During the tech giant’s latest earnings call, CEO Satya Nadella made it clear that Microsoft is still aggressively expanding data centre capacity: “We continue to expand our data centre capacity. This quarter alone, we opened data centres in 10 countries across four continents.”
“You don’t want to be upside-down on having one big data centre in one region, when you have a global demand footprint… we just want to make sure we’re building, accounting for the latest and greatest information we have on all of that.”
Reports surfaced back in February suggesting Microsoft was scaling back on several US data centre projects, pausing certain leases and citing power and construction issues as a way to hit the brakes. Pauses were later extended to projects in Chicago, London, Jakarta, and Wisconsin.
But just hours before the company’s latest earnings dropped, Microsoft vice chair and president Brad Smith published a blog post announcing plans to grow the company’s European data centre capacity by 40% over the next two years.
Nadella told investors he felt good about the company’s current data centre trajectory, stating: “The key thing for us is to have our builds and leases be positioned for what is the workload growth of the future.”
“You don’t want to be upside down when the shape of demand changes,” he said. “Because, after all, with essentially pre-training plus test time compute, that’s a big change in terms of how you think about even what is training. Forget inferencing.”
The shift in tone comes against a backdrop of surging demand for Microsoft’s cloud and AI services.
Microsoft cloud revenue rose to $42.4 billion in Q3, up 22% in constant currency, with Azure and other cloud services growing 35%.
To put that into perspective, Microsoft’s total revenue hit $70.1 billion, up 15% in constant currency, with net income rising 19% year-over-year.
Amy Hood, Microsoft’s chief financial officer, suggested that AI services alone contributed 16 percentage points of Azure’s growth.
But the growth is not without pressure, as Hood told investors the company now expects AI capacity constraints to persist beyond June, as demand is growing “a bit faster” than anticipated.
“We are going to be a little short, still, a little tight as we exit the year,” she said, referring to available data centre space. “But we are encouraged by that.”
Despite $21.4 billion in capital expenditures this quarter, roughly half of which went to long-lived infrastructure assets, Microsoft’s pace of build has at times struggled to keep up with demand.
Commercial bookings increased 18%, significantly ahead of expectations, driven in part by Azure demand from OpenAI. Commercial remaining performance obligation (RPO) rose to $315 billion, up 34% year-over-year, with 47% of it due to be recognised beyond the next 12 months.
Hood said the company had “pulled some of that space to be ready earlier,” adding that efficiency gains across GPU supply chains and software layers are helping offset pressures.
Nadella noted that AI workloads aren’t just about accelerators. “Even underneath ChatGPT…they use Cosmos DB. They use Postgres. They use core compute and storage.”
That ratio of AI to non-AI infrastructure, he suggested, was reshaping how Microsoft plans its buildouts.
“There’s nothing certain for sure in the future, except for one thing, which is our largest business is our infrastructure business,” Nadella said. The good news here is the next big platform shift builds on that. It’s not a complete rebuild, having gone through some of these platform shift[s], where you have to come out on the other side with a full rebuild.”
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