ServiceNow (NOW) Q1 2024 Earnings Call Transcript
ServiceNow (NYSE: NOW)
Q1 2024 Earnings Call
Apr 24, 2024, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, everyone, and welcome to the first quarter 2024 ServiceNow earnings conference call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, group vice president of investor relations. Please go ahead.
Darren Yip -- Vice President, Investor Relations
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 2021 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.
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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.
Bill McDermott -- Chairman and Chief Executive Officer
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 eight 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. gen AI adoption remained on a tear in Q1. Companies are leaning into gen AI as a powerful deflationary force to drive productivity. That's why NACVIEW 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 gen AI 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 at 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 and IT service management helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional gen AI customer successes and a detailed road map at our Financial Analyst Day on May 6 in Las Vegas.
From an industry perspective, public sector continues to excel globally. Major transactions in Q1 included government of Australia's health department and the government of Italy's IT division, Sojek, 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 gen AI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow single data model along with other partners to scale its IT services across the Middle East region while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs. Suzuki, Tokyo Gas i Net, ANA 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, enterprise has 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.
And here's the key. Those decisions have been made. So, 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 No. 1 gen AI 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 gen AI 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. gen AI depletion rates have doubled for both our employees and customers, and they are improving each and every month.
So, for engineers are accepting 48% of Texaco 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 three years. It's also why businesses will spend more than $0.5 trillion on gen AI 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 ray 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 gen AI 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 Plat4mation, 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 as early as 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.
Gina Mastantuono -- Chief Financial Officer
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 gen AI 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 four deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continued to drive more multiproduct deals as 15 of our top 20 deals included seven or more products.
We now have 1,933 customers paying us over $1 million in ACV. In addition, the number of customers paying us $20 million or more grew over 50% year over year. In Q1, our gen AI 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 gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had 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 the technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify.
gen AI is only as powerful as the platform is 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, deliver 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.
Questions & Answers:
Operator
Thank you. [Operator instructions] We'll now take our first question from Kash Rangan with Goldman Sachs.
Kash Rangan -- Goldman Sachs -- Analyst
Thank you very much. First earnings report and software for the year, Bill, good to see the optimism. My question on AI is at what point does AI get more broadly adopted, at least from a sales cycle standpoint, that despite the tough economic environment, you can actually draw in more potential prospects into the category because of the cost savings here. And one for Gina.
I noticed that -- it's still too early in the year, CRPO, RPO, a bit of seasonality there. Can you give us some insight into what to make of the rest of the year? Thank you so much and congratulations.
Bill McDermott -- Chairman and Chief Executive Officer
Thank you very much for the question, Kash. As I said, process optimization is the single biggest gen AI use case in the enterprise. And any process that exists in the enterprise today. will be reengineered or engineered depending on how messy the process is with gen AI.
So, every workflow in every enterprise will be rethought. So, just think about the sales process, for example, and the whole order to cash process, for example, or think about employees and onboarding and training 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. And instead of swivel sharing around or putting customers on hold or I'll get back to you tomorrow, have real-time data where most of the cases are deflected from virtual agent, but if an agent is involved, they have choice A or B, which one is more pleasing to the customer.
OK, 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 text. Now, you have everything done on one platform with full case information and case closure.
So, literally, from running a business in every department to building software, like I said, with the breakthrough on natural language tech turning into code. Every single enterprise will run completely differently because of gen AI and because of our clean sheet platform.
Gina Mastantuono -- Chief Financial Officer
Yeah. And Kash, on your question around seasonality about the CRPO. So, first and foremost, 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.
And so, from a seasonality perspective, you'll remember, we talked about the Fed duration. And so, Q2 is slightly more impacted, right, before it pops up again in Q3. And so, we feel really good about the trends that we're seeing. And again, feel really good.
We continue to be prudent in our guide around early renewals, while we are seeing them stronger than we saw last year, again, from a guidance perspective and a forecast perspective, we're continuing to be prudent there.
Kash Rangan -- Goldman Sachs -- Analyst
Awesome. Thank you.
Gina Mastantuono -- Chief Financial Officer
Thanks, Kash.
Operator
We'll take our next question from Karl Keirstead with UBS.
Karl Keirstead -- UBS -- Analyst
Yeah. Hi. Thanks. 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, call it, year stretch, it started to stabilize in 3Q and stabilized again in 4Q. Was that still the case in Q1? Were there one or two verticals that maybe lag, maybe some of the puts and takes about how the environment broadly felt? Thank you.
