment, with accelerated growth at scale, more large customers, and year-over-year expansion from existing clients. Are you noticing any new dynamics or trends? Sales cycles remain challenging, especially for larger accounts, but it's unusual to see such acceleration. Have you hired many new representatives over the past year who are now becoming effective? Is there something in your packaging and pricing that is making an impact? Or have you opened up new geographical markets? What do you believe is driving this acceleration?

Alex, it's Dominic. The main drivers are some external factors. We experienced very strong customer demand in Q1, and this trend has continued in recent quarters. We're operating within a different budget framework related to our customers' operations, which tends to be larger and less discretionary than other budget areas. Customers are finding ways to save money and achieve strong ROI, allowing them to quickly recoup their investments. This dynamic has been effective even in a challenging macroeconomic environment. Regarding our performance, it was primarily due to strong productivity. We had an exceptional quarter with large customers, setting a record with 138 new customers contributing over $100,000. It was also a significant expansion quarter, and I would emphasize that our success is more about productivity rather than having added a considerable number of fully ramped sales representatives.

Perfect. I would like to ask a follow-up regarding generative AI, as it hasn’t been mentioned yet. Considering the strong data asset you are developing on the platform, especially with Lara joining, how significant and realistic is it to expect some additional monetization opportunities by incorporating generative AI features into the product as you adapt your product packaging and go-to-market strategy?

Sure. So Alex, AI is something we've been investing in now for several years. I think we really got into it about five 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 has been a key aspect of our value proposition with the Video-Based Safety product for quite some time, particularly in terms of exoneration, as our customers are often accused of accidents they did not participate in. Additionally, it allows them to coach their drivers to mitigate risks. We've been promoting this for a couple of years, and the examples mentioned underscore its value. The financial impact can be substantial, reaching hundreds of thousands or even millions of dollars, making it a significant source of return on investment 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 timeline 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 six 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 has 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 six 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. We are experiencing significant success in our international markets, including Canada, Mexico, and Western Europe, with a record 17% of net new annual contract value originating from outside the U.S. We recognize that markets like Western Europe present larger opportunities than the U.S., particularly regarding the number of physical operational assets. Our core business in the U.S. remains the primary driver of growth and productivity, but we are indeed making investments internationally, and this is resulting in a larger mix of net new annual contract value coming from outside 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 believe the primary factor is the dynamics of working capital. Looking back a year, free cash flow was 18 percentage points lower than operating margin, mainly due to difficulties in the global supply chain. Now, in this quarter, we are 8 percentage points ahead in free cash flow compared to operating margin, indicating a clear turnaround. The main reason for this difference is the optimization of working capital; we had a strong collections quarter and continue to see improvements in supply chain and hardware availability. I expect these metrics to align closely moving forward. In Q1, we were slightly better on working capital, and I foresee them moving together within a range of plus or minus 5%.

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

Thank you for the question. It was a good quarter. I wanted to address the expansion related to the earlier questions. Clearly, you have mentioned that our performance was particularly strong. This suggests that there may be an increase in net revenue retention. Last quarter, Dominic mentioned that we anticipated net retention rates to be somewhat lower than the previous fiscal year. While I understand it’s only one quarter, does this quarter indicate a shift in perspective? Could we see retention rates end up similar to last year's due to the current strength and expansion in our installed base?

At the beginning of each year, we set a target for our net retention rate. In Q1, we exceeded that target. When more net new ACV comes from expansions, it positively impacts the net retention rate. We were above our target for Q1, and we are optimistic about maintaining that for the remainder of the year.

Makes sense. On the productivity side, it seems you're very satisfied with your current position. Are you disclosing your overall head count? I understand you don't want to specify quota representatives, but what is the total head count at this time? Additionally, how are you approaching the hiring environment given the positive trends you are observing right now, alongside the strength of your pipeline, while also considering the larger macroeconomic factors that aren’t currently affecting you?

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.

All right. So this concludes the question-and-answer portion. Thank you all for attending our Q1 fiscal year 2024 earnings call. Before I let you go, I have a few short announcements. First, we'll be attending the William Blair Growth Stock Conference in Chicago on June 6 and the Baird Global Consumer, Tech & Services Conference in New York on June 7. So we hope to see you in person at one of those events. Second, we are hosting our Investor Day on June 22 in Austin, Texas, where we will be providing additional insights into Samsara's trajectory and the overall state of physical operations. Please send an e-mail to [email protected], if you're interested in attending in person. For that preferred to attend virtually, our Investor Relations website will have a link to a live broadcast. That's it for today's meeting. If you have any follow-up questions, you can e-mail us at [email protected]. Thanks again. Bye, everyone.