Editor-DN
Microsoft CEO Satya Nadella speaks at a company event on artificial intelligence technologies on April 30, 2024 in Jakarta, Indonesia. Microsoft will invest $1.7 billion to build cloud computing and artificial intelligence infrastructure in Indonesia, which is betting on Southeast Asia’s biggest economic growth. .
Dimas Ardian | Bloomberg | Getty Images
As Microsoft As investors prepare for quarterly earnings this month, there’s one particular metric that’s becoming increasingly important: finance leases.
A finance lease allows a company to pay for an asset over the course of a year, rather than paying all upfront. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders will have to get used to some big numbers.
In July, Microsoft told investors Finance leases that had not yet begun rose to $108.4 billion, up $20.6 billion from the prior quarter, and up nearly 100 percent from two years ago, it said in a footnote to its annual report. Billions of dollars are high. The leases will begin between fiscal years 2025 and 2030, and run for 20 years, the filing said.
In total, Microsoft invested $19 billion in the latest quarter. The total, which includes assets acquired under finance leases, was more than $14 billion in the March quarter and Microsoft took out the entire 2020 fiscal year.
“It’s a crazy ramp,” said Charles Fitzgerald, a former Microsoft manager who writes about capital spending on his blog. Platformonomics.
Investors will get more clarity on Microsoft’s lease finance when the company reports fiscal first-quarter results in late October. Executives at Microsoft and other top tech companies have approved large capital expenditures over the past two years, often to boost their performance in creative AI.
Last month, Microsoft confirmed its participation in funding for the development of data centers and essential energy infrastructure, notably in the US, where it provided 20-year power to restart reactors at the Three Mile Island nuclear plant in Pennsylvania. A purchase agreement was also signed.
Caught off guard.
Microsoft’s higher spending in the June quarter was no surprise to those who followed Finance Chief Amy Hood’s direction from April. It said for the third time in a year that Microsoft expects capital spending to rise “materially.”
Still, Rishi Jalorea of RBC Capital Markets was kept away from the finance lease figures.
“I’m always on the side that capital leases and capital costs are going to be higher than people think, but they exceeded my own expectations,” Jalorea said. “Frankly, I’m trusting Microsoft here.” Capital lease is another term for finance lease.
Microsoft has said that it gets the best performance and best value when it builds data centers from scratch. But sometimes a company needs additional capacity immediately, and finance leases can help Microsoft get it more quickly.
Since OpenAI introduced ChatGPT in late 2022, the momentum has been frenetic. OpenAI provides the computing power, meaning the startup needs enough servers. Nvidia Graphics processing unit to keep ChatGPT online.
As ChatGPT and other OpenAI services become more popular, Microsoft has signed up additional cloud providers, including CoreWeave and Oracle. UBS analysts wrote in a report in September that Hood’s comments in January suggest that Microsoft’s finance lease includes relationships with CoreView and Oracle.
Microsoft declined to comment on where third-party cloud partnerships appear on its financial statements.
Investors don’t pay attention to the backlog of capital leases, Jalorea said. Microsoft doesn’t specify when they’ll start or how long they’ll last, which makes them less immediate than quarterly capital expenditures.
CEO Satya Nadella usually ducks the hood when analysts ask financial questions on earnings calls. But in July, Nadella stepped in when an analyst asked about a strategy to partner with other cloud providers that offset Microsoft’s direct data center costs.
“To me, it’s no different than leases we’ve done in the past,” Nadella said. “You could even say that sometimes buying from Oracle can be a more efficient lease because they’re even less dated.”
When it comes to raising capital expenditures and future finance leases, Jalorea said investors simply have to accept that they will weigh on profitability.
“Naturally, margins are coming down,” said Jalorea, who has a buy rating on the stock. “The price is here now, and the benefits aren’t here to make up for it. And I think that’s OK.”
