Editors' pick: Originally published Nov. 1.
BlackBerry's (BBRY) recent deal to embed its infotainment operating system, security software and other applications in more Ford (F - Get Report) vehicles underscores the wireless technology group's shift towards software and away from mobile phone hardware.
Cars are becoming the ultimate mobile device, and automotive technology is one of the growth areas the Waterloo, Ont., company has targeted. BlackBerry's QNX unit is already a leader in the market for car infotainment operating systems, 3D navigation and advanced driver assistance systems. BlackBerry bought the business, which also makes software for surgical robots, train control systems and other applications, from audio electronics company Harman International.
The developing market for smart cars presents an alluring opportunity but also entails challenges. Apple (AAPL - Get Report) and Alphabet's (GOOGL - Get Report) Google, the much better-capitalized duo, have given BlackBerry headaches in the mobile phone market, are taking a bigger seat in autos and will present formidable competition.
Wells Fargo analyst Maynard Um wrote that the agreement with Ford will not likely pay off until new car models appear, but suggested that autos are a bright spot for BlackBerry in a Monday note. Um projects that QNX will generate $110 million in sales in fiscal year 2017 and hit $138 million the following fiscal year. "We believe QNX should be one of BBRY's faster growing segments given the secular growth in connected cars, which will help continue BBRY's shift to a pure software company," the analyst wrote.
BlackBerry needs sources of growth. Um predicts that total revenue will drop from $2.2 billion in fiscal year 2016 to just under $1.4 billion in 2017 and $980 million the following year.
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When the company reported fiscal second-quarter earnings in late-September, CEO John Chen pointed to connected cars, enterprise software and the Internet of Things as growth areas.
The software makeover has been bumpy. The company's fiscal second-quarter revenues, announced in late September, came to $352 million, missing consensus estimates by 11%. Software and services revenue, which accounted for 44% of the top line, grew 111% to $156 million.
Earning per share came to 0 cents, which exceeded the forecast for a loss.
Wall Street expects software and services to grow to $175 million when BlackBerry reports third fiscal quarter results later this month, accounting for more than half of the $329 million in projected total sales. Blackberry is growing its software and services, just not as fast as its top line is declining.