10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended September 30, 2015

or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 001-34720
 
TELENAV, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0521800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

950 De Guigne Drive
Sunnyvale, California 94085
(Address of principal executive offices, including zip code)
(408) 245-3800
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of September 30, 2015, there were approximately 40,856,701 shares of the Registrant’s Common Stock outstanding.


Table of Contents

TELENAV, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.

TELENAV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
 
 
September 30,
2015
 
June 30,
2015*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
11,981

 
$
18,721

Short-term investments
 
99,763

 
101,195

Accounts receivable, net of allowances of $189 and $211 at September 30, 2015 and June 30, 2015, respectively
 
38,353

 
36,493

Deferred income taxes, net
 
328

 
327

Restricted cash
 
4,779

 
4,878

Income taxes receivable
 
5,472

 
6,080

Prepaid expenses and other current assets
 
5,002

 
4,288

Total current assets
 
165,678

 
171,982

Property and equipment, net
 
6,803

 
7,126

Deferred income taxes, non-current
 
689

 
443

Goodwill and intangible assets, net
 
36,820

 
37,528

Other assets
 
8,118

 
6,843

Total assets
 
$
218,108

 
$
223,922

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
740

 
$
830

Accrued compensation
 
6,966

 
9,628

Accrued royalties
 
12,759

 
9,358

Other accrued expenses
 
10,314

 
10,918

Deferred revenue
 
3,032

 
2,109

Income taxes payable
 
751

 
724

Total current liabilities
 
34,562

 
33,567

Deferred rent, non-current
 
4,577

 
4,858

Deferred revenue, non-current
 
7,637

 
4,719

Other long-term liabilities
 
4,763

 
4,595

Commitments and contingencies
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value: 50,000 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.001 par value: 600,000 shares authorized; 40,857 and 40,537 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively
 
41

 
41

Additional paid-in capital
 
142,135

 
140,406

Accumulated other comprehensive loss
 
(1,716
)
 
(1,540
)
Retained earnings
 
26,109

 
37,276

Total stockholders’ equity
 
166,569

 
176,183

Total liabilities and stockholders’ equity
 
$
218,108

 
$
223,922

* Derived from audited consolidated financial statements as of and for the year ended June 30, 2015
See accompanying Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Revenue:
 
 
 
 
Product
 
$
31,109

 
$
18,916

Services
 
12,952

 
16,071

Total revenue
 
44,061

 
34,987

Cost of revenue:
 
 
 
 
Product
 
18,083

 
10,178

Services
 
5,304

 
5,782

Total cost of revenue
 
23,387

 
15,960

Gross profit
 
20,674

 
19,027

Operating expenses:
 
 
 
 
Research and development
 
17,987

 
16,998

Sales and marketing
 
6,998

 
6,196

General and administrative
 
6,235

 
6,213

Total operating expenses
 
31,220

 
29,407

Loss from operations
 
(10,546
)
 
(10,380
)
Other income (expense), net
 
(187
)
 
1,303

Loss before provision (benefit) for income taxes
 
(10,733
)
 
(9,077
)
Provision (benefit) for income taxes
 
113

 
(1,140
)
Net loss
 
$
(10,846
)
 
$
(7,937
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Basic
 
$
(0.27
)
 
$
(0.20
)
Diluted
 
$
(0.27
)
 
$
(0.20
)
Weighted average shares used in computing net loss per share:
 
 
 
 
Basic
 
40,601

 
39,538

Diluted
 
40,601

 
39,538

 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
Cost of revenue
 
$
32

 
$
24

Research and development
 
1,458

 
1,500

Sales and marketing
 
840

 
764

General and administrative
 
757

 
1,100

Total stock-based compensation expense
 
$
3,087

 
$
3,388

See accompanying Notes to Condensed Consolidated Financial Statements.

2

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)


 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
 
 
 
 
 
Net loss
 
$
(10,846
)
 
$
(7,937
)
Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment, net of tax
 
(184
)
 
(645
)
Available-for-sale securities:
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
 
6

 
(189
)
Reclassification adjustments for gain on available-for-sale securities recognized, net of tax
 
2

 
(245
)
Net increase (decrease) from available-for-sale securities, net of tax
 
8

 
(434
)
Other comprehensive loss, net of tax:
 
(176
)
 
(1,079
)
Comprehensive loss
 
$
(11,022
)
 
$
(9,016
)
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements.