CJ Desai -- President and Chief Operating Officer
So, I would say, Karl, I would start first is environment, and we shared this in January, Bill, Gina, and I, it remains pretty much the same from our perspective as it -- and what we mean by that, it is not 2021, specifically. So, 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. And 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 so that is absolutely resonating and combine that with our in-platform generative AI, which also resonates really well because that is an accelerant to the productivity enhancements that an organization can take.
So, whether it's Wall Street banks, whether it's a life sciences corporation, whether it's governments, that story of automation, digital, productivity, enhance via gen AI is absolutely resonating and that is what is helping us, despite the environment continuing to be the same.
Bill McDermott -- Chairman and Chief Executive Officer
And I would just build on that, Karl, just for your benefit on the budgets themselves. The budgets are going up. And what I definitely see is the preference for gen AI now. I think we're ending one era in the enterprise, and we've begun another.
And we're into a new frontier now where gen AI 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. So, CJ is exactly right on the value-based economy, but also, I do see the budgets not only going up in IT but also just see gen AI becoming more of a business imperative. And if you can increase productivity, take cost out, and show that in a value case, this money that will be spent, and maybe different people approving it, but the money will be spent.
I also want to acknowledge some really great partnerships that we've achieved with Microsoft and IBM and NVIDIA. And I look at great companies like Novartis really rethinking the whole pharma process altogether with gen AI. There's just so much goodness going on in this market. And 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 five years that I've been here than I do right now on this call with you right now, absolutely best I've felt.
Karl Keirstead -- UBS -- Analyst
Thank you both.
Operator
We'll take our next question from Matt Hedberg with RBC Capital Markets.
Matt Hedberg -- RBC Capital Markets -- Analyst
Great. Thanks for taking my question, guys. 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 anything you just need to call out from a discounting perspective on Pro Plus relative to maybe some of your initial expectations?
Gina Mastantuono -- Chief Financial Officer
Yes. Hey, Matt, I'll take that one. So, yes, we are absolutely seeing faster Pro Plus adoption versus Pro. It's two quarters out, right? So, it's early days, but we feel really good about the adoption curve.
And we've been talking about whether or not that adoption curve would be faster. And we posited that it would be, and that's certainly proving out to be the case, although again, early days. With respect to discounting versus initial expectations, we feel really good about the realized pricing, and it has been very much in line with our initial expectations. And we'll talk a lot more as you would expect at Investor Day about the overall gen AI 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 really leaning in. We talked about seven deals in the top 10 had gen AI in it, significant deals over $1 million as well. So, we're definitely seeing monetization happening already.
Matt Hedberg -- RBC Capital Markets -- Analyst
Thank you, Gina.
Gina Mastantuono -- Chief Financial Officer
Thanks, Matt.
Operator
We'll take our next question from Brad Sills with Bank of America Securities.
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Great. Thank you so much. 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 that give you some visibility perhaps for CRPO to ramp from here given perhaps a ramping component in there? Thank you.
Gina Mastantuono -- Chief Financial Officer
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 300 basis points improvement versus last year. And yes, that is our longer-term backlog. So, as you think more longer term about the opportunity in ServiceNow, I couldn't be more excited about that.
We are seeing the average duration growing. And in fact, duration this Q1 is the largest it's been in the Q1 since, I think, 2019. And so, I feel really good about what that means for the mid- and long-term opportunity here for sure.
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Great to hear. Thanks, Gina.
Gina Mastantuono -- Chief Financial Officer
Thanks, Brad.
Operator
We'll take our next question from Keith Weiss with Morgan Stanley.
Sanjit Singh -- Morgan Stanley -- Analyst
Hi. Sanjit Singh in for Keith Weiss. Bill, I wanted to ask a little bit about gen AI adoption within ServiceNow, you mentioned Now on Now, but in terms of just like the gen AI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you kept a pace. How is gen AI adoption changing or not changing your hiring plans more broadly and specifically in some of the engineering team?
CJ Desai -- President and Chief Operating Officer
This is CJ. And here is where I would say that specifically, we absolutely believe, and we have seen it that gen AI is helping our software engineers code faster. I mean, straight up. It helps us our software engineers code faster, whether they are junior software engineers or very senior software engineers, they still can leverage and continue to leverage generative AI.
