And we also have a much better performance and power efficiency. We use in [indiscernible] the measure for every product. So, that’s replacement case, definitely picking up quite well. The refresh probably would still need some time to come. And on the other side, the new area like OTT security, we see other strong growth. So, that’s a new market because really all this OTT devices not connected online or kind of canola has now protection and pretty much impossible to run endpoint software because of different operating system living computing power. So we see this new OTL space pick up quite well. That’s the new market. So long-term wise, I still believe the network security market continued to grow. And — but probably will be more mix in the current environment, probably a little bit more towards the OpEx model, which is kind of a SASE, but for us, the differentiation is really, we have all the staff in the same FortiGate operating system FortiOS, which customers can run with the on-premise or in the cloud and the pop.
So we do see a lot of customers that in turn on the strategy function, maybe starting to SASE function first, then the additional strategy function, additional sat service. So that’s the way they are starting doing now.
Saket Kalia: Got it. Got it. And maybe the follow-up is on that point, kind of if I can stay with you. Just on that topic of refresh and replacement is there any sort of change in thinking for those customers about firewall versus SASE? And I mean, as part of the discussion, you mentioned pricing earlier, are you getting any sort of pushback on just appliance pricing since sort of the prior round of adjustments that you did sort of during the supply chain?
Ken Xie: We have not seen any pricing pressure discount because we tend to be much better performance and more function because of ASIC technology and none of our competitor has. On the other side, do you customers consider a new function they needed for security or higher network speed environment, I think compare us to some competitor because competitors sometimes they just cannot keep in function like all the SD-WAN or SASE in their existing firewall. For us is very, very different. So, we have all the SD-WAN, all the new SASE function built in into the same FortiOS running on different kind of FortiCare device there. So, that’s also kind of helping customers to really keep adding additional functions sometimes without really replacing the existing hardware, so that’s really helping the customer keeping kind of adding surveys and had secured with new function there.
And also, that’s also driving a lot of replacement of our competitor solution, especially in the big enterprise environment. So, that’s we see the strong — the strongest growing area for us actually is enterprise customers, which they not enter some finance stress because the high cost of the money, but we do see that the growing in our enterprise space as the valve is strong and a lot of replacement of competitive solutions using the FortiGate, which has a more function, better performance, low cost, and also more efficient on the energy consumption there.
Saket Kalia: Super helpful. Thanks, guys.
Ken Xie: Thank you.
Operator: Thank you. And one moment for our next call — our next question. Our next question comes from Brad Zelnick of Analyst. Your line is now open.
Brad Zelnick: Great. Thank you so much for taking my questions. And because we just had two for Ken I think I’m going to — I’m going to now go for two with Keith, if we could. Keith, first one, I think, pretty straightforward with $1 billion left in your buyback authorization and the strong cash generation of the business, I was surprised to see and not buy back any stock in the quarter. Can you just remind us of your approach to buybacks and if any change in thinking around use of cash and specifically M&A?
Keith Jensen: Peter’s pointing at our COO for M&A answers. So we’re all — listen, leaning forward here wants to say. I don’t think there’s been any real change in our buyback philosophy. We — the term we use is we’re very opportunistic. We do put a program in place with one of the Wall Street firms each quarter and we renew it. I think the important part there is looking at the $5 billion that we bought back over the last four years, and it’s not that we’re doing some other companies would do x percent of free cash flow or something like that. It is really looking for market opportunities and when we see them. Ken typically steps in and have something set up in that regard. And now our fellow John Whittle has been getting a chance to join.
John Whittle: Thank you for the question. On M&A, we’ve always been very, very disciplined. We’ve done some very strategic tech and talent tuck-ins. And I think you’ll see — we’re open-minded. We consider M&A as it makes sense, but that’s definitely been our approach so far. And I think you’ll see that approach continue, although we will be at the minded about M&A as it makes sense.
Brad Zelnick: Thank you for that. And maybe just my follow-up. I’m sorry, please.
Ken Xie: Probably is the most busy time in the last 10, 20 years now to look at all different companies.
Keith Jensen: Yeah. We see a lot of opportunities in the securities base for sure. And so yes, we build a pipeline just like sales build the pipeline, and we consider — considered them as they come along and reach out on product as well.
