Microsoft’s mammoth AI bet will lead to over $100 billion in data center leases
Microsoft CEO Satya Nadella speaks at a company event on artificial intelligence technologies in Jakarta, Indonesia, on April 30, 2024. Microsoft will invest $1.7 billion to build out cloud computing and artificial intelligence infrastructure in Indonesia, betting on Southeast Asia’s biggest economy to spur growth.
Dimas Ardian | Bloomberg | Getty Images
As Microsoft investors get ready for quarterly earnings this month, there’s one particular metric that’s become increasingly important: finance leases.
A finance lease lets a company pay for an asset over years, rather than all upfront. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders have to get used to some big numbers.
In July, Microsoft told investors in a footnote of its annual report that finance leases that had not yet begun had soared to $108.4 billion, up $20.6 billion from the quarter before, and nearly $100 billion higher than two years earlier. Leases will commence between the 2025 and 2030 fiscal years, and will run for up to 20 years, the filing said.
Overall, Microsoft made $19 billion in capital expenditures in the latest quarter. The total, which includes assets acquired under finance leases, was up from $14 billion in the March quarter and was as much as Microsoft shelled out in the entire 2020 fiscal year.
“It’s an insane ramp,” said Charles Fitzgerald, a former Microsoft manager who writes about capital expenditures on his blog Platformonomics.
Investors will get further clarity on Microsoft’s lease finances when the company reports fiscal first-quarter results in late October. Executives at Microsoft and other top tech companies have approved higher capital expenditures in the past two years, often to boost their performance in generative AI.
Last month Microsoft confirmed its participation in a fund to back the development of data centers and the necessary energy infrastructure, mainly in the U.S. It also signed a 20-year power purchase agreement to restart a reactor at the Three Mile Island nuclear plant in Pennsylvania.
Caught off guard
Microsoft’s higher costs in the June quarter weren’t a surprise to those who heeded finance chief Amy Hood’s guidance from April. She said for the third time in a year that Microsoft was expecting capital expenditures to grow “materially.”
Still, RBC Capital Markets’ Rishi Jaluria was caught off guard by the finance lease figure.
“I’m always on the side that capital leases and capital expenditures are going to be way higher than people think, but they exceeded my own expectations,” Jaluria said. “Frankly, I’m trusting Microsoft here.” A capital lease is another term for a finance lease.
Microsoft has said it achieves the best performance and the best cost when it’s building data centers from scratch. But sometimes the company needs additional capacity immediately, and finance leases can help Microsoft obtain it more quickly.
The pace has been frenetic since OpenAI introduced ChatGPT in late 2022. Microsoft supplies computing power to OpenAI, meaning the startup needs enough servers packed with Nvidia graphics processing units to keep ChatGPT online.
With ChatGPT and other OpenAI services becoming even more popular, Microsoft has signed up additional cloud providers, including CoreWeave and Oracle. UBS analysts wrote in a report in September that comments Hood made in January suggest that Microsoft’s finance leases include the relationships with CoreWeave and Oracle.
Microsoft declined to comment on where third-party cloud partnerships show up on its financial statements.
Jaluria said investors don’t pay attention to backlogs for capital leases. Microsoft doesn’t specify when they will kick in or how long they will last, making them less immediate than in-quarter capital expenditures.
CEO Satya Nadella normally defers to Hood when analysts ask financial questions on earnings calls. But in July, Nadella stepped up when an analyst asked about the strategy of forming partnerships with other cloud providers that supplement Microsoft’s direct data center spending.
“To me it’s no different than leases that we’ve already done in the past,” Nadella said. “You could even say sometimes buying from Oracle may be even more efficient leases because they are even shorter date.”
When it comes to the jump in capital expenditures and future finance leases, Jaluria said investors just have to accept that they will weigh on profitability.
“Naturally, margins are coming down,” said Jaluria, who has the equivalent of a buy rating on the stock. “The cost is here now, and the benefits are not here to offset it. And I think that’s OK.”
Nvidia CEO Jensen Huang introduces new products as he delivers the keynote address at the GTC AI Conference in San Jose, California, on March 18, 2025.
Josh Edelson | AFP | Getty Images
At the end of Nvidia CEO Jensen Huang’s unscripted two-hour keynote on Tuesday, his message was clear: Get the fastest chips that the company makes.
