Microsoft Corporation (MSFT.US) FY26Q1 earnings call: Customer concentration risk is manageable and the AI platform is creating real business value.

Recently, Microsoft Corporation (MSFT.US) held its FY26Q1 earnings conference call. Microsoft Corporation stated that revenue from Azure cloud in the second quarter at fixed exchange rates is expected to grow by approximately 37%, with demand significantly exceeding existing capacity. Azure has absorbed most of the income impact caused by the shortage of computing power, and its revenue figures could have been higher. Regarding the risk of customer concentration brought about by order growth, the company believes that these agreements are designed for quick consumption and usage in the short term, which precisely demonstrates that the AI platform and systems are creating real business value. The company's remaining performance obligations (RPO) balance of nearly $400 billion covers a wide range of products and customer scales, demonstrating the breadth of growth. More importantly, these contracts have an average term of only two years, designed for rapid consumption and usage in the short term. While OpenAI is an important part of this, the company's collaboration with them has enabled the construction of leading systems, with their experience and capabilities benefiting all other customers. Therefore, the large RPO scale and short contract terms together indicate that the company's growth is healthy and extensive. The company states that Microsoft Corporation's real moat lies not in the models themselves but in the construction of systems like M365 Copilot and GitHub Agent HQ. The focus is on building a highly substitutable general AI platform, rather than providing "managed services" for a specific large customer. This means that even if the demands of a large customer change, their computing power can seamlessly shift to other third-party customers (such as enterprise customers) or Microsoft Corporation's own first-party applications, fundamentally reducing dependence on a single customer. Regarding Q2 performance guidance, the company's total revenue is guided to be $79.5 billion to $80.6 billion (a growth of 14%-16%), with estimated sales costs of $26.35 billion to $26.55 billion, increasing by 21%-22% year-on-year; and expected operating expenses of $17.3 billion to $17.4 billion, growing by 7%-8%. Additionally, Microsoft Corporation's revenue share, exclusive IP rights, and Azure API exclusivity will continue until AGI achievement or 2030, with model and product IP rights extended to 2032. Q&A: Q: Despite Microsoft Corporation's consecutive quarters of performance (especially the 111% growth in commercial orders) far exceeding expectations, the stock performance lags behind the market. The market seems to be concerned about potential disruptive changes in the future, especially concerning "AGI" mentioned in the agreements. Do you believe that in the evolution of AI models and computing architectures, there exist potential disruptive factors such as AGI or others that could weaken Microsoft Corporation's current strong market position and advantages in the future? Do you have any concerns about this evolution, especially the future development of generative AI models? A: Firstly, we are very satisfied with the new agreement with OpenAI, as it brings more certainty to our cooperation (including the definition of AGI) and dispels some market doubts. But more importantly, it is about how we translate AI into real customer value. Even though AI model capabilities are advancing rapidly, their intelligence will still be "uneven" for a long time, performing well and poorly in different tasks. Therefore, Microsoft Corporation's real moat lies not in the models themselves, but in building systems like M365 Copilot and GitHub Agent HQ. These systems act as an "organizational layer," coordinating multiple specialized agents to work together, smoothing out the rough edges of AI to ensure its reliability, control, and prevent it from "derailing" when performing complex tasks. For example, in Excel, one agent generates a table, while another agent can analyze and iterate on it like a data analyst. We believe that the ability to build multi-agent systems is the key to transforming AI progress into lasting customer value, and is the true source of our confidence. We believe that the achievement of AGI is not imminent, but through this approach, we can continue to expand our competitive advantage. Q: With the remarkable growth in orders this quarter, the market is concerned that this may rely too much on a few large customers, leading to "customer concentration risk." Can you share some information to help us understand the signs of broadness in these transactions, beyond large contracts like OpenAI, behind the over 110% order growth exceeding 51% of RPO at CKH HOLDINGS, to give us more confidence in the health and global distribution of this growth? A: In terms of order growth, there is no need to worry about customer concentration risk. Our remaining performance obligations (RPO) balance of nearly $400 billion covers a wide range of