Microsoft’s data center crunch persists despite heavy spending

Microsoft Corp. is still suffering from a computing capacity crunch despite massive spending on data centers, a scenario that weighed on the company’s closely watched Azure cloud unit.

During the first quarter, the company lavished a whopping $34.9 billion on capital expenditures including leases, which indicates outlays on server farms. That was up about $10 billion from the previous period, and Chief Financial Officer Amy Hood said spending will increase again in the current fiscal quarter.

Demand for Azure services is “significantly ahead of the capacity we have available,” she said during a call with analysts. “I thought we were going to catch up,” Hood added. “We are not.”

Read More: Microsoft Forecasts Show Data Center Crunch Persisting Into 2026

The Azure cloud-computing unit posted a 39% revenue gain in the quarter when adjusting for currency fluctuations, the company said Wednesday in a statement, beating the Wall Street estimate of 37%.

While that rate of expansion is “healthy,” it was likely a bit below some of the more bullish expectations by investors, wrote Raimo Lenschow, an analyst at Barclays. Heading into earnings, all but one analyst tracked by Bloomberg rated the stock a buy.

Microsoft shares fell about 4% in extended trading after closing at $541.55 in New York. The company’s stock was up almost 29% this year through Wednesday’s close.

The world’s largest software maker has seen rapid growth in its cloud computing business, thanks in part to a landmark partnership with leading artificial intelligence startup OpenAI. On Tuesday, the two companies revised their agreement, giving Microsoft access to OpenAI technology and its AI inference business for years to come. The updated pact was widely applauded on Wall Street.

Microsoft’s total revenue increased 18% to $77.7 billion in the fiscal first quarter, while profit was $3.72 a share. Analysts on average estimated sales of $75.6 billion and per-share earnings of $3.68.

Sales in the unit containing business applications grew 17% to $33 billion. That was ahead of the average analyst estimate of $32.3 billion. Revenue per user increased as customers upgraded to more expensive tiers of software featuring the latest AI features, including the Copilot assistants, Microsoft said.

In the current quarter, Microsoft expects revenue to be between $79.5 billion and $80.6 billion. Azure growth in constant currency will be about 37%, Hood said. Bloomberg