TeleNav 2012 Annual Report Download - page 48

Table of Contents
software, stock-based compensation and amortization of developed technology that we incur in providing our navigation services, mobile advertising
and premium navigation services.
We primarily provide mobile navigation service customer support through a third party provider to whom we provide training and assistance
with problem resolution. We use three outsourced, hosted data centers and industry standard hardware to provide our 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.
While we expect that services revenue from wireless carrier customers will decline substantially in fiscal 2014, we do not expect to be able to
reduce our cost of services revenue at the same rate as services revenue, if at all. We will continue to incur significant costs, especially third party
content and data center operations costs, associated with providing our navigation services at reduced revenue rates or free under our freemium
distribution model. We expect that our total cost of revenue will increase as a percentage of revenue as we increase the percentage of our revenue
from automotive navigation solutions, which generally have higher associated third party content costs than our navigation offerings provided
through wireless carriers. We expect that our cost of revenue will decrease in absolute dollars, as it will be impacted by declining third party content
costs associated with the decline in revenue from wireless carrier customers, partially offset by increased amortization of developed technology
acquired. Cost of 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.
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 we incurred restructuring costs primarily related to severance and benefits expense associated with a reduction in workforce.
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 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. Our
operating expenses have stabilized in absolute dollars in the past fiscal year, as we have reduced certain headcount and achieved greater operational
effectiveness. Despite these recent efforts, we expect that certain costs will continue to increase over time, including compensation and related costs;
however, we are continuing to evaluate spending in certain areas and taking actions to create greater efficiencies. We anticipate continued investment
of resources, including the hiring of additional headcount in, or reallocation of employee personnel into, our strategic growth areas.
Research and development
. Research and development expenses consist primarily of personnel costs for our development employees and costs
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. A majority 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.
Sales and marketing . Sales and marketing expenses consist primarily of personnel costs for our sales, product management and marketing
staff, commissions earned by our sales personnel and the cost of marketing programs, advertising and promotional activities. Historically, a majority
of our revenue has been derived from wireless carriers, which bear much of the expense of marketing and promoting our services to their subscribers.
As a result, the majority of our sales and marketing expenses relate to supporting our wireless carrier customers and attracting new automotive
manufacturers, OEM, and advertisers. We expect to increase our investment in sales and marketing activities, in part, to support our initiatives in the
automotive industry and mobile advertising and to promote our branded services directly to end users. For example, we will add sales personnel to
support our advertising business.
General and administrative . General and administrative expenses consist primarily of personnel costs for our executive, finance, legal, human
resources and administrative personnel, legal, audit and tax consulting and other professional services and corporate expenses.
Other income, net . Other income, net consists primarily of interest we earn on our cash and cash equivalents and short-term investments.
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