So, I'll start with that is increasing our engineering productivity and it varies depending on how senior the engineer is or how junior the engineer is. And number two, it helps us increase our innovation velocity. So, that is really, really important to us that it increases our innovation velocity. When I flip that for our customers is that when customers leverage ServiceNow generative AI, and if they can do automation faster, whether he's using text-to-code or text-to-workflow types of use cases that they can not only increase the number of workflows that they put on ServiceNow, but second, it also increases that digital efficiency.
So, it's both ways. Our engineers are able to innovate faster and then our customers are able to workflow faster because of generative AI.
Bill McDermott -- Chairman and Chief Executive Officer
And one thing just to share with you, Keith, we have 20 gen AI cases on the Now on Now story within ServiceNow. And our chief information officer, Chris Bedi, put a very interesting LinkedIn post out there. 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 have a CRM system.
We have one of them. And we have an HR system. We have one of them. But they are feeding the ServiceNow Platform.
So, all the data from those systems of record in terms of how we run this company, we run the whole company on ServiceNow. And now we have 20 different gen AI use cases across all the departments of the company. So, my full expectation is that someday, we could do the earnings call where we're all in this room together and we'll take you through the living, learning lab of a gen AI-run company here at ServiceNow.
Gina Mastantuono -- Chief Financial Officer
Yes. And I would just add -- I think I would just add, we are absolutely customer zero, 100% on all of our gen AI use cases. Deflection rates have doubled for both our employees and customers and they're improving every month. right? It's really early days.
So, it's learning faster and faster. Software engineers are accepting 48% of text-to-code generation. So, there's absolutely the ability to see leverage in our R&D as we look to the mid- and long term. So, thank you for the question.
Sanjit Singh -- Morgan Stanley -- Analyst
Appreciate all the thoughts. Thank you.
Operator
We'll take our next question from Keith Bachman with BMO.
Keith Bachman -- BMO Capital Markets -- Analyst
Hi. Many thanks. 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 gen AI offerings and so how would you characterize -- and yet you're pointing to decelerating growth through 2024.
So, what's not growing as well? If gen AI is getting great adoption probably small dollar amounts contribution. But what's not growing as well? And the second part is perhaps going to come at the Analyst Day, but is there any specific metrics you could give us on dollars of ACV or anything else related to the gen AI SKUs? Or should we wait for Analyst Day perhaps to some more specific indications on what the adoption is. Thank you.
Gina Mastantuono -- Chief Financial Officer
Yes. So, we'll definitely give you a lot more details on all things of gen AI at Investor Day, and that's in a week and a bit. So, stay tuned there. Yes, 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.
And so, what I'd say is that 24.5% revenue growth at the scale at which we are, the larger numbers is pretty incredible. And we see continued traction across the board, whether it's our technology workflows, our customer workflows, or our creator as well. And so, really across the board, employees had a really strong quarter, ITSM core had a really strong quarter. ITSM core remains healthy in 16 of our top 20 deals, 10 deals over $1 million.
ITOM was included also in 16 of the top 20 deals with nine deals over $1 million, security and risk in totality, still doing well. And so, it's the great thing about having a platform with the breadth that ServiceNow has, that we continue to drive really, really good growth at our scale across the platform.
CJ Desai -- President and Chief Operating Officer
Yes. And the only thing I would add there is every single workflow continues to still grow double digits plus, plus. So, 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, which our CSM and other products, App Engine, part of creator and customer, all of them continue to grow very nicely, and they grew very nicely in Q1.
Keith Bachman -- BMO Capital Markets -- Analyst
Many thanks.
Gina Mastantuono -- Chief Financial Officer
Thanks, Keith.
Operator
We'll take our next question from Tyler Radke with Citi.
Tyler Radke -- Citi -- Analyst
Yes. Thanks for taking the question. I wanted to ask you how you're seeing the momentum just in terms of standard to Pro migrations. We talked a lot about Pro Plus, but it would seem that 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? Thank you.
CJ Desai -- President and Chief Operating Officer
So, first, I'll use, Tyler, one quick example that I was in a conversation at a bank, 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 Pro and Pro Plus together. And 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." That's a very specific example.
But the way we look at this specific product line, whether it's ITSM or whether it's CSM, our customer service, is I look at both Pro and enterprise in total. So, when I look at Pro and Enterprise in total, so I'm excluding Pro Plus on purpose here, so Pro and enterprise, which are the bigger SKUs at a higher priced amount, they grew nicely for ITSM, for CSM for our HR service delivery. Three of our anchor businesses, when you combine Pro and enterprise, that is still a high-growth business and the new add Pro Plus, that's what allows us, at this scale of $2.52 billion to grow at 24.5%.
