Microsoft says cloud AI demand is exceeding supply even after 79% surge in capital spending

Microsoft has increased expenditures at a rate not seen since at least 2016. It might not be enough.

In its earnings release on Thursday, Microsoft stated that capital expenditures increased 79% from the previous year to $14 billion. The company’s spending is outpacing its revenue growth – sales increased 17% throughout the period.

Despite all of its investment, Microsoft still lacks data center infrastructure, particularly for installing artificial intelligence models.

“We do have demand that exceeds our supply by a bit,” Microsoft CFO Amy Hood told analysts during the company’s earnings call.

Companies require an ever-increasing amount of computation to handle heavy workloads, as they include human-like creative AI capabilities into their products. It’s a boom that began with OpenAI and its ChatGPT chatbot, and Microsoft has followed following, adding helpers to its Teams collaboration software, Bing search engine, and other products. The system can summarize meeting transcripts, generate emails, and explain web-based material.

Microsoft is not the only AI hardware provider facing supply issues.

Nvidia, the leading provider of processors for training and deploying generative AI models, has experienced supply constraints, resulting in revenue more than tripling in successive quarters. Microsoft, one of Nvidia’s key customers, is currently experiencing difficulty.

During the fiscal third quarter, Microsoft’s Azure cloud revenue increased 31%, with AI accounting for 7 percentage points. Hood stated that the capacity issue may have influenced AI results and will have an impact in the fiscal fourth quarter. She explained that due to a supply constraint, Microsoft has less available capacity to rent out to clients for implementing AI models at the inference stage.

Azure is critical to Microsoft’s future, generating tens of billions of dollars in sales each quarter and rising faster than most other sections of the business. Azure’s AI services are gaining popularity among clients as Microsoft competes with Amazon Web Services.

Hood predicted that capital expenditures will rise “materially” in the current quarter, primarily for cloud infrastructure. She also asked for larger capital expenditures in the next fiscal year, which begins on July 1.

Microsoft plans “to scale to meet the growing demand signal for our cloud and AI products,” she stated.