Speaking at Nvidia’s GTC conference, Huang said that questions clients have about the cost and return on investment the company’s graphics processors, or GPUs, will go away with faster chips that can be digitally sliced and used to serve artificial intelligence to millions of people at the same time.
“Over the next 10 years, because we could see improving performance so dramatically, speed is the best cost-reduction system,” Huang said in a meeting with journalists shortly after his GTC keynote.
The company dedicated 10 minutes during Huang’s speech to explain the economics of faster chips for cloud providers, complete with Huang doing envelope math out loud on each chip’s cost-per-token, a measure of how much it costs to create one unit of AI output.
Huang told reporters that he presented the math because that’s what’s on the mind of hyperscale cloud and AI companies.
The company’s Blackwell Ultra systems, coming out this year, could provide data centers 50 times more revenue than its Hopper systems because it’s so much faster at serving AI to multiple users, Nvidia says.
Investors worry about whether the four major cloud providers — Microsoft, Google, Amazon and Oracle — could slow down their torrid pace of capital expenditures centered around pricey AI chips. Nvidia doesn’t reveal prices for its AI chips, but analysts say Blackwell can cost $40,000 per GPU.
Already, the four largest cloud providers have bought 3.6 million Blackwell GPUs, under Nvidia’s new convention that counts each Blackwell as 2 GPUs. That’s up from 1.3 million Hopper GPUs, Blackwell’s predecessor, Nvidia said Tuesday.
The company decided to announce its roadmap for 2027’s Rubin Next and 2028’s Feynman AI chips, Huang said, because cloud customers are already planning expensive data centers and want to know the broad strokes of Nvidia’s plans.
“We know right now, as we speak, in a couple of years, several hundred billion dollars of AI infrastructure” will be built, Huang said. “You’ve got the budget approved. You got the power approved. You got the land.”
Huang dismissed the notion that custom chips from cloud providers could challenge Nvidia’s GPUs, arguing they’re not flexible enough for fast-moving AI algorithms. He also expressed doubt that many of the recently announced custom AI chips, known within the industry as ASICs, would make it to market.
“A lot of ASICs get canceled,” Huang said. “The ASIC still has to be better than the best.”
Huang said his is focus on making sure those big projects use the latest and greatest Nvidia systems.
“So the question is, what do you want for several $100 billion?” Huang said.
Microsoft’s Amy Coleman (L) and Kathleen Hogan (R).
Source: Microsoft
Microsoft said Wednesday that company veteran Amy Coleman will become its new executive vice president and chief people officer, succeeding Kathleen Hogan, who has held the position for the past decade.
Hogan will remain an executive vice president but move to a newly established Office of Strategy and Transformation, which is an expansion of the office of the CEO. She will join Microsoft’s group of top executives, reporting directly to CEO Satya Nadella.
Coleman is stepping into a major role, given that Microsoft is among the largest employers in the U.S., with 228,000 total employees as of June 2024. She has worked at the company for more than 25 years over two stints, having first joined as a compensation manager in 1996.
Hogan will remain on the senior leadership team.
“Amy has led HR for our corporate functions across the company for the past six years, following various HR roles partnering across engineering, sales, marketing, and business development spanning 25 years,” Nadella wrote in a memo to employees.
“In that time, she has been a trusted advisor to both Kathleen and to me as she orchestrated many cross-company workstreams as we evolved our culture, improved our employee engagement model, established our employee relations team, and drove enterprise crisis response for our people,” he wrote.
Hogan arrived at Microsoft in 2003 after being a development manager at Oracle and a partner at McKinsey. Under Hogan, some of Microsoft’s human resources practices evolved. She has emphasized the importance of employees having a growth mindset instead of a fixed mindset, drawing on concepts from psychologist Carol Dweck.
“We came up with some big symbolic changes to show that we really were serious about driving culture change, from changing the performance-review system to changing our all-hands company meeting, to our monthly Q&A with the employees,” Hogan said in a 2019 interview with Business Insider.
Hogan pushed for managers to evaluate the inclusivity of employees and oversaw changes in the handling of internal sexual harassment cases.
Coleman had been Microsoft’s corporate vice president for human resources and corporate functions for the past four years. In that role, she was responsible for 200 HR workers and led the development of Microsoft’s hybrid work approach, as well as the HR aspect of the company’s Covid response, according to her LinkedIn profile.
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