products and customer scales, demonstrating the breadth of growth. More importantly, these contracts have an average term of only two years, meaning that customers sign these agreements for quick consumption and use in the short term, which precisely demonstrates that our AI platform and systems are creating real business value. While OpenAI is an important part of this, the collaboration with them has enabled us to build leading systems, with their experience and capabilities benefiting all other customers. Therefore, the large RPO scale and short contract terms together demonstrate that our growth is healthy and extensive, reflecting excellent execution. Q: Which key metrics or factors do you focus on to ensure that the company is not overbuilding infrastructure for current demands and to ensure that this strong demand is sustainable? A: We are not overinvesting in demand, quite the contrary, our capacity is continuously in high demand. Our capital expenditures are built on existing business: we hold nearly $400 billion in remaining performance obligations (RPO), and today's investments are made to fulfill these signed orders. From a financial perspective, the risk is manageable because the depreciation cycles of our short-term assets (such as GPUs) are highly matched with the term of customer contracts, and for long-term assets like data centers, we are extremely confident that future structural demands will fill them. The demand growth we see is not coming from a single area but is broad and real, and when customers see the true value of AI, they commit to real usage. Therefore, our current investments are based on verified demand and extraordinary confidence, rather than chasing bubbles. Q: How confident are you that software and consumer internet businesses will ultimately be able to monetize the massive AI investments globally? Our confidence in our investments primarily comes from two levels: efficient infrastructure and high-value applications. Firstly, we are building a globally efficient and flexible Token factory. By continuously procuring the latest hardware and leveraging software optimizations (such as increasing model efficiency by 30%), we continuously improve cluster efficiency and utilization, reducing the unit cost of computing power. Secondly, we have the most outstanding Agent system in multiple high-value areas. AI is not a zero-sum game; it is creating markets of far greater scale than before. Just as the "cloud" market is much larger than the "server" market, Copilot brings significant ARPU growth potential to businesses like M365 and programming tools. Our positioning in various fields including programming, security, health, and the new advertising + subscription model in the consumer end demonstrates strong monetization capabilities. It is this virtuous cycle of an "efficient factory" and "high-value products" that gives us the confidence to invest a huge amount of capital and R&D talent to seize the AI opportunity. Q: Regarding the $4.1 billion (loss) related to OpenAI investment under "other income" in the financial report, this number is very significant. Could you explain the specific composition of this expense? It far exceeds the numbers from previous quarters, and it seems that it is not just the OpenAI operating loss that Microsoft Corporation should share. Does this imply that there has been some change in accounting principles or reporting methods? What should be the expectations for this item in the coming quarters? A: This $4.1 billion loss is entirely the OpenAI operating loss that we are required to share under equity accounting, with no additional components included. It is important to note that this number has not been influenced by our new agreement with OpenAI. Q: It appears that we are entering a new era, where a few AI-native companies are making astonishingly large contract commitments. These commitments are not only huge in absolute value but sometimes 20 times the size of their current revenue. Conceptually, how do you evaluate the ability of these companies to fulfill such large-scale contracts? How do you consider setting risk "guardrails" for a single customer to control the risk of customer concentration? A: For us, the decision always comes back to a core principle: building a general platform that can flexibly serve third-party customers, first-party applications, and internal research. Therefore, when some demands disrupt this balance due to customer, geographical, or SKU concentration, we decline. Specifically, if demands target a single resource (e.g., only renting GPUs) without utilizing our complete computing and storage services, this deviates from our healthy profit structure and long-term business model as a platform company. We must prioritize securing resources for higher-profit first-party businesses and investing in our own research and model innovation; this is our long-term moat. Hence, we selectively say "no" to demands that, although they can fulfill requirements, do not align with our long-term interests. We are very satisfied with these decisions as they safeguard the company's strategic direction.