Microsoft tries to kill the 'pausing datacenter builds must be bad news for AI' trope

Sees economic strife as chance to sell even more stuff than its $70bn Q3 haul

Microsoft’s capital expenditure was slightly lower than forecast, in part due to “normal variability from the timing of delivery of data center leases” that the company was at pains to argue are not in any way bad news.

The company raked in $70.1 billion for the third quarter of FY 2025, a 13 percent year-over jump. Net income of $25.8 billion represented an 18 percent jump. Microsoft Cloud revenue rose $42.4 billion, up 20 percent. $21.4 billion went out the door on capital expenditure,

We've always been making adjustments to what pace we build, all through the last 10, 15 years

Microsoft is all-in on AI but doesn’t enumerate revenue generated by the tech, which has led to speculation that the enormous sums Microsoft intends to spend on AI infrastructure may not quickly deliver a return on investment. On the company’s earnings call, CEO Satya Nadella opened his remarks with the declaration that “Cloud and AI are the essential inputs for every business to expand output, reduce costs and accelerate growth” and then told investors that the last quarter saw Microsoft open datacenters in ten countries across four continents.

Microsoft, and other hyperscalers, have attracted attention after slowing datacenter builds – another event seen as perhaps indicating AI might not quickly pay for itself.

Later in the call, Nadella tried to quash the notion that revisions to datacenter builds are an indicator of anything significant.

“The reality is we've always been making adjustments to build, lease, what pace we build all through the last 10, 15 years,” he said, before adding “It's just that you all pay a lot more attention to what we do quarter-over-quarter nowadays.”

“Having said that, the key thing for us is to have our bills and lease be positioned for the workload growth of the future,” he added.

“You don't want to be upside down on having one big data center in one region when you have a global demand footprint. You don't want to be upside down when the shape of demand changes,” he added, especially given that training AI models needs different resources than inferencing workloads.

The CEO said the combination of Moore’s Law, improvements in software design, and changes to model architecture, mean hyperscale AI operators need to change their plans.

“We just want to make sure we're accounting for the latest and greatest sort of information we have on all of that,” Nadella said. “And that's what you see reflected, and I feel very, very good about the pace [of datacenter and AI buildout].”

CFO Amy Hood weighed in an observation that Microsoft’s getting better at provisioning AI datacenters and is sometimes making capacity available earlier than planned.

She also told investors “margins on the AI side of the business are better than they were at this point by far than when we went through the … server to cloud transition.”

That shift also saw Microsoft spend up big to build Azure and has worked out just fine as revenue for “Azure and other cloud services” grew 33 percent year over year. Hood said future commitments to use Microsoft’s cloud rose 34 percent to $315 billion. Forty percent of that will be paid in the next 12 months.

The company’s “Server products and cloud services” category grew revenue by 22 percent, but on-prem server products saw revenue dip six percent and was forecast to do it again in the current quarter. Hood said the dip was “slightly below expectations driven by renewals with lower in-period revenue recognition from the mix of contracts” and a reflection of customers moving to the cloud.

Indeed, Nadella mentioned “accelerating demand for cloud migrations” and named Abercrombie & Fitch, Coca-Cola, and ServiceNow as companies that have moved workloads into Azure.

Tariff talk

It’s 2025 so any earnings call will canvas the USA’s rapidly evolving tariff policy.

Hood discussed them in the context of a three percent jump in revenue from Windows sales to OEMs and devices revenue, which she said was “ahead of expectations as tariffs uncertainty through the quarter resulted in inventory levels that remained elevated.”

Or in other words, PC-makers imported boatloads of stuff in recent weeks to get them into the US before tariffs translate into price rises for consumers, leaving warehouses full of un-tariffed kit waiting to be bought.

During the Q&A section of the earnings call, Nadella was asked how an economic recession – which some predict the shakeup of world trade will cause – would impact Microsoft.

Nadella said Microsoft would tell customers its wares will help them to navigate “any turbulence in the macro”.

“I think if you sort of buy into the argument that software is the most malleable resource we have to fight any type of inflationary pressure or any type of growth pressure where you need to do more with less,” he said. “I think we can be super helpful in that. And so if anything, we would probably have more of that mindset is how do we make sure we are helping our customers. And then, of course, we'll look to share gains.” ®