Satya Nadella, CEO of Microsoft, speaks during a corporate event on artificial intelligence technologies in Jakarta, Indonesia, April 30, 2024. Microsoft will invest $1.7 billion to develop cloud infrastructure computing and artificial intelligence in Indonesia, betting on Southeast Asia’s largest economy to drive growth. .
Dimas Ardien | Bloomberg | Getty Images
As Microsoft As investors prepare to report quarterly results this month, there is one particular indicator that is becoming increasingly important: leasing.
A lease allows a business to pay for an asset over several years, rather than up front. For companies like Microsoft that are building huge data centers to handle artificial intelligence workloads, shareholders have to get used to high numbers.
In July, Microsoft told investors in a footnote to its annual report, finance leases that had not yet started had climbed to $108.4 billion, up $20.6 billion from the previous quarter and almost $100 billion more than two years earlier. The leases will begin between fiscal years 2025 and 2030 and last up to 20 years, the filing said.
In total, Microsoft made $19 billion in capital spending last quarter. The total, which includes assets acquired under finance leases, was up from $14 billion in the March quarter and was equal to what Microsoft paid out for the entire 2020 fiscal year .
“It’s an insane ramp,” said Charles Fitzgerald, a former Microsoft manager who writes about capital spending on his blog. Economic platform.
Investors will get more clarity on Microsoft’s lease financings when the company reports its first-quarter financial results in late October. Executives at Microsoft and other leading technology companies have approved higher capital spending over the past two years, often to improve their performance in generative AI.
Last month, Microsoft confirmed its participation in a fund to support the development of necessary data centers and energy infrastructure, primarily in the United States. He also signed a 20-year deal electricity purchase contract to restart a reactor at the Three Mile Island nuclear power plant in Pennsylvania.
Caught off guard
Microsoft’s higher costs in the June quarter were no surprise to those who followed CFO Amy Hood’s guidance from April. She said for the third time in a year that Microsoft expected “substantial” growth in capital spending.
Still, Rishi Jaluria of RBC Capital Markets was caught off guard by the leasing figure.
“I still believe capital leases and capital expenditures will be much higher than people think, but they exceeded my own expectations,” Jaluria said. “Frankly, I trust Microsoft here.” A financial lease is another term for a finance lease.
Microsoft said it gets the best performance and cost when it builds data centers from the ground up. But sometimes the company needs additional capacity immediately, and finance leases can help Microsoft get it faster.
The pace has been frenetic since OpenAI introduced ChatGPT in late 2022. Microsoft provides computing power to OpenAI, which means the startup needs enough servers with Nvidia graphics processing units to keep ChatGPT online.
With ChatGPT and other OpenAI services becoming even more popularMicrosoft has signed contracts with additional cloud providers, including CoreWeave And Oracle. UBS analysts wrote in a September report that comments Hood made in January suggested that Microsoft’s finance leases included the relationships with CoreWeave and Oracle.
Microsoft declined to comment on where third-party cloud partnerships appear in its financial statements.
Jaluria said investors are not paying attention to backlogs when it comes to capital leases. Microsoft doesn’t say when they will take effect or how long they will last, making them less immediate than the quarter’s capital spending.
CEO Satya Nadella normally defers to Hood when analysts ask financial questions on earnings calls. But in July, Nadella stepped up his efforts when an analyst asked him about the strategy of forming partnerships with other cloud providers that complement Microsoft’s direct data center spending.
“To me, it’s no different than any leases we’ve done in the past,” Nadella said. “One could even argue that sometimes buying from Oracle can be even more effective leases because they are even shorter term.”
When it comes to increased capital expenditures and future finance leases, Jaluria said investors simply have to accept that this will weigh on profitability.
“Naturally, margins are shrinking,” said Jaluria, who has the equivalent of a buy rating on the stock. “The cost is there now, and the benefits aren’t there to offset it. And I think that’s OK.”