Tyler Radke -- Citi -- Analyst
Thank you.
Operator
We'll take our next question from Gregg Moskowitz with Mizuho.
Gregg Moskowitz -- Mizuho Securities -- Analyst
Thank you very much for taking the question. Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, you took a sense of how much of gen AI software spend is incremental today as opposed to perhaps coming from other areas of IT. Thank you.
Bill McDermott -- Chairman and Chief Executive Officer
Yes. It's a really important question, Greg. I really believe the IT budgets in their own right will go up on a standard rate basis as we've seen now for many, 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, and they're like, "Hey, what are you guys doing on gen AI," and they know now that they got to go into that room with a story because this is a lot like when we had the internet, then we had the iPhone moment, everything went mobile.
Everything is going gen AI. It's just a question of how quickly you get there. So, I believe that a lot of the business operating spend will be moved to gen AI technology use cases that serve the business. And the reason I believe I'm right on that, if you look at great companies, some of them in this quarter like Microsoft and Novartis, so Hitachi Energy or Equinix or IBM, they're looking at this as, hey, what does this mean to my employees, to my customers, to my partners and they're very well aware of the fact that inflation is sticky and rates are high, and they're on their own.
They've got to deal with this stuff. And the only way to change the game is to rethink the game and move from checkers to chefs and gen AI is now opening up the window for transformational conversations. And that's why I say we are the AI platform for business transformation because we're using technology to transform the business, how can the business run at a lower cost? They're asking questions like, why am I on several different leases on-premise and in cloud, and why do I have all these systems? I need a system for every 1,000 employees, it's ridiculous. So they want to rethink things and so I think there's two things that are going to happen: one is business budget is going to move into the gen AI category, and it's not going to take away from the IT spend in the end; and two, there's going to be real winners and real losers and real winners and real losers has already begun its formation because if you don't plant the AI flag in the ground in the next eight months, there's not going to be an AI flag to put in the ground and ours are getting put in the ground all over the global economy. And the company that I see out there doing extremely well in that regard is what Microsoft is doing with CoPilot.
And I see what we are doing with Now Assist AI. And I think it's the combination of those two players in the enterprise. And obviously, you've got the great ones like NVIDIA and so forth that's building the GPU force, but that is really what I'm seeing. And I'm also super honored this quarter to see IBM really jump in as a friend and a partner with ServiceNow, and we feel the same way about Watson X.
And we're very open to all the participants that are making LLMs, and they can all integrate with ServiceNow and we'll own the domain-specific to ServiceNow, but we welcome all participants. And I think that's another unique part of ServiceNow that we're not interested in shutting anybody out. We're actually technology capable enough to open up to everybody and that's really turning on the whole ecosystem in our favor. So, plans are being put in flags in the ground in the Kingdom of Saudi Arabia, all the way to Japan and beyond.
We are winning.
Gregg Moskowitz -- Mizuho Securities -- Analyst
Perfect. Thanks, Bill.
Bill McDermott -- Chairman and Chief Executive Officer
Thank you, Gregg.
Operator
We'll take our next question from Mark Murphy with JPMorgan.
Gina Mastantuono -- Chief Financial Officer
Mark?
Operator
I do apologize. It looks like Mark has disconnected. We'll take our next question from Brad Zelnick with Deutsche Bank.
Brad Zelnick -- Deutsche Bank -- Analyst
Great. Thanks so much for taking the question. It's great to hear all the traction in international. You called out deals in Australia, Italy, Brazil.
But I want to focus, Bill, on what you just mentioned about the Kingdom of Saudi Arabia, where in your press release, you called out a $500 million investment in that market given obviously it's a massive, massive opportunity. Gina, can you double-click into the $500 million investment you're making over what time period, where it lands on the financials? And maybe more generally, how should we think about your strategic use of capital and capex for these types of deals? Thanks.
Gina Mastantuono -- Chief Financial Officer
Brad, thanks so much for the question. So, we're really excited about the investment in Saudi. And rest assured that $500 million is a long-term investment over a long horizon period. It will be in -- most of that investment is in data center, so it will be in cost of sales, but you'll -- again, we manage our margin very tightly.
