Microsoft CFO Urges Focus as AI Spending Faces Growing Scrutiny

Microsoft’s CFO Amy Hood has urged employees to stay focused as AI spending scrutiny increases, with OpenAI’s Project Stargate and DeepSeek’s cost-efficient model reshaping the industry.

Microsoft’s Chief Financial Officer Amy Hood has called on employees to stay focused as questions mount over the long-term sustainability of AI infrastructure spending.

In an internal memo obtained by Business Insider, Hood reaffirmed Microsoft’s strategy of expanding AI and cloud services while navigating a rapidly evolving competitive landscape. Hood wrote (read the full memo at the end):

“There has been a lot of AI-related news this week, but our focus is clear: delivering real-world AI solutions while simultaneously globally scaling our cloud and AI infrastructure to support our partners and customers as they adopt, build, and grow as well. As a company, we remain steadfast in the priorities which are required to deliver on that product promise — security, quality, and AI innovation. Thank you for your focus as we work together for our customers who rely on us.”

Her message comes at a time when the AI sector is experiencing major shifts. DeepSeek, a Chinese AI startup, has introduced its highly efficient R1 AI reasoning model that challenges the conventional cost-heavy approach to artificial intelligence development.

Meanwhile, OpenAI, SoftBank, and Oracle are moving forward with Stargate, a $500 billion AI infrastructure project designed to create an alternative to Microsoft’s cloud ecosystem.

These developments are unfolding as Microsoft continues its aggressive AI expansion, with the company planning to spend $80 billion on AI-enabled data centers in fiscal 2025. However, investor concerns and shifting AI alliances are raising questions about whether such large-scale spending will generate sustainable returns.

Microsoft’s AI Investment Strategy Under Pressure

Microsoft has played a central role in AI infrastructure development, largely through its long-standing partnership with OpenAI. The company has invested close to $14 billion in OpenAI, securing exclusive access to its models via Azure. However, OpenAI’s participation in the Stargate initiative suggests it is moving toward greater infrastructure independence.

The Stargate project aims to establish independent AI computing hubs, reducing reliance on Microsoft’s cloud services. Satya Nadella has downplayed concerns about OpenAI’s diversification, maintaining that Azure remains a key part of OpenAI’s infrastructure.

However, industry observers see OpenAI’s expanding partnerships as a sign that Microsoft’s dominance in AI hosting could weaken over time.

DeepSeek Challenges the Traditional AI Model

While Microsoft and OpenAI focus on large-scale infrastructure, DeepSeek has emerged with a different approach. The startup’s DeepSeek R1 model has proven capable of competing with OpenAI’s models while using significantly fewer resources.

This efficiency has led to speculation that AI companies may no longer need to rely on expensive, compute-heavy infrastructure to achieve high-performance results.

Recognizing DeepSeek’s potential, Microsoft has added DeepSeek R1 to its Azure AI Foundry, providing customers with alternative AI models alongside OpenAI’s offerings. However, DeepSeek’s rise has not come without controversy. The U.S. Navy recently banned the use of DeepSeek AI over national security concerns, and Italian regulators are investigating the company over potential data privacy violations.

In addition, OpenAI has launched an internal review to determine whether DeepSeek may have improperly accessed its training data during the development of its models. If proven, this could raise further ethical and legal concerns about AI development practices.

Investor Reactions and Market Uncertainty

Microsoft’s latest earnings report reflects both the promise and uncertainty of its AI expansion. The company reported a 12% increase in revenue to $69.6 billion, with its cloud division contributing $40.9 billion, a 21% year-over-year rise. AI services accounted for 13 percentage points of Azure’s 31% growth, but non-AI cloud services fell short of expectations.

Despite these numbers, the market reaction was mixed. Microsoft’s stock dipped following the earnings report, highlighting investor concerns about the sustainability of its AI investments. As AI competition intensifies and spending escalates, questions remain over whether Microsoft’s infrastructure-heavy strategy will yield long-term profitability.

Adding further pressure, SoftBank’s $25 billion investment in OpenAI signals a strategic shift in AI funding. This move, separate from the Stargate initiative, provides OpenAI with additional capital, potentially allowing it to develop models without relying solely on Microsoft’s resources. As a result, OpenAI could further distance itself from Azure, reshaping the competitive balance in AI cloud services.

Political and Regulatory Challenges

Microsoft and its competitors are also facing growing regulatory scrutiny. AI security has become a top priority for governments, as seen with the U.S. Navy’s ban on DeepSeek AI, citing concerns over potential cyber threats. Additionally, Italy’s data privacy investigation into DeepSeek raises broader questions about compliance with European regulations.

