Microsoft CEO Satya Nadella acknowledged the amount of the software company’s security business for the first time in January 2021. The sum was significant.

On an earnings call, Nadella told analysts that the company had hit $10 billion in yearly revenue and was “growing more than 40%” year over year. To put it another way, it was outperforming every other big Microsoft product.

The remarks were eye-opening. Nadella was noted for revitalising Microsoft, managing a fivefold increase in market valuation during his seven years at the leadership. That expansion was partly dependent on transforming Microsoft’s cloud business into a more serious competitor to Amazon Web Services in a massive market.

By informing investors about the size of Microsoft’s security division, Nadella was inadvertently revealing a powerful growth engine. The company’s total sales increased by only 14 percent over the previous year. In comparison, Palo Alto Networks, one of the top pure-play security software businesses, grew sales by 21% over the same time period on a lesser base of less than $4 billion.

“Nobody had any idea it was a $10 billion business,” said Andrew Rubin, CEO of cybersecurity software start-up Illumio, speaking of Microsoft’s security revenue. Rubin, whose company was valued last year at $2.75 billion, was surprised by the growth and scale of what Microsoft had assembled, spanning several markets and all three reporting segments.

Microsoft is set to report fiscal third-quarter earnings on Tuesday, and investors may get another look inside the company’s security division. Ransomware assaults have recently escalated, resulting in an increase in spending by enterprises, small businesses, and the public sector. In addition, in the aftermath of Russia’s invasion of Ukraine earlier this year, the US government has warned of increased cybersecurity dangers.

Because the largest corporations have traditionally been huge Microsoft clients, and there’s a trust component, security is proving to be a competitive advantage for Azure against AWS, according to Rubin.

Like Rubin, Gregg Moskowitz, an analyst covering Microsoft at Mizuho Securities, was taken aback when Nadella revealed the magnitude and rate of expansion of the security business.

“I would have guessed somewhere between $5 billion and $10 billion,” said Moskowitz, who recommends buying the stock.

Nadella offered an update in January 2022, indicating that momentum was accelerating. Security was now increasing at about 45 percent per year, thanks to some small acquisitions, and sales had surpassed $15 billion each year. More than 15,000 customers, according to Nadella, are using Azure Sentinel, a cloud-based Splunk option for looking into security data that Microsoft announced in 2019.

Microsoft’s security portfolio also includes tools to protect employees’ devices, track the use of cloud apps, and enable secure access to corporate resources, positioning it as a competitor to CrowdStrike, Okta, Palo Alto Networks, and others.

A Microsoft spokesperson referred to Nadella’s previous statements, in which he emphasised the company’s “cross-cloud, cross-platform” products, which “integrate more than 50 different categories across security, compliance, identity, device management, and privacy.”

It’s difficult to determine how much Microsoft is edging out smaller competitors because the business doesn’t give more precise information. This leaves market participants to speculate.

“There is a very large sector which is growing in high single digits, possibly north of that,” Palo Alto Networks CEO Nikesh Arora told Morgan Stanley analyst Hamza Fodderwala at a conference last month. “There are not many players who are consolidators in that sector. It’s still – I think that 3.5% was still the largest market share, depending on how you count Microsoft Security’s revenue.”

According to Gartner, Microsoft will control approximately 8.5 percent of the total security software market in 2021, a bigger stake than any other company.

Hackers have successfully exploited weaknesses in Microsoft’s Exchange Server email and calendar software, according to the security ecosystem. This created an opportunity for challengers.

CrowdStrike CEO George Kurtz stated during his company’s earnings call in March 2021, following the original revenue announcement, that Microsoft’s customers have been experiencing a “crisis of trust.”

According to Kurtz, Microsoft clients were looking at the intrusions and saying they needed to derisk and find another security supplier. He used the phrase of the fox guarding the henhouse, which implies that the entity in charge of protection is actually detrimental.

Microsoft must now figure out how to become an even bigger role in security. Moskowitz stated that the firm may begin disclosing snippets about security revenue or growth more regularly, but not every quarter. He compared the frequency to announcements on the use of its Teams communication programme. After not providing a comparable figure for six months, Nadella stated in January that Teams had 270 million monthly active users in the fourth quarter.

Moskowitz does not expect security revenue growth to accelerate further, but he does not rule out the possibility of the firm spending tens of billions of dollars on an acquisition in the field.

“We think, strategically speaking, they are going to be far more interested in potentially acquiring strong cloud security assets, as opposed to a company that may have a heritage in the on-premise world,” Moskowitz said.

It would not be inexpensive. Even with the market’s early-year correction, cloud security companies trade at some of the highest multiples in the tech industry, reflecting how much businesses are spending to protect their data.

(Adapted from CNBC.com)

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