Microsoft cloud computing biz to grow slowly amid shortage of data centres

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By Matt Day and Dina Bass 

Microsoft Corp. said its cloud-computing business will continue to grow slowly in the current quarter as the company struggles to build enough data centers to handle demand for its artificial intelligence products. 

The Azure cloud division will grow at as much 32 per cent in its fiscal third quarter, not much faster than it did during the last three months of 2024. The shares fell about 5 per cent in extending trading.

 

The Redmond, Washington-based software maker is considered a leader in commercialising artificial intelligence products, thanks to its close partnership with ChatGPT maker OpenAI. In the last year, Microsoft has unleashed a blizzard of Copilot-branded AI assistants, but efforts to monetise those products is taking longer than some investors would prefer. 

 

Microsoft said Azure AI services grew 157 per cent. But overall sales in the key cloud unit are being hurt by the fact that the company still doesn’t have enough data center capacity to meet customer needs, Chief Financial Officer Amy Hood said in an interview. She later told investors that the capacity constraints should lift by the end of the fiscal year.

 

The company has almost $300 billion worth of commercial service contracts that Microsoft must provide in the future and has not yet recognized as revenue, she said.

 

Demand remains strong, with commercial bookings — a measure of future revenue — rising 67 per cent, “far ahead” of what Microsoft had expected, she said. Hood attributed that partly to Azure commitments from OpenAI.

 

Along with cloud rivals Google and Amazon.com Inc., Microsoft is spending more than it ever has in its history, outlays that mostly go to the chips and data centers required to fuel power-hungry AI services. The company has said it expects to spend $80 billion this fiscal year on AI data centers. Wall Street has begun to question the massive outlays, especially after the Chinese upstart DeepSeek released a new open-source AI model that it claims rivals the abilities of US technology at a fraction of the cost.

 

Capital expenditures during the quarter were $22.6 billion, the company said, exceeding analyst expectations of about $21 billion. The infrastructure buildout resulted in narrower margins in the cloud business.

 

Total revenue in the three months ended Dec. 31 rose 12 per cent to $69.6 billion. Profit during the quarter, the second of Microsoft’s fiscal year, was $3.23 a share. Analysts estimated sales of $68.9 billion and profit of $3.12 per share, according to data compiled by Bloomberg. 

 

The company said 13 percentage points of Azure’s second-quarter growth was attributable to AI, compared with 12 points in the first quarter. Microsoft said its AI revenue during the quarter reached the point where it would be expected to bring in $13 billion over the course of a year.