In late January last year, the CEO of Microsoft, Satya Nadella told investors on an earnings call, that the company’s security business had reached USD 10 billion in revenue and was growing at the rate of 40 percent year-on-year. It was evident that the security business was outpacing every other product owned by the company.
Nadella has been known for his revival of Microsoft, while overseeing a five-fold expansion in market capitalization during his 7-year stint at the top. The level of growth was based on Microsoft’s Cloud business posing a more serious threat to Amazon Web Services in a massive market.
By revealing to investors the size of Microsoft’s security business, Nadella was able to uncover a powerful growth engine for Microsoft. The total revenue at the company was up by only 14 percent from the corresponding period the previous year.
Andrew Rubin, CEO of cybersecurity software firm Illumio, said that nobody realized that it was a USD10 billion business. Rubin, whose company was valued at USD2.75 billion last year, said that he was surprised by the growth and scale of of what the company had achieved. .
Investors wanting a glimpse of what is happening inside the company’s security division, are aware that ransomware and other malicious attacks have increased, leading to huge spending by enterprises, small companies and the public sector. The US government has also warned of an increase in cyberattacks following Russia’s invasion of Ukraine.
Security is proving to be a competitive advantage for Azure over AWS because the largest enterprises have always been big Microsoft customers and there’s a trust factor, said Rubin.
Like Rubin, Gregg Moskowitz, an analyst covering Microsoft at Mizuho Securities, was surprised when he first heard Nadella disclose the size and growth rate of the security business.
Moscowitz said that he would have only guessed that the figure would be between USD5 billion to USD 10 billion a year, and recommended buying the stock.
Nadella issued an update in January this year, showing that the momentum of its’ security division was on the rise. Security as a business was seen to be growing at over 45 percent a year, topping revenue at over USD15 billion a year. Nadella pointed out that over 15,000 customers were using Azure Sentinel, a cloud-based alternative for Splunk that was used for sifting through security data. Microsoft had introduced Azure Sentinel in 2019.
Microsoft security suite competes with market pioneers
Microsoft security suite includes products that track the use of cloud applications, keep devices safe, and provide secure access to corporate resources. This makes it a clear rival to companies like Okta, Palo Alto Networks and Crowdstrike.
Palo Alto Network’s CEO Nikesh Arora was quoted as saying that the security sector was a very large sector growing in high single digits, and that Microsoft still had the largest market share. Global research firm Gartner estimated that Microsoft controlled approximately 8.5 percent of the total market share – which is larger than that of any other firm.
In the past, hackers have successfully exploited vulnerabilities in Microsoft products, including Microsoft’s Exchange Server email and calendar software. This challenge provided an opening to companies wanting to challenge Microsoft’s domination in the market.
Crowdstrike CEO George Kurtz said that Microsoft’s customers have been enduring a crisis of trust.
Customers who were aware of the hacks had said that they need to derisk and look at other providers. He also said that for many customers, it was akin to the fox guarding the henhouse, a notion that the entity responsible for protection was actually harmful itself.
Moskowitz feels that the company may make a multi-billion dollar acquisition to further consolidate its lead at the top.
Such an acquisition is not likely to come cheap, as cloud computing companies were trading at the highest of tech companies, in an indication of how much customers were willing to pay to protect their data.