Brad Zelnick: Got it. That makes all the sense in the world, and you guys have done a great job of it over the years. Maybe just on the margin discipline that — and the leverage that we’re seeing in the quarter, Keith, can you maybe just give us an update on head count plans and where you are year-to-date? And as maybe relative to three months ago, how enthusiastic you are and where you are in sort of pushing or pulling back on the throttle to continue hiring and how we should think about OpEx? Thank you.
Keith Jensen: I would ask Ken, were you going to say something on hiring?
Ken Xie: It’s okay. I think we continue to invest balance the gross margin. So the area like a lot of on the long-term product, we continue to invest, and we do the selective hiring. And also, we also take this opportunity to — to mixing the management ratio or structure will be better. So it’s more invest in the field sales engineering and also the R&D area and the kind of more flat on certain management level and making the whole company more efficient.
Keith Jensen: Yes. I think the — setting aside the fact that need more resources in finance, but I was hoping Ken was just going to announce that, but that’s probably not. The — I think the business model, Brad, you’ve seen it through the cycles where — if you look back at 2017, for example, and if you look at the gross margin number, when you start to see the slowdown of the pause, the cycle and the hardware, you start to see the mix shift to the really rich services. And then as the market recovers, you see that relationship change a little bit. Clearly, we’re in a situation right now with the firewall market that the mix shifted 10 points of services, and I think that was 87% gross margin. it’s making margin targets very achievable, let’s put it that way.
And I would imagine, I think we raised it by 0.75 of a point at the midpoint for the full year. That’s a pretty big move at this point and I think we feel very comfortable with that as we look at the rest of 2024.
Brad Zelnick: Excellent. Thank you.
Operator: Thank you. Our next question comes from Ben Bollin of Cleveland Research Company. Your line is now open.
Ben Bollin: Thanks. I appreciate you taking the questions. Good afternoon everyone. Keith, I was hoping you could talk a little bit about the receivables drawdown and the DSO performance. I believe you made a comment on your prepared remarks about large deal impact in collections, but it does look like DSOs are below what we’ve seen for the last few years. So, I’m curious if there’s a change in working capital management. Anything notable there?
Keith Jensen: No, I don’t think there’s really a change. I think there’s always a few puts and takes, if you will. I think the real driver was that last quarter, we had those six eight-figure deals, and I believe all those closed in the last week or two of the quarter. So that put a lot of pressure on DSOs and only having one eight-figure deal this quarter, which I believe closed fairly early in the quarter in mid-quarter, but not in the last week. So, I think that’s really all I would point to there.
Ben Bollin: Okay. And the last one for me. You talked a little bit about duration. If you step back, a lot of your business is done through the partner community. Do you have any thoughts on how much of that business is being financed by the partners themselves to manage this kind of CapEx to OpEx appetite? Any thoughts there would be helpful. Thanks.
Keith Jensen: Yes, I think when you say partners, I would say that all the large distributors that we’re working with their offering financing programs, either in some cases, it might be through their own captive. But I think more often not, it’s white labeling somebody else’s product, if you will. I think that also some of the larger resellers are also offering financing. I think that where it makes a little more sense for ourselves as an OEM is on larger deals, whether we move to the extended payment program or working with the channel and provide them capital, if you will, for the financing. I think there’s a lot of different ways to go there. But I don’t think good credits, so to speak, are suffering because they can’t find credit. I don’t think that’s the issue.
Ben Bollin: Thank you.
Operator: Thank you. Our next question comes from Adam Borg of Stifel. Your line is now open.
Adam Borg: Awesome and thanks so much for taking the questions. Maybe for Ken, last quarter, you talked about a great job with increasing traction with enterprise agreements. And I was hoping you could talk. Obviously, I know 1Q is typically a smaller quarter. Maybe talk a little bit more about the EA strategy overall and the go-to-market efforts to more systematically drive these enterprise agreements, especially in the back half of this year?
Ken Xie: Yeah, I think we do see when we have a more enterprise customer and they also want to be long-term customers and also with many different products like the consolidation strategy they have right now. We see more EA. And at the same time, with that one, we definitely see kind of a bigger deal and also kind of a more long-term customer can with us right now.
