Dive Brief:
- Microsoft grappled with cloud capacity constraints as AI workloads increased consumption of Azure compute in the three months ending Dec. 31, company executives said Wednesday.
- The hyperscaler has close to $300 billion in cloud contracts on its books that have yet to be counted toward revenue, according to CFO Amy Hood. “We have been short power and space,” Hood said, speaking during the company’s Q2 2025 earnings call.
- Despite ongoing capacity challenges, Microsoft’s cloud business grew 21% year over year, yielding $40.9 billion in revenues and accounting for nearly 60% of the company’s total quarterly revenues. Azure and other cloud services segment revenues grew 31%, with AI services contributing 13 percentage points to the increase.
Dive Insight:
As large language models devour cloud resources, Microsoft is pouring massive capital into infrastructure buildouts. The company is on pace to spend roughly $80 billion on AI-enabled data centers this fiscal year.
“We have more than doubled our overall data center capacity in the last three years, and we have added more capacity last year than any other year in our history,” Chairman and CEO Satya Nadella said Wednesday.
As the primary backer of OpenAI, Microsoft added a significant cloud consumption engine to its Azure ecosystem. The ChatGPT builder trains and runs its LLMs in Azure data centers, competing with enterprise customers for capacity.
Microsoft freed OpenAI to source compute outside of Azure earlier this month as part of a federally orchestrated $500 billion AI infrastructure push dubbed Stargate. In the agreement, however, Microsoft retains first right of refusal on OpenAI workloads.
Azure commercial bookings spiked 67% year over year and were “significantly ahead of expectations” during the final months of 2024, largely driven by OpenAI, Hood said. Renewals and add-ons to enterprise contracts and commitments by existing customers to migrate additional workloads helped drive the increase.
“When you look at customers who purchased Copilot during its first quarter of availability, they have expanded their seats collectively by more than 10X over the past 18 months,” Nadella said.
Microsoft expects the capacity crunch to begin to ease later this year, according to Hood. By the end of the company’s current fiscal year on June 30, the company foresees capacity to be “roughly in line with near-term demand,” Hood said.
The company’s capital expenditures including finance leases were $22.6 billion in Q2. More than half of cloud and AI infrastructure spend was on long-term assets, Hood said. The remainder went toward CPU and GPU services to satisfy immediate demand.
