One such statistic that has become in significance as Microsoft investors prepare for quarterly earnings this month is financing leasing.
A financing lease enables a business to pay for an asset over time as opposed to everything at once. Shareholders need to get used to some very large figures for businesses like Microsoft, who are constructing enormous data centers to handle workloads related to artificial intelligence.
In a footnote to its annual report, Microsoft informed investors in July that financing leases that had not yet started had surged to $108.4 billion, up $20.6 billion from the previous quarter and almost $100 billion more than two years prior. According to the petition, leases will start in the fiscal years 2025 and 2030 and last for a maximum of 20 years.
on the most recent quarter, Microsoft invested $19 billion on capital projects. The amount was more than Microsoft spent during the whole 2020 fiscal year and increased from $14 billion in the March quarter to include assets bought under financing leases.
Charles Fitzgerald, a former Microsoft manager who blogs on capital expenditures on Platformonomics, called the ramp “insane.”
Microsoft’s leasing finances will become more transparent for investors when it releases its fiscal first-quarter earnings in late October.
In the last two years, executives at Microsoft and other leading tech companies have authorized larger capital expenditures, frequently to improve their generative AI performance.
Microsoft said last month that it would contribute to a fund that would support the construction of data centers and the required energy infrastructure, mostly in the United States. In order to restart a reactor at the Pennsylvanian nuclear power facility Three Mile Island, it also inked a 20-year power purchase deal.
Those who followed Microsoft’s finance head Amy Hood’s advice in April weren’t surprised by the company’s higher expenses in the June quarter. For the third time in a year, she stated that Microsoft anticipated a “material” increase in capital spending.
Still, the financing leasing figure surprised Rishi Jaluria of RBC Capital Markets.
Although they exceeded my own predictions, Jaluria stated, “I’m always on the side that capital leases and capital expenditures are going to be way higher than people think.” “To be honest, in this case, I trust Microsoft.” A financial lease can also be referred to as a capital lease.
According to Microsoft, creating data centers from the ground up results in the greatest cost and performance. However, there are instances when the business need extra capacity right now, and financing leases might enable Microsoft to acquire it more swiftly.
With the release of ChatGPT by OpenAI in late 2022, things have been moving quickly. OpenAI receives computational power from Microsoft, thus in order to maintain ChatGPT online, the business has to have a sufficient number of servers equipped with Nvidia graphics processing units.
With the increasing popularity of ChatGPT and other OpenAI services, Microsoft has added CoreWeave and Oracle to its roster of cloud providers. In a research published in September, UBS analysts noted that Hood’s January remarks seemed to imply that CoreWeave and Oracle partnerships are part of Microsoft’s finance leasing.
Regarding how third-party cloud agreements appear on its financial accounts, Microsoft declined to comment.
According to Jaluria, investors don’t focus on capital leasing backlogs. Their duration and date of implementation are not specified by Microsoft, which makes them less urgent than capital expenditures made during the quarter.
Normally, when analysts probe Hood about finances on earnings calls, CEO Satya Nadella yields. But in response to a question from an analyst in July on the plan to augment Microsoft’s direct data center expenditure with alliances with other cloud providers, Nadella spoke up.
“It doesn’t seem any different to me than the leases we’ve already completed,” Nadella declared. “You could even argue that, on occasion, leasing from Oracle might be even more cost-effective because the terms are shorter.”
According to Jaluria, investors just need to understand that the increase in capital expenditures and upcoming financing leases will have an impact on profitability.
“Margins are naturally declining,” stated Jaluria, who rates the company with a recommendation akin to a buy. “The advantages do not yet outweigh the costs, which are already there. And I consider that acceptable.
