Microsoft Ramps up Cloud Data Center Spend

Last quarter saw second-biggest increase in capital spending since 2007

Yevgeniy Sverdlik

April 25, 2016

3 Min Read
Microsoft Ramps up Cloud Data Center Spend
Microsoft CEO Satya Nadella addresses shareholders during Microsoft Shareholders Meeting in December 2014 in Bellevue, Washington. The meeting was the first for Nadella as CEO. (Photo by Stephen Brashear/Getty Images)

Microsoft saw one of the biggest spikes in data center spend in company history in the last quarter.

It invested $2.3 billion in capital during the three-month period, which included a 65 percent increase in data center spend year over year, Microsoft CFO Amy Hood said on the company’s fiscal third quarter earnings call on April 21. “As planned, we accelerated our data center and cloud services investments to meet growing global demand,” she said.

During the quarter, Microsoft saw a 66 percent year-over-year spike in capital spending, its second-largest since the third quarter of fiscal 2007, according to data compiled by Bloomberg. The largest was an 86 percent increase in the second quarter of 2014.

Microsoft is one of the three largest providers of cloud services, its Azure and Office 365 offerings placing it in the number-two spot in the market behind Amazon. Google is considered the third-largest player in the general-purpose cloud infrastructure space, but IBM is also a strong contender.

Providing customers a wide variety of physical locations to host their virtual cloud infrastructure in – the so-called cloud availability regions or zones – is an important aspect of competition among cloud providers. For Microsoft, which has been ahead of its biggest competitors in terms of the number of available cloud regions, it is a key point of differentiation.

Last month, Google announced a major push to expand its global cloud data center footprint as part of a bigger push to strengthen its position in the enterprise cloud market. The plan includes adding 12 cloud availability regions in both company-built and leased data center facilities around the world.

Read more: Google to Build and Lease Data Centers in Big Cloud Expansion

Google spent $2 billion in capital last quarter, which according to its CFO Ruth Porat was due to "outsized machine spend that filled some recently constructed data centers."

Microsoft also uses a mixed data center strategy, which includes both designing and building its own facilities as well as leasing capacity from commercial data center providers. This mixed strategy has recently prompted the company’s infrastructure team to rethink its approach to scaling data center capacity and switch from its previously favored data center containers to a more traditional design that can be used in both its own and colocation data centers.

Read more: Microsoft Moves Away from Data Center Containers

Microsoft leases a lot of data center capacity from wholesale and retail providers, including Digital Realty Trust, DuPont Fabros Technology, Vantage Data Centers, and CyrusOne.

In this year’s first calendar quarter alone, it leased a total of about 47MW in three deals just in the US, according to the commercial real estate firm North American Data Centers. Microsoft signed three data center leases totaling about 30MW in calendar 2015.

Read more: Who Leased the Most Data Center Space in 2015

The company is accelerating its cloud data center spend to stay ahead of its competitors and to keep up with growing demand for its cloud services.

Azure revenue grew 120 percent in constant currency in the third quarter, according to Microsoft. Usage of Azure compute and SQL database services more than doubled year over year, the company said.

Revenue from Office 365, its productivity software suite delivered as a subscription service, grew 63 percent in constant currency.

As a whole, Microsoft’s Intelligent Cloud segment, which includes server products and cloud services, as well as traditional enterprise services, reported $6.1 billion in revenue for the quarter – up 3 percent year over year.

The Productivity and Business Processes segment, which includes commercial and consumer Office products and cloud services, as well as Dynamics products and services, reported $6.5 billion in revenue – up 1 percent year over year.

Microsoft’s total revenue for the quarter was $22.1 billion, or 2 percent up year over year.

Read more: Report Confirms Large Cloud Providers Drive Q1 Leasing

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