Office for iPad: A Billion Dollar Opportunity for Microsoft Corporation?

Microsoft may be late to the iPad party, but the opportunity for the company is still meaningful.

Apr 6, 2014 at 12:45PM

Most of the analysis of what Office for iPad in Apple's App Store means for Microsoft (NASDAQ:MSFT) discusses what the move suggests about the company's shifting strategy. For instance, in a previous post I discussed why Office for iPad is Microsoft's best strategic move in years. But what about the potential implications on Microsoft's financials? How could Office for iPad impact the software giant's bottom line?

The impact
Microsoft Office is the undeniable leader productivity software, so it's likely the suite sill see a boost in sales with its availability on the world's most popular tablet. While it will take time for investors to see exactly how many new Office 365 subscriptions its availability on the iPad could inspire, that doesn't stop us from making estimates.

Word Office Ipad

Microsoft Word for iPad. Available with a Office 365 subscription.

Microsoft can make money from new Office 365 subscriptions as a result of the suite's availability on the iPad in two ways. First, users may subscribe to Office 365 from within the Office apps on the iPad. Microsoft only gets to keep 70% of the $100 recurring fee from these subscriptions. Second, users may be persuaded to subscribe to Office 365 thanks to its newfound availability on an iPad yet choose to subscribe on a PC or another device for either $9.99 per month of $100 per year. Microsoft gets to keep 100% of these subscriptions.

I consider it reasonable to assume that 10% of new iPad buyers in the next twelve months and 5% of Apple's current active installed iPad base will subscribe to Office from within Apple's App Store. It is also fairly conservative to estimate that new subscriptions, inspired by Office's availability on iPad yet completed outside of the iPad app, could amount to a figure equivalent to about 2% of new iPad sales in the next twelve months and 1% of the active installed base of iPads.

This hypothetical scenario could result in about $1.15 billion in incremental recurring revenue for Microsoft. Assuming a 75% gross profit margin on these sales (3.5% higher than Microsoft's corporate average), this could boost Microsoft's annual gross profit by about 2%. And thanks to Microsoft Office 365's lucrative gross profit margin, this 2% boost to gross profit would likely have an outsized impact on the bottom line.

But even this understates the billion-dollar opportunity Office for iPad is for Microsoft. Thanks to a smooth transition to a recurring revenue model with Office 365, Office for iPad gives Microsoft investors a solid new stream of cash they can likely count on for years to come.

While it's a shame it took Microsoft so long to finally bring Office to iPad, the opportunity is still meaningful. Sure, these are just estimates based on a hypothetical scenario. But, if anything, these estimates are likely conservative

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Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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