And the growth that we're expecting from that investment is huge. The opportunity that we see in Riyadh and Saudi, NEOM, is great. And Bill spent a nice time there at the LEAP conference, and we're really excited about really pulling our technology to really help that society grow and become a digital-first economy. And they're leaning in very heavy with ServiceNow and are really excited about our product portfolio, not only our gen AI but really the breadth of the entirety of the portfolio.
So, it will be within our capex guide that you have always seen, it's not on top of, and we're just really excited about planning flags more in the Middle East.
Brad Zelnick -- Deutsche Bank -- Analyst
Awesome. Thanks for the color.
Gina Mastantuono -- Chief Financial Officer
Thanks, Brad.
Operator
And Mark Murphy has dialed back in. We will go to Mark Murphy with JPMorgan.
Mark Murphy -- JPMorgan Chase and Company -- Analyst
Thank you. Make sure to not hang up the phone this time. 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.
And also, is there a pivot point coming where you would want to crank up your own hiring engine within ServiceNow to keep up with the top-line growth?
Bill McDermott -- Chairman and Chief Executive Officer
Yes. First of all, Mark, thank you very much. Incidentally, my compliments on the research that you put out. I read your email this morning and you called the quarter exactly as it was.
So, super well done on your part, not surprising considering the great company you work for. I will give you a couple of things. Leadership is everything. We just hired a great leader who is leading our training initiatives globally, both internally and externally, world-renowned, and she is going to drive not only a knowledge revolution within our own company but also within the ecosystem.
And 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 RiseUp with ServiceNow that we have 1 million people trained around the world on the ServiceNow Platform, and we're well on our way to achieving that goal. I talked about Plat4mation as one company that probably not everybody on this call ever heard of, but you know all the big ones, and they're all investing huge human capital contributions and some of them have literally multi, multibillion business plans built with ServiceNow.
So, we really like the fact that we can impact the customers' value case with our ServiceNow Six Sigma knowledge team and then we can extend the feet on the street through the ecosystem and also the trust that we have with the ecosystem where they know we're not trying to duplicate their business models on the contrary. We need them to invest in their business models to move our ambition to be the defining one forward. So, it's a really good question actually. And you are right, we're working really hard at it, but it's also true for you to know that the partners see the opportunity like never before.
and they're doubling down on ServiceNow. So, we think we got a good formed strategy, and we think that we are going to be able to cover this global economy, and we're moving at warp speed to do so.
Mark Murphy -- JPMorgan Chase and Company -- Analyst
Thank you so much. Really appreciate it.
Bill McDermott -- Chairman and Chief Executive Officer
Thank you, Mark.
Operator
We'll take our next question from Samad Samana with Jefferies.
Samad Samana -- Jefferies -- Analyst
Hi. Good morning. Thanks for taking my question.
Gina Mastantuono -- Chief Financial Officer
Hi, Samad.
Samad Samana -- Jefferies -- Analyst
Hey. How are you? I hope everybody is doing well. Thank you, as always, for squeezing me in. 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 three quarters of 2023.
And 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 maybe help us understand what you saw in 1Q and maybe the philosophy around it.
Bill McDermott -- Chairman and Chief Executive Officer
Yeah. Samad, we see the biggest opportunity we've ever seen. And we know the gen AI revolution is real, and we're doubling down. What you're seeing our investments are very focused on building the best software in the world and selling the best software in the world.
So, we have great leadership on both the engineering side and the go-to-market side and we're going to have more clarity of focus in the way we drive the go-to-market. Now, we're getting to size and scale the calls for that. So, there are various motions to market that will have single line of sight accountability and responsibility for a number and the accountability can't be stressed highly enough because we need leaders that can run businesses here. And that's what really big leaders want to do anyway.
And Gina rightfully pointed out, we don't do anything without the margin in mind. So, we have a pipeline. We manage the whole company on something we call the CEO dashboard. We are in real time with a rolling four-quarter average pipe.
We have our gen AI use cases that are against that pipe based on the stage of the sales cycle. So, we know how many we can afford to hire based on probability of closure within 1% to 2%. That is how we drive the financial performance of the company and how many people we let in the door. I do want to stress because we run a clean platform here and we run a gen AI company here.
That's our absolute commitment. We are going to run a super efficient company. So, on the G&A side of the equation, we continue to be lean and as we get bigger as a percent of revenue, that will drop even further. So, I think you're going to like that.
