Microsoft says demand for cloud AI outstrips supply despite surge in costs

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

In its earnings report Thursday, Microsoft said capital spending jumped 79 percent from a year earlier to $14 billion. The company is spending much faster than it’s growing revenue, with sales up 17% over the period.

Even with all that investment, Microsoft has a shortage of data center infrastructure specifically for deploying AI models.

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

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

Microsoft isn’t the only AI hardware vendor with a supply challenge.

Nvidia, the largest developer of processors for training and deploying generative AI models, had a limited offering as revenue more than tripled in consecutive quarters. Now Microsoft, one of Nvidia’s major customers, is feeling the stress.

In the fiscal third quarter, Microsoft’s Azure cloud revenue rose 31%, with 7 percentage points from AI. Hood said the capacity issue may have affected AI’s results and will have an impact in the fiscal fourth quarter. The supply constraint means Microsoft has less capacity available to lease to customers to implement AI models at the conclusion stage, she said.

Azure is the 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. Within Azure AI services stand out as a highlight, attracting new customers against Microsoft Amazon Web services.

Hood said capital spending will increase “significantly” in the current quarter, mainly for cloud infrastructure. And she called for higher capital spending in the new fiscal year starting July 1.

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

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