Microsoft’s Cloud Computing Ambitions Hinge on Data Center Expansion
As the demand for artificial intelligence products continues to surge, Microsoft Corp. is facing a critical challenge: building enough data centers to meet customer needs. The company’s cloud-computing business, Azure, is expected to grow at a moderate pace in the current quarter, with revenue increasing by as much as 32%. However, this growth is being hindered by the lack of data center capacity.
A Leader in AI Commercialization
Microsoft’s close partnership with OpenAI, the maker of ChatGPT, has established the company as a leader in commercializing artificial intelligence products. In the past year, Microsoft has launched a range of Copilot-branded AI assistants, but efforts to monetize these products are taking longer than expected.
Capacity Constraints Weigh on Azure Sales
Despite strong demand for Azure AI services, which grew 157%, overall sales in the key cloud unit are being hurt by the capacity constraints. Chief Financial Officer Amy Hood attributed this to the fact that the company still doesn’t have enough data center capacity to meet customer needs. However, she assured investors that these constraints should lift by the end of the fiscal year.
Strong Demand and Future Revenue
Demand for Microsoft’s cloud services remains strong, with commercial bookings rising 67%, far ahead of expectations. This is partly due to Azure commitments from OpenAI. The company has a significant backlog of commercial service contracts worth almost $300 billion, which will be recognized as revenue in the future.
Massive Investments in AI Infrastructure
Microsoft, along with its cloud rivals, is investing heavily in AI infrastructure, including chips and data centers. The company expects to spend $80 billion this fiscal year on AI data centers, a significant outlay that has raised questions on Wall Street. Capital expenditures during the quarter were $22.6 billion, exceeding analyst expectations.
Narrower Margins and Total Revenue
The infrastructure buildout resulted in narrower margins in the cloud business. Total revenue in the three months ended Dec. 31 rose 12% to $69.6 billion, with profit during the quarter reaching $3.23 a share.
AI Revenue and Growth
Microsoft’s AI revenue during the quarter reached a significant milestone, with the company expecting to bring in $13 billion over the course of a year. The company attributed 13 percentage points of Azure’s second-quarter growth to AI, compared with 12 points in the first quarter.
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