Microsoft AI Bet Shows Up in Finance Leases That Haven’t Yet Commenced.
Microsoft’s significant investment in artificial intelligence (AI) is set to have a substantial impact on its financials, particularly in the area of data center leases. The company has informed its investors that uninitiated financial leases have surged to $108.4 billion, an increase of $20.6 billion from the previous quarter and nearly $100 billion more than two years prior. These leases are expected to commence between the fiscal years 2025 and 2030 and can extend for as long as 20 years.
This increase in financial leases is part of Microsoft’s broader strategy to enhance its capabilities in generative AI. The company has been actively investing in data centers and energy infrastructure, with a recent confirmation of its involvement in a fund aimed at supporting the establishment of data centers, predominantly in the United States. Additionally, Microsoft signed a 20-year power purchase agreement to reactivate a reactor at the Three Mile Island nuclear facility in Pennsylvania.
The elevated costs reported by Microsoft for the June quarter were not unexpected given previous guidance from finance chief Amy Hood. However, the exact figures have surprised some analysts, with Rishi Jaluria from RBC Capital Markets noting that he was taken aback by the financial lease figure. Despite the significant increase, Microsoft maintains that it achieves optimal performance and cost efficiency when constructing data centers from the ground up. Financial leases can facilitate quicker access to additional capacity when needed.
The rising popularity of ChatGPT and other OpenAI offerings has necessitated a sufficient number of servers equipped with Nvidia graphics units, leading to Microsoft’s partnerships with providers like CoreWeave and Oracle. These partnerships are reflected in Microsoft’s financial documents, although the company has chosen not to comment on how third-party cloud partnerships are specifically reflected in its financial reports.
CEO Satya Nadella has addressed the strategy behind forming partnerships with other cloud providers, stating that it is no different from the leases the company has executed in the past. He noted that purchasing from Oracle may even result in more efficient leases due to their shorter terms. Investors will gain additional insights into Microsoft’s leasing finances when the company releases its fiscal first-quarter results later in October.
