Microsoft says cloud AI demand is outstripping supply even after a 79% jump in capital spending

Microsoft says cloud AI demand is outstripping supply even after a 79% jump in capital spending

increasing spending at a rate not seen since at least 2016. It may still not be enough.

In its earnings report on Thursday, Microsoft said capital spending jumped 79% from a year earlier to $14 billion. The company spent faster than revenue increased — sales rose 17% during the period.

Even with all that investment, Microsoft has a lack of data center infrastructure, specifically for deploying artificial intelligence models.

“We have demand that slightly exceeds our supply,” Microsoft Chief Financial Officer Amy Hood told analysts on the company’s earnings call.

Companies need increasing amounts of computing power to run large workloads, adding human-like generative AI features to their products. It’s a boom that OpenAI and its ChatGPT chatbot started, and Microsoft has followed suit, adding assistants to its Teams communications app, Bing search engine and other services. This technology can summarize meeting transcripts, compose emails and describe information from the web.

Microsoft isn’t the only AI hardware vendor facing supply challenges.

Nvidia
, the largest developer of processors for training and deploying generative AI models, has been supply constrained, with revenue more than tripling in consecutive quarters. Now Microsoft, one of Nvidia’s main customers, is feeling the pressure.

During the fiscal third quarter, revenue in Microsoft’s Azure cloud grew 31%, with 7 percentage points from AI. Hood said capacity issues may have affected AI’s results and will impact the fiscal fourth quarter. Supply limitations mean Microsoft has less capacity available to lease to customers to use AI models at the inference stage, he said.

Azure is key to Microsoft’s future, contributing tens of billions of dollars in revenue each quarter and growing faster than most other parts of the company. In Azure, AI services stand out as the highlight, attracting new customers as Microsoft takes on Amazon
Web Services.

Hood said capital spending will increase “materially” in the current quarter, particularly for cloud infrastructure. And he’s asking for higher capital spending in the new fiscal year, starting July 1.

Microsoft intends “to scale to meet the growing demand signals for our cloud and AI products,” he said.