TeleNav 2014 Annual Report Download - page 53

Table of Contents
In fiscal 2014 , 2013 and 2012 , we generated 94% , 92% and 94% of our revenue, respectively, in the United States. With respect to
revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify that revenue as being
generated in the United States, because we provide deliverables to and receive compensation from the manufacturer's or OEM's United States'
entity.
Cost of revenue
Our cost of revenue consists primarily of the cost of third party content, such as map, geocodes, POI, traffic, gas price and weather data
and voice recognition technology that we use in providing our navigation solutions. Our cost of revenue also includes the cost of third party
exchange ad inventory as well as expenses associated with data center operations, customer support, the amortization of capitalized software,
recognition of deferred development costs on specific projects, stock-
based compensation and amortization of developed technology. The largest
components of our cost of revenue are the fees we pay to providers of map, POI and traffic data, TomTom and HERE. We have agreements with
TomTom and HERE 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 on a per installed vehicle basis. With respect to TomTom, we are required to pay certain minimum fees for access
to its content by our mobile navigation customers, as well as a usage fee. Although we recently began using OSM for certain of our freemium
navigation products, we do not anticipate that we will cease to use TomTom and HERE in the near-term on our paid subscription mobile
navigation solutions.
For our on-board automotive navigation solutions provided to Ford, we pay royalties on a per installed unit produced basis to HERE as
well as other content providers, depending on the geographic distribution of our solution with Ford. .
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, 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. We use two outsourced, hosted data centers 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 display 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 ad trafficking operations.
While we expect that services revenue from wireless carrier customers will continue to decline substantially in fiscal 2015, we do not
expect to be able to reduce our cost of services revenue at the same rate of decline as services revenue. Although we successfully transitioned to
utilizing OSM content on our freemium navigation applications resulting in notable cost savings, we will continue to incur significant costs,
especially related to third party content as well as for data center operations. 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 2015 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 navigation offerings provided through wireless carriers.
43