Due to the delay in the delivery of external equipment, some of MS's investment will be carried over to the first half of next year. MS's design change request also influenced the adjustment of Iren's schedule... AI demand exceeds supply
Microsoft (MS) has strengthened its management of external companies entrusted with artificial intelligence (AI) data centers. As facility delivery was delayed one after another, MS's investment schedule was pushed back, and Iren, a key supplier, also postponed its annual sales target until next year. AI demand still exceeds supply, but whether suppliers can deliver equipment at the promised time has emerged as a new variable.
MS strengthens external business management... Nscale contract also adjusted
Citing sources, Bloomberg reported on the 5th (local time) that Microsoft has strengthened management of some data center businesses of AI specialized cloud (neocloud) companies such as Iren, Nevius, and Nscale. The company is withdrawing from projects deemed to be high risk and is internally reviewing whether to sign new contracts.
On the day the report was released, Iren and Nevius stock prices closed down about 17% and 14%, respectively, during regular trading.
In fact, there are cases where contracts were omitted or expansion was abandoned. Microsoft previously withdrew from Nscale's contract for its data center in Lawton, Essex, England. According to a Reuters report on the 19th of last month, the expected timing of power supply has been delayed to the 2030s. At the time, Microsoft said that the decision was limited to one business site and that cooperation with Nscale would continue.
Nscale's Texas data center decided not to use the right to more than double the size of the contract. Reuters reported on the 5th that this decision was made several months ago and does not affect existing Texas contracts.
A Microsoft spokesperson told Reuters that the company is securing the necessary computing power through a combination of its own data centers, leased facilities, and partnerships with external providers.
Iren ARR target adjusted to January next year
iRen announced its performance after the market closed on the 5th and moved its goal of achieving annualized revenue (ARR) exceeding $4 billion from the end of this year to January 2027. They cited the design change requested by the customer and the supplier's schedule as reasons, and suggested the possibility of a delay until the end of February next year.
The customer who requested the design change is MS. In the quarterly report submitted on the same day, Irene stated that it was changing the overall network design of the Texas data center facility (Horizon) that it supplies to MS in accordance with MS's request. Delays caused by changes requested by MS in the contract will extend the delivery date, and no deduction of fees due to the delay will be applied. The two companies are also discussing delivery schedules and settlement of fees and costs.
Bloomberg reported that a cable-related problem occurred at Iren's Texas operation, and that Iren and Microsoft officials renegotiated the delivery schedule last week. Depending on the rescheduled schedule, completion may be delayed by weeks or months.
ARR is an operational indicator that converts sales of ancillary services such as usage fees and storage devices for contracted GPUs that have entered into operation into annual terms, and is different from accounting sales. Actual sales are reflected in stages as equipment is delivered and goes through trial runs, testing, and customer inspection.
Part of MS investment was also carried over... Demand still exceeds supply
The supply delay also affected MS's facility investment (capital expenditure). Microsoft Chief Financial Officer (CFO) Amy Hood said at an earnings briefing on the 28th of last month that some of the external supply that was expected to arrive between July and September had been delayed. For this reason, capital expenditures for the quarter amounted to $45.2 billion, which was less than the 'exceeding $50 billion' that the company had previously suggested.
Microsoft also lowered its annual capital expenditure forecast for this year by $5 billion to about $170 billion. The delivery date of some external quantities has been moved to the second half of fiscal year 2027, from January to June of next year. MS predicted that capital expenditures will increase during this period due to CPU and GPU investments and delayed delivery of supplies.
Although the investment schedule has been pushed back, the need to secure more computing power remains. CFO Hood said customer demand continues to exceed supply and predicted that capital spending between October and December of this year will exceed $50 billion.
Iren is also increasing sales at facilities already in operation. AI cloud sales from July to September were $200 million, an increase of 182% from the previous quarter. Horizon 1, the first of the four facilities for MS, was delivered to MS last August and has completed inspection and is now in operation, while Horizons 2 to 4 are in the latter stages of construction.
Delivery conditions even for large contracts... Warning of industry reorganization
Even if demand increases, it may be difficult to keep the contract if the supplier fails to provide the service at the promised time. According to a disclosure submitted by Nevius to the U.S. Securities and Exchange Commission (SEC) in September last year, the contract worth approximately $17.4 billion with Microsoft is premised on the deployment of GPU facilities and provision of services. If the delivery date is not met and replacement computing capacity is not provided even after the grace period has passed, MS may terminate the GPU service contract.
There were also forecasts warning of a cost burden for the industry as a whole. On the 14th of last month, Gartner predicted that more than 80% of neocloud companies will cease independent operations by 2030 due to cost pressure and lack of business model differentiation. The forecast includes not only business closures but also integration through mergers and acquisitions.
The key issue going forward is whether the adjusted delivery schedule will be implemented. The timing of when Iren's follow-up facility completes operation and customer inspection, and the speed at which MS secures external supplies that have been delayed until the first half of next year, are expected to determine the expansion of computing capacity and the increase in sales of suppliers.
