BlackBerry (BBRY) has been counting on its software and services business to reverse its fortunes over the last few years, given the precipitous decline of its once dominant smartphone business. While the company's BlackBerry Messenger and enterprise software businesses are seen as key candidates for driving a turnaround, there has been a lot of buzz around the company's sometimes overlooked QNX embedded systems business, which has made significant progress in the burgeoning connected automobiles space. In this note, we take a look at where the QNX business currently stands and its potential opportunities and risks.
We have an $8 price estimate for BlackBerry, which represents a slight premium over the current market price.
What Is QNX?
BlackBerry acquired QNX Software Systems from Harman International (NYSE:HAR) back in 2010 for around $200 million. While BlackBerry has used QNX to power its Playbook line of tablets and build its BB10 operating system, the software's primary application lies in embedded systems. The operating system is microkernel-based, and its key attributes of stability and security, is useful in mission critical applications such as medical equipment, air traffic control and control systems. However, QNX's flexibility and relatively low hardware requirements have allowed it to find a significant market in the auto industry, where it has been seeing a significant uptake for automotive infotainment systems. Infotainment systems broadly control the information, communication and entertainment systems in a vehicle. BlackBerry's QNX software typically provides the operating system and middleware, with OEMs (original equipment manufacturers) controlling the overall user interface and experience of the infotainment product.
Leader In Automotive Infotainment Space, But Monetization Is Weak
BlackBerry says that its QNX technology is currently deployed by over 40 OEMs in tens of millions of vehicles throughout North America, Europe and Asia. (BlackBerry Form 40-F) Sales of automotive infotainment systems stood at close to 40 million units, according to estimates from IHS Automotive, and the market is expected to grow to about 130 million units by 2020. QNX had a market share of around 53% in 2013, while Microsoft (NASDAQ:MSFT), the second largest player, had a market share of just about 27%. Among QNX's most notable customers are General Motors (NYSE:GM), which uses the software in its OnStar automobile communication systems, and Apple (NASDAQ:AAPL), which uses the software for its CarPlay utility that connects iPhones to infotainment systems.
However, despite the strong proliferation and installed base, the QNX business is not believed to be very meaningful to BlackBerry's financial performance (the company does not break out QNX financials). The business generates revenues through the licensing of QNX software products and through the professional services that BlackBerry provides to customers for developing QNX powered devices. Estimates from Bloomberg peg QNX revenues at just about 2% of BlackBerry's total sales and IHS analysts estimate software licensing fees at a relatively paltry $3 per vehicle.
Risks of Commoditization
The weak monetization could stem from the fact that a lot of the value in the automotive infotainment space is likely to come from offering a differentiated user interface and user experience, an area controlled by OEMs. QNX's OS and middleware, on the other hand, operate behind the scenes under layers of software programmed by automakers, and could have a lower ability to capture end-consumer value. This could prove to be an issue for BlackBerry if it wants to grow in the connected automotive market (which is forecast to touch $53 billion by the year 2018), since the share of core software sales as a percentage of the overall market size could decline as the space becomes more commoditized.
Competition has also been increasing. Large players such as Apple and Google (NASDAQ:GOOG) have been beefing up their presence in the market, seeking to extrapolate their smartphone successes to the connected automobile space. QNX could also face mounting competition from open source softwares in the kernel space. For instance, Linux has been finding favor with many automakers such as Tesla (NASDAQ:TSLA), who want a greater level of control over their automobile systems.
Playing To Its Strengths
BlackBerry has been playing to QNX's strengths in order to drive growth. The company recently launched a new operating system that is directed at automotive safety, dubbed QNX OS for Automotive Safety 1.0, banking on the stability and security that the QNX platform offers. This operating system will provide back-end software that drives automotive security features including a heads-up display, advanced driver assistance systems (ADAS) and digital instrument clusters. The growing interest in the 'Internet of Things' could prove to be a significant opportunity for QNX, since its software has relatively modest hardware requirements, making it suitable for low powered devices. QNX could have an early mover advantage in this space since it already has a large network of third-party developers on its platform.
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