TeleNav 2015 Annual Report Download - page 53

Table of Contents
We classify our cost of revenue as either cost of product revenue or cost of services revenue. Cost of product revenue consists primarily of
the cost of third party content we incur in providing our on-board automotive navigation solutions and recognition of deferred development
costs. Cost of services revenue consists primarily of the costs associated with third party content, third party exchange ad inventory, data center
operations and outsourced hosting services, customer support, amortization of capitalized software, stock-based compensation and amortization
of developed technology that we incur in providing our navigation and advertising network services.
We primarily provide mobile navigation service customer support through a third party provider to whom we provide training and
assistance with problem resolution. In addition, we use outsourced, hosting services and industry standard hardware to provide our navigation
services. We generally offer to our wireless carrier customers and generally maintain at least 99.9% uptime every month, excluding designated
periods of maintenance. Our internal targets for service uptime are even higher. We have in the past, and may in the future, not achieve our
targets for service availability and may incur penalties for failure to meet contractual service availability requirements, including loss of a portion
of subscriber fees for the month or termination of our wireless carrier customer agreement.
The largest component of cost of revenue as it relates to our advertising business is the cost of location-based, third party advertising
inventory which we acquire from advertising exchanges. Our search ad inventory is generated from our user base of paid and freemium users of
our Scout and Telenav branded and carrier branded mobile navigation solutions. Other notable costs of our advertising business are the cost of ad
delivery via contracted hosted relationships and the cost of our advertising operations.
While we expect that our services revenue from wireless carrier customers will continue to decline substantially in fiscal 2016, we do not
expect to be able to reduce our cost of services revenue at the same rate, if at all, as the decline in services revenue. Although we successfully
transitioned to utilizing OSM content on our freemium navigation applications resulting in notable cost savings, we expect to continue to incur
significant costs, especially related to third party content as well as for outsourced hosting services. Cost of services revenue related to our
advertising business will be impacted by our ability to grow advertising revenue, as well as the cost and availability of display ad inventory
sourced from third party exchanges. While our product revenue is expected to increase in fiscal 2016 due to continued growth in automotive,
much of this growth will be generated from distribution of our automotive solution with Ford in China and Europe where the underlying content
costs are significantly higher on a per unit basis. Consequently, we expect that our overall total cost of revenue will increase as a percentage of
revenue as we increase the percentage of our revenue from automotive navigation solutions and advertising network services, which generally
have higher associated third party content costs and third party display ad costs, respectively, than our mobile navigation offerings provided
through wireless carriers.
Operating expenses
We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative. In
addition, in fiscal 2013 and 2014 we incurred restructuring costs primarily related to severance and benefits expense associated with reductions
in workforce and facility exit costs associated with consolidation of facilities. In fiscal 2015, we incurred restructuring costs primarily related to
a reassessment of our facility impairment costs. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses,
advertising sales commissions, payroll taxes, employee benefit costs and stock-based compensation expense. Other expenses include marketing
program costs, third party contractor and temporary staffing services, facilities-related costs including rent expense, legal, audit and tax
consulting and other professional service fees. We allocate stock-
based compensation expense resulting from the amortization of the fair value of
stock-based awards granted, based on the department in which the award holder works. We allocate overhead, such as rent and depreciation, to
each expense category based on headcount. Effective in the first quarter of fiscal 2015, we began classifying product management costs as a
component of research and development expenses due to the change made effective July 1, 2014 whereby this function no longer reports into the
sales and marketing organization. Previously such costs had been included within sales and marketing expenses. We anticipate continued
investment of resources, including the hiring of additional headcount in, or reallocation of employee personnel into, our growth areas, which
include automotive and advertising, with a recent emphasis on hiring advertising sales personnel and related support functions.
Research and development . Research and development expenses consist primarily of personnel costs for our development and product
management employees and costs of outside consultants and temporary staffing. Product management costs are classified as research and
development expenses commencing July 1, 2014. We have focused our research and development efforts on improving the ease of use and
functionality of our existing services, as well as developing new service and product offerings in our existing markets and in new markets. In
addition to our U.S. employee base, a significant number of our research and development employees are located in our development centers in
China and, as a result, a portion of our research and development expense is subject to changes in foreign exchange rates, notably the Chinese
Renminbi, or RMB. In addition,
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