Dive Brief:
- Microsoft continues to grapple with cloud capacity constraints as AI consumption spikes, CEO Satya Nadella said Wednesday, during its Q1 2025 earnings call for the three-month period ending Sept. 30. Data centers “don’t get built overnight,” Nadella said, pointing to the power grid and issues with third-party leases as limiting factors.
- The tech giant saw cloud revenues increase 22% year over year, to $38.9 billion, a slight slowdown from 24% year-over-year growth in the segment during the same period last year. Microsoft’s AI business is on track to surpass $10 billion in annual revenues next quarter and become the fastest segment in company history to reach that milestone, according to Nadella.
- Microsoft is spending tens of billions of dollars to increase data center capacity. The company reported quarterly capital investments of $20 billion, nearly doubling the $11.2 billion poured into infrastructure during the same period last year. “Roughly half of our cloud and AI-related spend continues to be for long-lived assets that will support monetization over the next 15 years and beyond,” CFO Amy Hood said.
Dive Insight:
The race to scale AI is fueling a data center building boom that shows no signs of letting up.
Microsoft plants to increase capital spending next quarter in response to growing customer cloud consumption, Hood said. “We expect capital expenditures to increase on a sequential basis given our cloud and AI demand signals,” she said Wednesday. "We will stay aligned and, if needed, adjust to the demand signals we see."
Google Cloud intends to increase data center spending in the coming months, too, Alphabet and Google CFO and SVP Anat Ashkenazi said during a Tuesday earnings call. The company’s capital investments increased 63% year over year to $13 billion in Q3.
Hyperscaler infrastructure buildouts drove server and storage component revenues to record highs during the first half of the year, according to Dell’Oro Group market research. The firm expects data center spend to increase 38% this year, surpassing $400 billion, as hunger for compute capacity reshapes the cloud business.
Microsoft has focused on growing its Azure public cloud footprint globally. The company now has over 60 cloud regions and announced major infrastructure investments in Brazil, Italy, Mexico and Sweden over the last several months, Nadella said.
“This demand all showed up pretty fast,” said Nadella, pointing to Microsoft’s ChatGPT deployments and generative AI-powered suite of copilot tools. “Pick the top four or five products of this generation — they're all sort of in and around our ecosystem,” he said.
Despite growth in AI consumption, Microsoft’s $13 billion investment in the company that engineered ChatGPT had a financial downside. Hood said OpenAI losses would cost approximately $1.5 billion in losses on the quarter.
As the technology matures, Microsoft has shifted its focus from the AI startup space and toward the enterprise customer, Nadella added.
“We are not actually selling raw GPUs for other people to train — in fact, that’s a business we turn away,” said Nadella. “We really are not even participating in most of that because we are literally going to the real demand, which is in the enterprise space.”
