Leader of the AI boom $Microsoft (MSFT.US)$ The quarterly financial report will be released this month. Analysts believe that as microsoft's AI datacenter continues to grow, the company's capital expenditure on finance leases will receive more and more attention. The company has stated that the amount of finance lease not yet started has soared to over a trillion dollars.

Leasing allows companies to spread asset costs over many years rather than pay all at once. In July, Microsoft revealed in the footnotes of its annual financial report that the amount of unstarted financing leases had soared to $108.4 billion, an increase of $20.6 billion from the previous quarter, and nearly $100 billion more than two years ago. The leasing will start from the 2025 fiscal year and last for up to 20 years.

Overall, Microsoft's capital expenditure in the latest quarter was $19 billion, including assets acquired through financing leases. This figure increased by $4 billion compared to the March quarter, remaining consistent with Microsoft's spending for the entire 2020 fiscal year.

Media reports indicate that when Microsoft reports its first-quarter financial performance at the end of October, investors will gain further insights into Microsoft's leasing financial situation. Over the past two years, Microsoft and other top technology companies' executives have approved higher capital expenditures, often to enhance performance in the field of generative AI.

Last month, Microsoft confirmed its participation in a fund to support the development of data centers and essential energy infrastructure. The company also signed a 20-year power purchase agreement with Star Energy, the largest nuclear reactor operator in the USA, to restart a reactor at Three Mile Island nuclear power plant in Pennsylvania specifically to power Microsoft's data centers.

Analysts believe that the increase in capital expenditures by Microsoft in the last quarter should come as no surprise. Microsoft's Chief Financial Officer, Amy Hood, has repeatedly stated over the past year that Microsoft expects capital expenditures to 'significantly increase.'

Nevertheless, Rishi Jaluria, an analyst at RBC Capital Markets, expressed surprise at the financing lease figures. 'I usually expect capital leases and capital expenditures to be higher than others, but Microsoft's figures have far exceeded my expectations. However, to be honest, I believe in Microsoft.'

Microsoft stated that when the company builds datacenters from scratch, it can achieve the best performance and cost-effectiveness. However, sometimes the company needs to immediately increase capacity, and financing leases can help Microsoft obtain these resources faster.

Since OpenAI launched ChatGPT at the end of 2022, Microsoft's pace of operation has been intense. Microsoft provides computing power for OpenAI, which means the startup needs enough servers equipped with NVIDIA graphics cards to ensure ChatGPT is online.

As ChatGPT and other OpenAI services become increasingly popular, Microsoft has signed contracts with more cloud service providers including CoreWeave and Oracle. UBS analyst wrote in a report in September that Amy Hood's comments in January indicate Microsoft's financing leases include partnerships with CoreWeave and Oracle.

Jaluria stated that investors usually do not pay attention to the backlog of capital leases. Microsoft did not specify when these leases would take effect or how long they would last, so they do not have the immediacy of capital expenditures within a quarter.

Typically in earnings conference calls, when analysts raise financial questions, Microsoft CEO Nadella defers the questions to Hood to respond. However, in July, when an analyst inquired about Microsoft's strategy in collaborating with other cloud service providers, Nadella responded proactively.

"To me, this doesn't differ from the leasing we've done in the past; you could even say that sometimes purchasing from Oracle might be a more effective form of leasing because of their shorter terms."

Regarding the surge in capital expenditures and future financing leases, Jaluria mentioned that investors must accept that these expenses will impact profitability.

"Naturally, profit margins are decreasing, costs are now present, and revenues have yet to come to offset this. I don't see an issue with that."

Editor/Lambor