TeleNav 2010 Annual Report Download - page 60

receive and modified certain other terms. In September 2010, we further amended our agreement with Sprint,
which changed the way in which we receive revenue from the majority of the services we provide to Sprint’s
subscribers. See “—Overview”.
Subscription fees from our GPS Navigator service represented 92% and 94% of our revenue in fiscal 2009
and 2010, respectively. Activation fees represented less than 1% of our revenue in each of fiscal 2009 and 2010.
We primarily sell our services in the United States. In fiscal 2009 and 2010, revenue derived from U.S.
sources represented 96% and 97% of our revenue, respectively.
Cost of revenue. Our cost of revenue increased 46% from $20.2 million in fiscal 2009 to $29.5 million in
fiscal 2010. As a percentage of revenue, cost of revenue decreased from 18% in fiscal 2009 to 17% in fiscal
2010. The substantial majority of our cost of revenue related to costs of third party content and technology that
we use in providing our LBS such as map, POI, traffic, gas price and weather data and voice recognition
technology. The remaining portion of our cost of revenue included expenses associated with data center
operations, customer support, the amortization of capitalized software and stock-based compensation. Cost of
revenue increased at a slightly lower rate than the 54% increase in revenue for the comparable period as a result
of the use of lower cost content and lower customer support costs per end user resulting from an increased
portion of customer support provided by our wireless carrier partners and our greater use of outsourcing.
However, these factors were partially offset by the decrease in ARPU and higher usage rates of third party
content by our end users who purchase our services as part of a bundle. The increase in cost of revenue in
absolute dollars was primarily driven by the increase in our number of end users. The majority of the increase in
cost of revenue in absolute dollars was due to a 38% increase in third party content costs and, to a lesser extent,
from a 43% increase in customer support costs as well as increased costs of data center operations.
In September 2010, we amended our agreement with Tele Atlas to change the fee structure for map and POI
data we provide for Sprint’s bundled offerings in order to align the manner in which we pay fees to Tele Atlas
with the manner in which we receive revenue from Sprint. See “—Overview”. Although we anticipate these
changes to our Tele Atlas agreement will reduce the cost impact of the anticipated increase in the number of
Sprint bundle subscribers on our cost of revenue, we expect that our cost of revenue will increase in both
absolute dollars and as a percentage of revenue as the number of our end users increases, average usage of our
services by end users increases and from amortization and depreciation expense associated with planned data
center capacity increases, as well as increased amortization of capitalized software development costs. In
addition, we anticipate that ARPU from our LBS will continue to decline, which will further increase cost of
revenue as a percentage of revenue.
Gross profit. Our gross profit increased 56% from $90.6 million in fiscal 2009 to $141.7 million in fiscal
2010 primarily due to an increase in the number of our end users. Our gross margin increased from 82% in fiscal
2009 to 83% in fiscal 2010. We expect our gross margin to decline as the ARPU from our LBS continues to
decline and cost of revenue increases in both absolute dollars and as a percentage of revenue.
Research and development. Our research and development expenses increased 77% from $23.5 million in
fiscal 2009 to $41.6 million in fiscal 2010. The increase was primarily due to the costs associated with increased
headcount to enhance the functionality of our services and develop new offerings, increased compensation and
benefits for our existing employees, as well as $1.5 million of stock compensation expense associated with
certain outstanding stock option grants that vested upon the closing of our IPO. As a percentage of revenue,
research and development expenses increased from 21% in fiscal 2009 to 24% in fiscal 2010. The total number
of research and development personnel increased 31%, from 524 at June 30, 2009 to 686 at June 30, 2010. We
believe that as we continue to invest in expanding the LBS we offer, establish relationships with new wireless
carrier partners and develop new services and products, revenue from those investments and development efforts
will lag the related research and development expenses. We expect that research and development expenses will
increase in absolute dollars as we continue to enhance and expand the services and products we offer.
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