QNX: How Big is Your Backlog?
My first introduction to the business model underpinning the automotive industry was Harman International’s earnings calls more than a decade ago when then-CEO and founder Sidney Harman (RIP) would intone regarding the multi-billion dollar backlog of Harman’s automotive billings.? To the uninitiated, it sounded like some kind of financial mumbo-jumbo designed to flimflam the analysts.? But there was no sleight of hand afoot.? Backlogs are a real thing in the auto biz and Harman was and is a master of building them.
Soon, map-maker HERE and TomTom took up the backlog boogie and, now, BlackBerry and Qualcomm have joined the backlog conga line, with BlackBerry boasting a $815M backlog for its IoT business – i.e. automotive.? It’s a big number, but is it big enough?? (Qualcomm claims an automotive backlog of $45B.)
In the automotive business, the key figures are profitability and backlog.? You can maybe tolerate short-term losses if the long-term promises profits.? And in the auto biz, with contracts running anywhere from five to 10 years, a backlog of bankable business is key.
Until recently, BlackBerry wasn’t making money and its backlog was underwhelming.? Under new leadership the bottom line has been shored up as has the order book, now promising as many as five years (more?) of profitable opportunity.
Vito Giallorenzo, chief financial officer for BlackBerry’s IoT business (which includes automotive), spelled out the particulars of doing business in the automotive industry during a presentation this week at the BlackBerry Investor Day in New York City.? His presentation reminded me of what I say to companies that say they want to enter the automotive industry: “Why?”
New market entrants to the automotive business are usually subjected to years of revenue-less gyrations or pre-production hell.? During this time, as Vito pointed out, a variety of processes must be managed including:
Initial Negotiation, Development, and Integration - Define technical requirements, Support customer building software, Complete integration and testing using reference hardware
Safety Certification and Performance Optimization - Optimize software performance for final production hardware, Complete safety, including audits and fault injection testing
Those steps, alone, can take 2-3 years.? It is possible for non-recurring expenses during this process to help defray supplier costs for things like proofs of concept or prototypes, but this is only setting the stage for the main event: start of production and the potential for 7-10 years of recurring revenue.
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Suppliers entering the automotive business are willing to suffer through the 2-3 years of development because of the brass ring of SOP.? At a time when new suppliers are routinely entering the automotive supply chain eco-system to support new electrification programs or vehicle automation, the prospect of a 7-10-year deal represents real value to investors or acquirers.
Companies from Hughes Telematics to UIEvolution/Xevo and more have benefited from booking long-term business with auto makers.? Early deals with car makers can translate into billion-dollar valuations.?
Xevo stands out, in particular.? Previously known as UIEvolution, which had a 10-year deal with Toyota, Xevo leveraged the revenue from its Toyota relationship to win business from General Motors (for the Marketplace in-dash app) and other auto makers leading to its $320M acquisition by Lear Corporation.
Wind River’s backlog of automotive business as well as its non-automotive activities likely played a major role in the $3.5B price tag paid by Aptiv.? The backlog of business not only guarantees long-term revenue, it also sets the stage for ongoing business with existing customers.
These considerations are likely to play a role in BlackBerry’s own long-term outlook.? The one-time dominant player in automotive infotainment systems now derives less than 10% of its revenue from the IVI segment.? Advanced driver assist systems (21%), cockpit (29%), and central compute (11%) are more important businesses moving forward.
Similarly, BlackBerry has established a firm beachhead in China as reflected in a substantial presence in the electric vehicle segment and the fact that Asia-Pacific accounts for 28% of revenue.? All of which isn’t to suggest there aren’t storm clouds on the horizon for BlackBerry.
Perhaps the single greatest cause for concern is Qualcomm’s acquisition of OpenSynergy’s COQOS hypervisor.? Qualcomm is the dominant supplier of SoCs for the automotive market and BlackBerry has benefited from a nearly 100% attach rate for its own hypervisors with Qualcomm implementations.? Qualcomm’s increasingly vertical integration through acquisition (i.e. COQOS, Veoneer) may erode some future prospects for BlackBerry.
For the time being and the next five years or more, BlackBerry can boast of the 255M cars currently on the road running QNX software as it continues to build its backlog with an increasing focus on central compute and away from infotainment.? The company's agnostic approach to partnerships means its prospects aren't tied to any particular semiconductor or hardware supplier. And BlackBerry’s formidable and bourgeoning backlog remains attractive to customers, investors, and potential acquirers.
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Attorney | Portfolio Manager | Realtor | Broker
1 周Question for the QNX enthusiasts on this post. AI will reduce complexity in the software stack over time. There is also opinion that AI could replace traditional Operation Systems. QNX being a minimalistic Microkernal, does this play into QNX’s hand?
Helping automotive customers solve complex software development problems, using open standards.
4 个月Roger - Great post and insightful as always. I will question your comment "Until recently, BlackBerry wasn't making money and its backlog was underwhelming". I would respectfully change that to "Until recently, BlackBerry didn't communicate well their automotive (OS) revenue nor backlog." You have to then ask, "Why are they disclosing it in so much more detail now?"
Attorney | Portfolio Manager | Realtor | Broker
4 个月COQOS is ASIL B AGL. Apples and Oranges when compared to QNX ASIL D microkernal.
Chief Financial Officer at East of England Co-op
4 个月Roger C. Lanctot , it's not really about who I like, it's a relatively small group of Tier 2 DMS providers, so probably space for them all to do ok. If you compare say lidar providers of which there are many to DMS of which there are very few (maybe we could name 5 or so) However, I see the rearview mirror as the optimum location for DMS/OMS and Seeing Machines have the huge advantage of an exclusive agreement with Magna International. Gentex have an inhouse solution via their acquisition of Guardian Optical technologies. So if the RVM becomes the main location for DMS and Gentex and Magna continue to be the dominant parties then I would predict Seeing Machines will be the market leader.
Chief Financial Officer at East of England Co-op
4 个月I would keep an eye on Seeing Machines which is quoted in London ticker SEE.L They are a leading player in the growing DMS/OMS market and have partnerships with Valeo and Magna to name but 2. Their licensing model is well established with a growing automotive orderbook/backlog.