And I think a lot of companies now are showing up here at our doorstep, they want to see the Now on Now story because they're like, how is it that you could have one financial system for thousands and thousands and one HR system and one CRM system, when my company has hundreds and I can't even keep track of them all. And I think a lot of what I'm trying to explain to you is we're in the beginning stages of the end of one era and the beginning of another.
Gina Mastantuono -- Chief Financial Officer
And I would just add to that, Samad.
Samad Samana -- Jefferies -- Analyst
Yeah. Yeah.
Gina Mastantuono -- Chief Financial Officer
I would just add that last year, might have looked like we slowed down sales and marketing, but there's a lot in that number, and we talked about this, a lot of operations ops. And we actually were very focused even last year on continuing to hire quota-bearing feet on the street sales folks. We're entering -- we entered 2024 with the higher -- the highest increase in ramp reps that we have in a while. So, yes, we will be reaccelerating.
We feel really good about pipe. We feel really good about demand. But I want to make clear that we didn't stop hiring salespeople feet on the street last year. We continue to hire, and we will continue to do that because our pipe looks strong and demand looks great.
Samad Samana -- Jefferies -- Analyst
Very helpful. And then I had a quick follow-up for you. On CRPO, you mentioned, I think, in response to another question about maybe some early renewals in 1Q. Can you maybe just help us understand if it was material enough to impact the guidance or just I know the guidance was good, but just trying to think through on that timing, if there's anything we should consider for 2Q and then maybe even the back half based on your expectations on renewals?
Gina Mastantuono -- Chief Financial Officer
Yes. So, if you remember, Samad, last year, we've been -- over the last year, we've been more prudent in how we've been forecasting early renewals because it's hard to forecast. It's very customer-specific and customer by customer. And so, in Q1, our beat was really strong on our net new ACV growth, but we also saw early renewals than our prudent forecast.
I haven't changed how we're thinking about forecasting. I'm still remaining prudent given the macro. And so, as we think about seasonality. I talked about Q2 being lower, slightly lower, but then it bounced back up in Q3 when Fed is our strong quarter.
And so, again, it wasn't material enough to impact the Q2 guidance, but I'm not assuming better early renewals in Q2 like we saw in Q1.
Samad Samana -- Jefferies -- Analyst
Awesome. See you guys in a week and a bit.
Gina Mastantuono -- Chief Financial Officer
Awesome. Thanks, Samad.
Bill McDermott -- Chairman and Chief Executive Officer
By the way, Samad, when you show up, you'll notice that it will be a stunning knowledge, and 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.
Samad Samana -- Jefferies -- Analyst
Looking forward to it, Bill. Thank you.
Bill McDermott -- Chairman and Chief Executive Officer
Thank you.
Operator
We'll take our next question from Patrick Walravens with JMP Securities. Patrick, your line is open. Please go ahead.
Patrick Walravens -- JMP Securities -- Analyst
Great. Thank you. Bill and CJ, can you help us understand how important it is to have and release your own LLM? So, you guys had StarCoder in February, Databricks and DBRX in March. Let's just say Snowflake did their Arctic family.
CJ Desai -- President and Chief Operating Officer
I would say it is extremely important, Patrick, is the simple answer. Here are the three things we are solving for with our own LLMs. First of all, they are use case-specific. And ServiceNow has many use cases that are used by our customers, whether it's IT service management, customer service, our ITOM, all of our key product lines.
These are use case-specific. And sometimes you would say, even for what Bill talked about agent summarization and other things or text-to-code, we always want use case-specific LLMs. So, then the question is why, one, the accuracy is higher; number two, these are smaller models which are efficient to run, as you have seen, our gross margin guidance that Gina provided that we feel comfortable with the cost to run these models because when the models are smaller, the cost to run them is not high; and number three, from an end-user perspective, a smaller model always performs better. So, I consider this as a unique strategy that we are fortunate to have a great AI teams at ServiceNow focused on not only the engineering execution but combine that with research and experience on how our customers will consume Pro Plus, these things matter.
And that's why domain-specific small language models is the right strategy for ServiceNow. We can run it in our cloud. customers' data is protected, and they have higher throughput and get higher value.
Patrick Walravens -- JMP Securities -- Analyst
That's super helpful. Thank you.
Operator
We'll take our next question from John DiFucci with Guggenheim.
John DiFucci -- Guggenheim Partners -- Analyst
Thank you for taking my question. Bill, you both talked about the strong government across the world and emphasizing international. I know the U.S. government is strong for you.
