TeleNav 2011 Annual Report Download - page 54

Table of Contents
Cost of revenue
Our cost of revenue consists primarily of the cost of the third party content, such as map, POI, traffic, gas price and weather data and voice
recognition technology that we use in providing our LBS. Our cost of revenue also includes expenses associated with data center operations,
customer support, the amortization of capitalized software and stock-based compensation. The largest component of our cost of revenue is the
fees we pay to providers of map and POI data, TomTom Maps and NAVTEQ. We have long term agreements with TomTom Maps and
NAVTEQ pursuant to which we pay royalties according to a variety of different fee schedules, including on a per use basis, on a per end user per
month basis and commencing in fiscal 2011, on a fixed fee basis for certain navigation offerings.
We primarily provide customer support through a third party provider to whom we provide training and assistance with problem
resolution. We use three outsourced, hosted data centers to provide our services and industry standard hardware to provide our LBS. 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. 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, including those through bundled or free offerings,
average use of our services by end users increases and additional operating costs and depreciation associated with our planned data center
capacity and redundancy increases, as well as increased amortization of capitalized software development costs. In addition, we anticipate that
cost of revenue will increase over time as we continue to enhance the richness of the content offered by our products and if we increase the level
of our revenue from automotive navigation solutions.
Operating expenses
We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative.
Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, payroll taxes, employee benefit costs and stock-
based compensation expense. Other expenses include marketing program costs, facilities, 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 options granted, based on the
department in which the option holder works. We allocate overhead, such as rent and depreciation, to each expense category based on headcount.
Our operating expenses increased in absolute dollars in fiscal 2010 and fiscal 2011 as we became a public company and built our infrastructure
and added employees across all categories to support our growth, develop new services and products, and expand into international markets. We
expect our operating expenses to continue to increase in fiscal 2012 as we continue in these endeavors.
Research and development . Research and development expenses consist primarily of personnel costs for our development employees and
use of outside consultants. 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. The majority of our research and
development employees are located in our development centers in China and, as a result, a substantial portion of our research and development
expense is subject to changes in foreign exchange rates, notably the Chinese renminbi, or RMB.
Sales and marketing . Sales and marketing expenses consist primarily of personnel costs for our sales and marketing staff, commissions
earned by our sales personnel and the cost of marketing programs and advertising. As we primarily rely on our wireless carrier customers to
market and promote our services to their subscribers, our sales and marketing expenses consist primarily of the cost of supporting our wireless
carrier customers and attracting new wireless carrier customers to offer our LBS. We cooperate with our wireless carrier customers in
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