Microsoft Office For iPad Is A Boon For Apple

| About: Apple Inc. (AAPL)

Summary

Microsoft has finally made its Office software available for Apple iPad.

The Microsoft Surface tablet will be rendered all but obsolete.

Apple stock is still a solid long-term investment.

On March 27, 2014, Microsoft (NASDAQ:MSFT) launched Office for fierce rival Apple (NASDAQ:AAPL) and its iPad. Microsoft has historically folded Office results into its Business division. Last year, Microsoft indicated that Office generated "over 90%" of $24.7 billion in fiscal 2013 Business operating segment revenue. To state the obvious, the personal computer and the attached Office program revolutionized productivity. Microsoft, of course, is now somewhat desperate for mobile growth as the PC market grapples with secular decline. Mark Hachman and PC World, however, already went on to rip Microsoft, Nokia (NYSE:NOK), Windows 8, and the recent foray into mobile as "fail plus fail equals more fail." Office for iPad is actually an admission of defeat out of Microsoft. Apple has won the mobile war. To the victor go the spoils.

Office for iPad Specifications

Free versions of Microsoft Office for iPad actually break down into three separate Word, Excel, and PowerPoint applications. The free iPad versions of Word, Excel, and PowerPoint allow for the opening, copying, viewing, and sharing of content and documents. Apple iPad users, of course, must purchase Office 365 to access the full capabilities of each program. The Microsoft marketing apparatchik refers to these full capabilities as "robust editing" and "rich formatting." Most importantly, the Office 365 subscription is required to create new documents. The Microsoft Office suite of software and assorted iPad downloads parallel the ongoing shift towards cloud computing.

Paid Office 365 subscriptions are classified according to business and home groupings. Business Office 365 subscriptions range between $5.00 and $15.00 per month, and require annual commitments. Business Office 365 is marketed as ideal for small and mid-size businesses of up to 300 employees. The premium Office 365 Enterprise E3 costs $240.00 per year, per employee, and does include desktop versions of Word, Excel, PowerPoint, Office, OneNote, InfoPath, and Lync. For now, the majority of iPad owners would be in the market for Home Office 365 subscriptions, instead of small business and enterprise solutions. The Home Office 365 subscription costs $9.99 per month, or $99.99 per year. Home Office 365 allows for cloud computing between combinations of five separate tablets, personal computers, and Macs.

Microsoft will pay 30% commissions to Apple for Office 365 subscriptions purchased via the App Store. Apple reported record sales of 71 million iPad units through its latest 2013 fiscal year. This performance was a 22% improvement above 2012, in terms of iPad unit sales. Going forward, Apple shareholders can expect Cupertino to ship 80 million iPads through 2014. Apple may then bank $250 million in marginal application sales, if 5% of new and existing iPad users were to purchase Office 365 through the App Store. Again, Microsoft has subtly conceded defeat within the tablet space, which will ultimately emerge as a greater boon for long-term Apple shareholders.

The Tablet Market

2010

2011

2012

2013

Q1 2013

Q1 2014

Apple Revenue

$65.2B

$108.2B

$156.5B

$170.9B

$54.5B

$57.6B

iPad Revenue

$5.0B

$19.2B

$30.9B

$32.0B

$10.7B

$11.5B

iPad Unit Sales

7.5M

32.9M

58.3M

71.0M

22.9M

26.0M

iPad Revenue Per Unit Sold

$666.67

$583.59

$530.02

$450.70

$467.25

$442.31

iPad % of Apple Revenue

7.7%

17.7%

19.7%

18.7%

19.6%

20.0%

Click to enlarge

Source: Apple Earnings Releases and SEC Filings

Taken together, the iPad and iPhone platforms now generate roughly three-fourths of Apple revenue. On a superficial level, prospective Apple investors may be somewhat alarmed that iPad revenue per unit sold has declined sharply from $666.67 to $442.31 between fiscal 2010 and Q1 2014. Be advised that iTunes sales have consistently remained within the high single-digits as a percentage of corporate revenue throughout this time frame. Language written within recent financial reports has suggested that consumers are purchasing older iPad and iPhone machines, instead of opting out of the iOS ecosystem altogether.

Apple iPad profitability may have actually expanded as the product line matured. The triangulation of research firm IHS and Apple financial data serve as evidence that Cupertino is leveraging its immense buying power to drive down shared component parts within the iPad and iPhone machines. A November 5, 2013 IHS report presented estimates of $304.00 in bill of materials costs for the 16GB wi-fi + cellular iPad Air, which did calculate out to 6% in savings off the comparable third-generation iPad. The report also estimated that the 128GB wi-fi + cellular iPad Air carried $355.00 in bill of materials costs. This very same iPad Air model now retails for $929.00. The staggering decline in NAND flash costs had Lazard analyst Edward Parker refer to Apple as a "storage company." Apple has historically maintained its same iPad and iPhone price points, despite the well-documented decline in cost of goods sold.

On October 26, 2012 Microsoft released its Windows 8 operating system in conjunction with the Surface tablet. The Windows 8 concept was designed to fuse traditional smartphone, personal computer, and tablet interfaces together beneath one operating system. The Surface, of course, was billed to bridge the gap between tablets and laptops. All Surface workstations feature Office software, working keyboards, kickstands, and ports to print out documents. Despite the hype, the technology commentariat has thoroughly dismissed Windows 8, 8.1, and various iterations of the Surface tablet as an unmitigated flop. Microsoft did take a $900 million Surface RT charge as part of its Q4 2013 earnings. Offering up Office for the iPad may emerge as Microsoft's first step towards quietly abandoning the Surface tablet.

Research firm IDC listed Q4 2013 tablet market vendors as Apple, Samsung (OTC:SSNLF), Amazon (NASDAQ:AMZN), Asus, Lenovo (OTCPK:LNVGY), and "Others." Fifth-place Lenovo sold 3.4 million tablets through the Holiday quarter. Microsoft, with its $340 billion in market capitalization, has remained all but a non-factor within the tablet market. For Microsoft, Office 365 for iPad sales may be described as a pyrrhic victory, at best. Additional Office 365 subscriptions will amount to a trifling sum relative to the opportunity costs of effectively shutting down the Surface and Nokia Lumia 2520 tablets.

The Bottom Line

The Office for iPad event should be interpreted as a de facto victory for Apple. Legendary investor Warren Buffett may opine that the moat is still expanding at Cupertino. Again, shareholders may expect for Apple to sell 80 million iPads through 2014. By itself, the iPad platform would then generate $36 billion in sales, if the tablets were to move at a $450 per unit average. In all, Apple appears poised for high single-digit revenue and profit growth through 2014, because no Apple iPad/iPhone killer exists upon the near-term horizon. Larger screens for the iPhone 6 will help Apple compete effectively alongside the phablet movement. Reuters recently reported that the looming iPhone 6 launch would branch off into two separate 4.7-inch screen and 5.5-inch screen handsets.

Apple, of course, has remained a cash machine in recent years. Apple closed out its Q1 2014 books with $158.8 billion in cash and investments above $95.5 billion in total liabilities on the balance sheet. Be advised that Apple liabilities did include $11.4 billion in deferred revenue. This deferred revenue will ultimately be booked as sales, which would leave $84.1 billion in liabilities. Apple may then still carry $74.4 billion, or $80 per share, in cash and investments after theoretically paying off all liabilities. Apple shares did change hands at $542.55 at the end of the April 2 trading session. Apple trades for a relatively cheap 11 times estimated earnings, after backing out its financial liquidity.

Apple shares still deserve a buy rating.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.