As\u00a0Microsoft\u00a0investors get ready for quarterly earnings this month, there\u2019s one particular metric that\u2019s become increasingly important: finance leases.<\/p>\n
A finance lease lets a company pay for an asset over years, rather than all upfront. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders have to get used to some big numbers.<\/p>\n
In July, Microsoft\u00a0told investors\u00a0in a footnote of its annual report that finance leases that had not yet begun had soared to $108.4 billion, up $20.6 billion from the quarter before, and nearly $100 billion higher than two years earlier. Leases will commence between the 2025 and 2030 fiscal years, and will run for up to 20 years, the filing said.<\/p>\n
Overall, Microsoft made $19 billion in capital expenditures in the latest quarter. The total, which includes assets acquired under finance leases, was up from $14 billion in the March quarter and was as much as Microsoft shelled out in the entire 2020 fiscal year.<\/p>\n
\u201cIt\u2019s an insane ramp,\u201d said Charles Fitzgerald, a former Microsoft manager who writes about capital expenditures on his blog\u00a0Platformonomics.<\/p>\n
Investors will get further clarity on Microsoft\u2019s lease finances when the company reports fiscal first-quarter results in late October. Executives at Microsoft and other top tech companies have approved higher capital expenditures in the past two years, often to boost their performance in generative AI.<\/p>\n
Last month Microsoft confirmed its participation in\u00a0a fund\u00a0to back the development of data centers and the necessary energy infrastructure, mainly in the U.S. It also signed a 20-year\u00a0power purchase agreement\u00a0to restart a reactor at the Three Mile Island nuclear plant in Pennsylvania.<\/p>\n
Microsoft\u2019s higher costs in the June quarter weren\u2019t a surprise to those who heeded finance chief Amy Hood\u2019s guidance from April. She said for the third time in a year that Microsoft was expecting capital expenditures to grow \u201cmaterially.\u201d<\/p>\n
Still, RBC Capital Markets\u2019 Rishi Jaluria was caught off guard by the finance lease figure.<\/p>\n
\u201cI\u2019m always on the side that capital leases and capital expenditures are going to be way higher than people think, but they exceeded my own expectations,\u201d Jaluria said. \u201cFrankly, I\u2019m trusting Microsoft here.\u201d A capital lease is another term for a finance lease.<\/p>\n
Microsoft has said it achieves the best performance and the best cost when it\u2019s building data centers from scratch. But sometimes the company needs additional capacity immediately, and finance leases can help Microsoft obtain it more quickly.<\/p>\n
The pace has been frenetic since OpenAI introduced ChatGPT in late 2022. Microsoft\u00a0supplies computing power\u00a0to OpenAI, meaning the startup needs enough servers packed with\u00a0Nvidia\u00a0graphics processing units to keep ChatGPT online.<\/p>\n
With ChatGPT and other OpenAI services becoming\u00a0even more popular, Microsoft has signed up additional cloud providers, including\u00a0CoreWeave\u00a0and\u00a0Oracle. UBS analysts wrote in a report in September that comments Hood made in January suggest that Microsoft\u2019s finance leases include the relationships with CoreWeave and Oracle.<\/p>\n
Microsoft declined to comment on where third-party cloud partnerships show up on its financial statements.<\/p>\n
Jaluria said investors don\u2019t pay attention to backlogs for capital leases. Microsoft doesn\u2019t specify when they will kick in or how long they will last, making them less immediate than in-quarter capital expenditures.<\/p>\n
CEO\u00a0Satya Nadella\u00a0normally defers to Hood when analysts ask financial questions on earnings calls. But in July, Nadella stepped up when an analyst asked about the strategy of forming partnerships with other cloud providers that supplement Microsoft\u2019s direct data center spending.<\/p>\n
\u201cTo me it\u2019s no different than leases that we\u2019ve already done in the past,\u201d Nadella said. \u201cYou could even say sometimes buying from Oracle may be even more efficient leases because they are even shorter date.\u201d<\/p>\n
When it comes to the jump in capital expenditures and future finance leases, Jaluria said investors just have to accept that they will weigh on profitability.<\/p>\n
\u201cNaturally, margins are coming down,\u201d said Jaluria, who has the equivalent of a buy rating on the stock. \u201cThe cost is here now, and the benefits are not here to offset it. And I think that\u2019s OK.\u201d<\/p>\n<\/p>\n
As\u00a0Microsoft\u00a0investors get ready for quarterly earnings this month, there\u2019s one particular metric that\u2019s become increasingly important: finance leases. A finance lease lets a company pay for an asset over years, rather than all upfront. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders have to get used to […]<\/p>\n","protected":false},"author":0,"featured_media":10506,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-10505","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"_links":{"self":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/10505","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/comments?post=10505"}],"version-history":[{"count":0,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/10505\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media\/10506"}],"wp:attachment":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media?parent=10505"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/categories?post=10505"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/tags?post=10505"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}