And I suppose it's still pretty good for you. But Gina, you didn't mention it in the list of verticals that did well this quarter. Can you comment a little bit more on the U.S. federal government and what you expect for the rest of the year?
Gina Mastantuono -- Chief Financial Officer
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 was strong and had its biggest Q1 ever with $8 million plus deals and net new ACV growth that accelerated.
And so, we hosted our largest Fed forum ever with customers representing more than $1 billion in ACV and triple the number of attendees at our executive circle and over 35 partner sponsorships and so really strong federal business. And actually, our gen AI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. And so, we're seeing early adopters and healthy industry -- sorry, healthy interest in our domain-specific models, which offer better security that CJ just talked about and really can drive tremendous efficiency gains. And so, exciting themes ahead for 2024 and feel really good about what the federal business will continue to do for us as well as public sector as a whole.
So, thanks so much for the question.
John DiFucci -- Guggenheim Partners -- Analyst
Thanks, Gina.
Operator
We'll take our next question from Ethan Bruck with Wolfe Research.
Alex Zukin -- Wolfe Research -- Analyst
This is Alex Zukin from Wolfe. Maybe just the question that you guys have gotten a couple of times on Pro Plus adoption. Listen, it's very clear that the enthusiasm is there, the interest level is there. You talked about it at length in terms of the new product launch being the fastest ever.
Is there a way to kind of stratify or at a high level, just give us a sense for what percentage of your deals or pipeline either for Q1 included Pro Plus and how it looks for the rest of the year? And how -- like that compares to your kind of expectations when you set on this journey? And then I've got a quick follow-up.
CJ Desai -- President and Chief Operating Officer
Hey, Alex, great to hear from you. So, I'll take this on. So, there are a couple of things we are seeing. So, when we launched Pro in 2018 September, and we launched Pro Plus in 2023 September.
As Bill outlined in his comments, the Pro Plus uptake by our customers is at a higher pace than Pro uptake was across not only just ITSM but also CSM and also HR, which are three big product lines for ServiceNow. So, when you look at exactly two quarters and two days that we have been in the market, it has exceeded our internal projections on what Pro Plus will do and our ability to sell them. And as Gina outlined, that not only it was in the seven out of 10 deals, which are the top deals for ServiceNow in Q1, we had $7 million-plus deals, including public sector deals in a regulated environment where our engineers have made the technology work for this regulated environment. So, overall, when I see what is happening on the demand environment, it is at a higher pace given very clear metrics around productivity for whether it's IT agents, customer service agents, HR staff, or for the employees.
And that's what is driving the demand because it accelerates the productivity or multiplies it, however you want to call it. The second thing I would say is when I look out Q2, Q3, Q4, I still see significant interest from customers, and they are saying, "OK, CJ, what's going on with the customers who purchased this in, say, for example, Q4?" Now, here is a really positive news that I do want to report, and we will share more details at our Financial Analyst Day, Alex, is that customers are, for the first time very eager to turn on Pro Plus and want to see and work with us on where the productivity improvements they are seeing and say, help us understand, I saw that when a call got transferred from one IT into the other IT agent on Follow the Sun model, the quick summarization help them significantly, so they didn't ask the end user same question. So, there are a lot of nuances we are learning as we work with our customers, but they are deploying and when I say deploying, as in implementing Pro Plus at a much faster rate than Pro, which is allowing us and our sales team to use this as an example while convincing other customers to sell. So, overall, not only the demand environment I'm seeing is better for Pro Plus than Pro.
If you ask me the same question in 2019 April, which was five years ago. But I'm also seeing that customers are turning on Pros and working with us saying, here is where I'm seeing the improvement. Here is how I should think about it. And our engineering teams are doing a phenomenal job releasing improvements literally on a monthly basis to make sure that our customers are successful with Pro Plus.
Operator
And we'll take our next question from Michael Turrin with Wells Fargo Securities.
Michael Turrin -- Wells Fargo Securities -- Analyst
Hey, great. Thanks. I appreciate you squeezing me in. Gina, 47% free cash flow margin certainly stands out, maybe walk us through the drivers of strength there for Q1.
Anything one-time for us to consider? And maybe just given we're holding on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year. Thank you.
Gina Mastantuono -- Chief Financial Officer
Yeah. Thanks, Michael, for noticing. We're really proud of the 47% free cash flow margin. Year over year, though, you have to remember that Q1 of last year was lower than normal given the Silicon Valley Bank and regional bank prices that happened that quarter.