Meanwhile, OpenAI’s Stargate initiative has entered the political spotlight. Former President Donald Trump has publicly defended the project amid skepticism from Tesla and xAI CEO Elon Musk.

Trump dismissed Musk’s concerns about the project’s financial viability, saying Musk’s opposition was motivated by personal issues. Musk had previously criticized the funding structure of Stargate, posting on X, “SoftBank has well under $10B secured. I have that on good authority.” OpenAI CEO Sam Altman quickly refuted this claim, responding, “Wrong, as you surely know. Want to come visit the first site already under way?”

Microsoft’s Long-Term AI Strategy

While OpenAI and DeepSeek continue to make waves, Microsoft appears committed to its AI-first cloud strategy. The company has been diversifying its AI investments, backing companies such as Anthropic and Mistral AI to hedge against any potential shift in its OpenAI partnership.

At the same time, Microsoft’s decision to integrate DeepSeek R1 into Azure AI Foundry suggests a willingness to embrace a wide AI model variety, positioning Azure as a more open ecosystem for AI deployment.

This move could help Microsoft mitigate the risks of OpenAI’s infrastructure diversification while still expanding its role in AI services.

Amy Hood’s full memo to Microsoft employees:

“Team,

This afternoon, we announced our second-quarter financial results. We grew revenue by 12% to $69.6 billion, operating income by 17% to $31.7 billion, and earnings per share by 10% to $3.23.

Our results exceeded our Q2 outlook given to Wall Street.Our Microsoft Cloud revenue was $40.9 billion, up 21% year-over-year. Our results reflect strong customer demand as we continue to create cutting-edge capabilities that are driving real value and measurable impact for our customers.

This quarter, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year. Highlights from our commercial business, which grew 17%, are below:Commercial bookings were significantly ahead of expectations and increased 67% and 75% in constant currency. The outperformance was primarily driven by Azure commitments from our partner, OpenAI, and strong execution across our core annuity sales motions.

Azure and other cloud services revenue grew 31%, landing at the lower end of our expectations. This includes 13 points of growth from AI services, which exceeded expectations. Growth in non-AI services came in slightly below our expectations, influenced by some near-term execution challenges.

Microsoft 365 commercial cloud revenue grew 16%, slightly ahead of expectations, driven by our E5 suite and M365 Copilot. M365 Copilot has seen growth in adoption, expansion, and usage.

Dynamics 365 revenue grew 19% driven by growth across all workloads.We invested $22.6 billion in capital expenditures as we invest against both short- and long-term demand signals for our Microsoft Cloud inclusive of AI workloads.In our consumer business, revenue grew 2%, which was better than expected. As we work to accelerate growth in our consumer business, we remain focused on delivering consumer experiences that delight and earn user loyalty.

Below are key points from our consumer businesses:Search and news advertising ex TAC revenue grew 21%, above expectations, with rate expansion and continued volume growth from Edge and Bing.Windows OEM and devices revenue grew 4%, ahead of our expectations, driven by commercial PC inventory builds in advance of Windows 10 EOS as well as uncertainty around tariffs.

Gaming revenue decreased 7%, primarily driven by hardware. Xbox Content and services revenue increased 2%, ahead of expectations, driven by better performance in Blizzard and Activision content, including Call of Duty.

LinkedIn revenue grew 9%, reflecting growth across all lines of business. However, ongoing weakness in the hiring market in key verticals negatively impacted growth in the Talent Solutions business.

As a reminder, our stock trades not only on our results, but on our outlook for the next quarter and beyond. Investors listen to our earnings call to gain deeper insights into these indicators, and I would encourage you to listen too, as it offers useful context to help align our efforts in driving toward our priorities and commitments.

You can join the call live today at 2:30PM Pacific Time, listen on-demand, or read the transcript on the Investor Relations Website.There has been a lot of AI-related news this week, but our focus is clear: delivering real-world AI solutions while simultaneously globally scaling our cloud and AI infrastructure to support our partners and customers as they adopt, build, and grow as well.

As a company, we remain steadfast in the priorities which are required to deliver on that product promise — security, quality, and AI innovation. Thank you for your focus as we work together for our customers who rely on us.With appreciation and gratitude,

Amy”

Markus Kasanmascheff
Markus Kasanmascheff
Markus has been covering the tech industry for more than 15 years. He is holding a Master´s degree in International Economics and is the founder and managing editor of Winbuzzer.com.

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