Keith Jensen: Yeah. I think that — and John took this over. So he gets to make that individual lap on EAs. But as Ken kind of alluded to it, it tends to make a lot of sense when you’re most usually going to see it as part of your expansion inside of a larger enterprise. You’re probably not going to see it frequently with the very first sale into a new logo, you could. And I think some things that are really we’re starting to see resonate there are the new FortiPoints program that we make available and things with that nature where customers have reached that point where they’re very comfortable for in that for the technology and our customer support, et cetera, and they start thinking about long-term relationships. They know they’re going to buy more. They may not know what. But the combination of EAs and FortiPoints, I think, has been well received by the customer group.
Adam Borg: That’s great. And maybe just as a quick follow-up. In the slide deck, I didn’t recall seeing the breakout of the FortiGate by small, medium and large. I know that indicator has been less meaningful more recently. I was just curious, there anything interesting there as you think about the FortiGate sales by size. Thanks, again.
Keith Jensen: No. I think the two that take it really — you see us at this point in the firewall life cycle, it’s really for us, we want to increase the focus on SASE. I think we feel very good about it. you see us adding some more information there. And to your point that it wasn’t anything that was really new or earth shattering on the FortiGates.
Adam Borg: Great. Thanks, again.
Operator: Thank you. And one moment for our next question. Our next question comes from Keith Bachman of BMO. Your line is now open.
Keith Bachman: Good afternoon. Thank you very much. And Peter and Keith, I appreciate the slides. I did find seven and eight to be quite interesting. And I want to focus my first question on that. And if you look at the amount of billings from SASE, 24%. Is there — just any clarification on — of that 24%, how much is SD-WAN? And then if I look at the SecOps really interesting that enterprise is 40% of the SecOps. And is there just any patterns or anything that’s kind of bubbling up as a frequent purchase within the SecOps portfolio you have that is serving to be pretty interesting to the enterprise. I just — I thought that 40% number was quite interesting. And believe it or not, I’m going to count that as one question. And then Keith, just anything you could think about or guide us on the FortiCare support line item as we think about the correlation to the product sales, and then I will cede the floor before Peter gets a chance to cut me off.
Keith Jensen: I need to reverse what I covered FortiCare, FortiGuard. I think it’s a great question is FortiCare, which is the traditional support offering, we talk about services being a lagging indicator. It’s really what did you sell before and what rep you’re recognizing now. And what’s important is that FortiCare is going to be more closely linked to more recent product sales, right, because you have fewer products to attach it. So, you’ll probably see a little more pressure on FortiCare there. FortiGuard, which is the security subscriptions, which can be bundled, but they can also now be a variety of SecOps solutions and SASE solutions is getting a fair amount of tailwind from those other two pillars. So, you will start to see, I think, and have seen a little more divergence in the growth rates as it goes through the cycle if we own between FortiCare and FortiGuard.
And FortiGuard actually has higher margins. And I think that we tried to call out in the prepared remarks that if you look at the SASE SecOps business, which I’ll just broadly call SASE not currently FortiCare and FortiGuard and our software licenses. You start to see a company now that has a run rate of about $750 million in say non-hardware and non-attached service contracts, which is pretty impressive, I think.
Ken Xie: And I think since we only launched our own FortiSASE six months ago, we see pretty strong growth but also SD-WAN has been there for a few years. So, I have to say, probably most — a majority if not the most, SASE still more comes from SD-WAN, which is in the chart there. Maybe the better way to say is really look at the pipeline, so that’s on Keith’s script. He says — it’s a unified SASE probably pipeline grow like 45%. And then the SSE pipeline growth over 150%. That’s maybe a better indicator as a pretty strong for the interest and also leverage our both SD-WAN and the firewall market-leading position there. So, we do see a lot of customer adding the SASE, adding the SD-WAN and convert some of them to the additional service, which will probably come about over 90% of our — like the SASE business right now.
And is also very strong interest from the customer right now. And at the same time, some of the trial program like using the FortiWiFi AP as a hardware agent offers certain free SASE service. That’s also what drive additional like differentiated — unified SASE approach compared to the other competitor in the market, which we also drive quite a lot of SASE specifies going forward. So, that’s also the reason we believe probably within a few quarters or a few years, we’ll be the number one leader in the SASE market.
Operator: Thank you. Our next question comes from Joseph Gallo of Jefferies. Your line is now open.
Joseph Gallo: Hey guys. Thanks for the question. A lot of cool stuff around AI at your conference. FortiAI, any early feedback? And how are we thinking about monetizing that? And any impact to gross margins? And when can that benefit top line? Thanks.
