On April 9, 2010, BlackBerry (NASDAQ:BBRY) announced that it was set to acquire QNX Software Systems for $200 million. At that time, QNX was actually a unit of consumer electronics company Harman International Industries (NYSE:HAR). Interestingly, QNX also traces its beginnings to the same 1980's University of Waterloo setting as BlackBerry and its founder, Mike Lazaridis. Over the years, QNX was to emerge as the dominant operating software above the automotive console market. In recent months, CEO John Chen praised QNX as the "crown jewel" of the BlackBerry portfolio. Misguided bulls, however, are likely to remain disappointed after placing big bets upon a niche player. QNX will not save BlackBerry.
The Embedded QNX
QNX software architecture is notable for its microkernals that take up minimal storage space, while also processing multiple tasks and complex calculations. The operating system will still remain functional, after multiple servers are either purposefully not run, or malfunction due to technical glitches. The microkernel architecture varies from traditional operating systems, which may shut down completely, if one part of the algorithm were to fail. As such, QNX is now a go-to name for machine-to-machine communications in traffic control, automotive consoles, and medical devices. Kurt Wagner and CNN Money defined QNX as a "solution for things that can't crash."
After the buyout, BlackBerry launched the Playbook tablet as the first QNX-run device within the portfolio. Ironically, Mike Lazaridis then proclaimed that "amateur hour" was over for Apple (NASDAQ:AAPL) and its iPad. For its 2013 fiscal year, however, Apple reported record sales of 71 million iPad units that generated $32 billion in segment revenue. Alternatively, the BlackBerry Playbook has remained all but irrelevant within the tablet space. Recent research reports out of IDC may indicate that BlackBerry has shipped a mere 100,000 Playbook tablets per quarter, at best. IDC has consistently identified Apple, Samsung (OTC:SSNLF), ASUS, Lenovo, and Acer as the top-five tablet vendors, according to units sold, over the past year, with BlackBerry Playbook results falling into the "Others" classification. According to IDC data, fifth-place Lenovo shipped 3.4 million tablet units during the 2013 Holiday quarter.
Despite the Playbook debacle, QNX went on to also serve as the technical framework behind the BlackBerry 10 operating system. The BlackBerry 10 movement was to largely branch off into Q10, Z10, and Z30 handsets. Critical reviews, however, railed against "unfinished" and "mismatched" BlackBerry hardware and software. BlackBerry has actually lost ground to the Apple iOS - Google (NASDAQ:GOOG) Android duopoly, in the aftermath of the QNX acquisition. On March 7, 2014, research firm comScore estimated that BlackBerry lost 50 basis points in U.S. smartphone subscriber market share through the November 2013 to January 2014 quarter. BlackBerry now desperately clings onto a shrinking 3.1% of the U.S. smartphone market. For the sake of comparison, Android (51.7%) and iOS (41.6%) combined to operate a staggering 93.3% of U.S. subscriber handsets through this latest quarter.
Fool's Gold in Connected Cars
Misguided bulls often highlight connected cars as a growing and scalable market for QNX and BlackBerry. BlackBerry bulls argue that connected cars are a logical extension for smartphone and tablet ecosystems. The connected car concept, for example, would allow consumers to seamlessly check engine vitals, sort through downloaded music files, and arrange conference calls between existing mobile devices and car consoles. For now, a standalone car console featuring high-definition graphics, touch screen scrolling, GPS navigation, and streaming radio folds within the infotainment market segment.
Last February, Bloomberg reported that Ford (NYSE:F) would be dropping Microsoft (NASDAQ:MSFT) in favor of QNX, to manage its own Snyc entertainment system. For many, the move confirmed QNX' reputation as the flagship name in automotive operating systems. In the aggregate, however, this news may be comparable to the 'blind leading the blind' cliché. For now, QNX dominates a niche market, where its own licensing fees still appear minimal. Various reports have estimated that QNX controls between 50% and 60% of the infotainment market. On September 9, 2013, IHS reported 2012 global infotainment revenue of $34.6 billion. BlackBerry, however, reported a mere $6.8 billion in total net sales for fiscal 2014.
The triangulation of financial data may indicate that QNX is similar to Android, where market share data does not directly correlate to real revenue and profits. BlackBerry, however, is no Google. Waterloo cannot afford to effectively give away software at cost, in hopes of driving traffic towards higher margin product. Going forward, IHS has already foreshadowed that Linux will overtake both Microsoft and BlackBerry QNX to dominate the infotainment operating system market by 2020. Tech geeks, of course, recognize that the flexible and open-source Android is based upon the Linux kernel. Google has made no secret of its long-term plans to also expand Search through connected homes and vehicles.
The Bottom Line
On March 28, 2014, BlackBerry reported forth quarter and full year results for its fiscal 2014. BlackBerry actually opened the report by listing out $2.7 billion in cash and investments as a Q4 2014 highlight. Be advised that BlackBerry's Q4 2014 cash and investment balance was actually $500 million off the prior quarter, when the company posted $3.2 billion in cash and investments on the Q3 2014 books. Perhaps even more importantly, BlackBerry racked up $5.9 billion in annual losses upon $6.8 billion in 2014 revenue. BlackBerry closed out the 2014 year having generated a mere $976 million in fourth quarter sales. Investors were obviously not pleased with this news, as they promptly dumped BlackBerry shares to $8.41 and a 7.1% loss on the March 28 trading session. Wall Street has now effectively applied a $4.4 billion market capitalization price tag on to the BlackBerry business.
Prospective BlackBerry investors holding out hope for a QNX spinoff and immediate improvement in shareholder value will be thoroughly disappointed. Again, BlackBerry purchased QNX for $200 million in 2010, and has already embedded the software within BlackBerry 10. QNX may now be worth a mere $350 million, at best. John Chen and his high praise for QNX as an alleged long-term building block may actually be a psychological ploy, in similar fashion to a head coach introducing a struggling quarterback as "our guy" to buck up team morale. Prior to Chen's arrival as CEO, BlackBerry had desperately attempted to sell itself off to no avail. Going forward, QNX valuations may ultimately deteriorate beneath the $200 million initial purchase price, if BlackBerry 10 continues to lose market share.
The BlackBerry annual report did include a $1.25 billion issuance of debt within the statement of cash flows as a financing activity. The $1.25 billion issuance of debt were indeed bonds sold to Fairfax Financial -- that carry rights to be converted to stock at $10 per share. Full conversion of the bonds may therefore add 125 million shares to a balance sheet that carried 526.6 million common shares outstanding at the close of fiscal 2014. Without the loan, however, BlackBerry may have been in danger of default, as it again posted a dwindling $2.7 billion in cash and investments above 3.9 billion in liabilities for Q4 2014.
QNX will not save BlackBerry. BlackBerry shareholders should sell stock in order to avoid a severe correction in prices within the next year. BlackBerry cannot effectively compete against the likes of Samsung, Google, Apple, or even Microsoft, over the long-term.
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.