Microsoft CEO Satya Nadella speaks at an artificial intelligence technology company event in Jakarta, Indonesia, April 30, 2024. Infrastructure, betting on Southeast Asia’s largest economy to spur growth.
Dimas Adian | Bloomberg | Getty Images
as Microsoft As investors prepare for quarterly earnings this month, one specific metric is becoming increasingly important: finance leases.
Finance leases allow companies to pay for an asset over a period of years rather than paying it all up front. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders have to get used to some big numbers.
July, Microsoft tell investors In a footnote to its annual report, financial leases that have not yet begun have soared to $108.4 billion, an increase of $20.6 billion from the previous quarter and nearly $100 billion from two years ago. The leasing would begin between fiscal years 2025 and 2030 and would last for up to 20 years, the document said.
Overall, Microsoft’s capital expenditures in the most recent quarter were $19 billion. That total, which includes assets acquired through financial leases, is up from $14 billion in the March quarter and equals Microsoft’s total spending in fiscal 2020.
“It’s been crazy growth,” said Charles Fitzgerald, a former Microsoft manager who blogs about capital spending. Platform economics.
Investors will learn more about Microsoft’s leasing finances when it reports its fiscal first-quarter results at the end of October. Executives at Microsoft and other top technology companies have approved higher capital spending over the past two years, often to improve their performance in generating artificial intelligence.
Last month, Microsoft confirmed its participation in a fund to support the development of data centers and necessary energy infrastructure, primarily in the United States. reactor.
caught off guard
Microsoft’s higher costs in the June quarter came as no surprise to those paying attention to Finance Chief Amy Hood’s April guidance. For the third time in a year, she said Microsoft expects capital spending to grow “significantly.”
Still, RBC Capital Markets’ Rishi Jaluria was caught off guard by the finance lease data.
“I always thought capital leases and capex were going to be much higher than people thought, but they exceeded my own expectations,” Jarulia said. “Quite frankly, I trust Microsoft here.” Capital lease is another term for financial lease.
Microsoft says it achieves optimal performance and optimal cost when building data centers from the ground up. But sometimes companies need to add capacity immediately, and financial leasing can help Microsoft get it faster.
This step has been crazy since OpenAI launched ChatGPT in late 2022. Providing computing power for OpenAI means that the startup needs enough servers NVIDIA The graphics processing unit keeps ChatGPT online.
As ChatGPT and other OpenAI services become more popular, Microsoft has signed up other cloud providers, including CoreWeave and Oracle. UBS analysts wrote in a September note that Hood’s comments in January suggested that Microsoft’s financial leases included relationships with CoreWeave and Oracle.
Microsoft declined to comment on how third-party cloud partnerships are reflected in its financial statements.
Jarulia said investors are not concerned about the backlog of capital leases. Microsoft did not specify when these expenditures would begin or last, making them less immediate than quarterly capital expenditures.
Chief Executive Satya Nadella typically defers to Hood when analysts ask about financials on earnings calls. But in July, when an analyst asked about Microsoft’s strategy for forming partnerships with other cloud providers to supplement Microsoft’s direct data center spending, Nadella stepped up.
“To me, this is no different than leasing that we’ve done in the past,” Nadella said. “You could even argue that sometimes buying from Oracle can be a more efficient lease because they have shorter dates.”
When it comes to the surge in capital expenditure and future finance leases, Jarulia said investors must accept that this will impact profitability.
“Naturally, margins are declining,” said Jarulia, who has a buy rating on the stock. “The costs are here now and the benefits don’t offset it. I think that’s OK.”
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