All of that being said, even if you normalize for that, we are significantly higher. And that's testament to the strong margin, operating margin and some nice work that we've been doing on working capital efficiencies. And so, we feel really good seasonality for free cash flow will be similar to what you've seen historically. And so, just really strong results.
The team has done an outstanding job on working capital efficiencies, and we'll continue to see that as well.
Operator
And we have time for one last question. We'll take our last question from Derrick Wood with Cowen.
Derrick Wood -- TD Cowen -- Analyst
Great. Thanks. CJ, just to kind of follow up on that last discussion. Just in terms of how you're seeing adoption of gen AI.
I guess on one end of the spectrum, perhaps it's easy to drop this into the hands of workers, let them experiment quickly figure out how to drive productivity. On the other end of the spectrum, perhaps there's a lot of data hygiene investments needed. You need SIs to come in and help drive real process change and really drive the learning curve. I guess where do you guys -- what end of the spectrum are you seeing when it comes to adopting LLMs within the ServiceNow Platform?
CJ Desai -- President and Chief Operating Officer
So, first of all, thanks for the question, Derrick. Here is how I would describe it. Our design goals and engineering goals were, this has to be super simple to turn it on, as in Pro Plus, once you are on Pro, and you can start using our Pro Plus capabilities, whether it's for agents, employees and so on. That has been our design principle.
The setup is super simple, and customers are turning it on and seeing where they are seeing improvements on productivity, whether it's for agents or employees. So, that's number one. Number two, I absolutely do not expect that this requires a heavy system integrator types of implementation that is drawn out in the old machine learning technologies, where you create a model, refine a model and you need data scientists, machine learning engineers, and so on. This is pretty straightforward for ServiceNow use cases where system integrators can help is what Bill talked about that, hey, is there a new way to look at this process? And should I even put in another process on ServiceNow Platform because I can see this is just super fast to get value out of ServiceNow? So, in terms of implementation cycles, they are actually faster on Pro than they have ever been before.
And we don't expect a heavy implementation cost. However, if our customers want to leverage system integrators, the biggest value that they always had is helping them think through what additional generative AI use cases they can use and redefining processes.
Bill McDermott -- Chairman and Chief Executive Officer
And Derrick, I would just give you one thing to think about, too. You could take great companies like Novartis, who want to be a global leader in their industry. And that industry has been held back with six-and-a-half-year clinical trials. And these kinds of CEOs are rethinking everything and they're using generative AI as the gateway to change.
And they're looking at not only gen AI, but they're also looking at ServiceNow as a fresh new platform design to take on some of the tougher process challenges that has slowed companies down. And as CJ said, which I think is a major point, the time to implementation on these gen AI use cases has been faster than anything I've seen, not just against Pro but against anything. They want it in now. So, there's an urgency and that urgency is coming from the C-suite, and it's a movement.
And I've never seen a desire for implementation speed like I have for gen AI. And that, to me, is a big factor as you navigate and the way you think about this business, this business model and gen AI is a category, who's going to win, who's going to lose, and which customers really want the solution, how quickly do they want the solution if they see the value they want it yesterday, and that's a great sign for us.
Operator
Thank you. And with that, that does conclude today's presentation. [Operator signoff]
Duration: 0 minutes
Call participants:
Darren Yip -- Vice President, Investor Relations
Bill McDermott -- Chairman and Chief Executive Officer
Gina Mastantuono -- Chief Financial Officer
Kash Rangan -- Goldman Sachs -- Analyst
Karl Keirstead -- UBS -- Analyst
CJ Desai -- President and Chief Operating Officer
Matt Hedberg -- RBC Capital Markets -- Analyst
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Sanjit Singh -- Morgan Stanley -- Analyst
Keith Bachman -- BMO Capital Markets -- Analyst
Tyler Radke -- Citi -- Analyst
Gregg Moskowitz -- Mizuho Securities -- Analyst
Brad Zelnick -- Deutsche Bank -- Analyst
Mark Murphy -- JPMorgan Chase and Company -- Analyst
Samad Samana -- Jefferies -- Analyst
Patrick Walravens -- JMP Securities -- Analyst
John DiFucci -- Guggenheim Partners -- Analyst
Alex Zukin -- Wolfe Research -- Analyst
Michael Turrin -- Wells Fargo Securities -- Analyst
Derrick Wood -- TD Cowen -- Analyst
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ServiceNow (NOW) Q1 2024 Earnings Call Transcript was originally published by The Motley Fool