3

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Operating activities
 
 
 
 
Net loss
 
$
(10,846
)
 
$
(7,937
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
1,069

 
1,477

Amortization of net premium on short-term investments
 
205

 
543

Stock-based compensation expense
 
3,087

 
3,388

Write-off of long term investments
 
442

 

Gain on disposal of property and equipment
 

 
(12
)
Bad debt expense
 
73

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(1,933
)
 
(1,178
)
Deferred income taxes
 
(247
)
 
578

Restricted cash
 
99

 
72

Income taxes receivable
 
608

 
(1,626
)
Prepaid expenses and other current assets
 
(714
)
 
1,179

Other assets
 
(1,718
)
 
53

Accounts payable
 
(97
)
 
325

Accrued compensation
 
(2,662
)
 
(5,734
)
Accrued royalties
 
3,401

 
5,010

Accrued expenses and other liabilities
 
(436
)
 
(1,441
)
Income taxes payable
 
27

 
26

Deferred rent
 
(68
)
 
1,403

Deferred revenue
 
3,841

 
(79
)
Net cash used in operating activities
 
(5,869
)
 
(3,953
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(242
)
 
(163
)
Purchases of short-term investments
 
(10,249
)
 
(69,300
)
Purchase of long-term investments
 

 
(200
)
Proceeds from sales and maturities of short-term investments
 
11,483

 
79,075

Net cash provided by investing activities
 
992

 
9,412

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
204

 
1,353

Repurchase of common stock
 
(570
)
 

Tax withholdings related to net share settlements of restricted stock units
 
(1,313
)
 
(678
)
Net cash provided by (used in) financing activities
 
(1,679
)
 
675

Effect of exchange rate changes on cash and cash equivalents
 
(184
)
 
(645
)
Net increase (decrease) in cash and cash equivalents
 
(6,740
)
 
5,489

Cash and cash equivalents, at beginning of period
 
18,721

 
14,534

Cash and cash equivalents, at end of period
 
$
11,981

 
$
20,023

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid (received), net
 
$
(549
)
 
$
47

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Summary of business and significant accounting policies
Description of business
Telenav, Inc., also referred to in this report as “we,” “our” or “us,” was incorporated in September 1999 in the State of Delaware. We are a leader in personalized mobile navigation. We help on the go people by creating products that (1) provide easily-accessed, relevant, and personalized information for discovery, traffic, local search, and navigation and (2) are available across multiple platforms and devices, including mobile phones, tablets, computers and cars. We operate in three segments - automotive, advertising and mobile navigation. Our fiscal year ends on June 30 and in this report we refer to the fiscal year ended June 30, 2015 as “fiscal 2015” and the fiscal year ending June 30, 2016 as “fiscal 2016.”
Basis of presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The condensed consolidated financial statements include the accounts of Telenav, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements include all adjustments (consisting only of normal recurring adjustments) that our management believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to current period presentation for comparative purposes.
Our condensed consolidated financial statements also include the financial results of Shanghai Jitu Software Development Ltd., or Jitu, located in China. Based on our contractual arrangements with the shareholders of Jitu, we have determined that Jitu is a variable interest entity, or VIE, for which we are the primary beneficiary and are required to consolidate in accordance with Accounting Standards Codification, or ASC, subtopic 810-10, or ASC 810-10, Consolidation: Overall. The results of Jitu did not have a material impact on our overall operating results for the three months ended September 30, 2015 and 2014.
The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for fiscal 2015, included in our Annual Report on Form 10-K for fiscal 2015 filed with the U.S. Securities and Exchange Commission, or SEC on August 24, 2015.
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Form 10-K for fiscal 2015.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by us include the determination of revenue recognition and deferred revenue, the recoverability of accounts receivable, the determination of acquired intangibles and goodwill, the fair value of stock awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Concentrations of risk and significant customers
Revenue related to services provided through Ford Motor Company, or Ford, comprised 69% and 53% of revenue for the three months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and June 30, 2015, receivables due from Ford were 63% and 58% of total accounts receivable, respectively. Revenue related to services provided through AT&T Mobility LLC, or AT&T, comprised 11% and 20% of revenue for the three months ended September 30, 2015 and 2014, respectively. Receivables due from AT&T were 9% and 14% of total accounts receivable at September 30, 2015 and June 30, 2015, respectively. No other customer represented 10% of our revenue or 10% of our accounts receivable for any period presented.

5

Table of Contents
TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Certain of our licensed map, points of interest, or POI, and traffic data have been provided principally by TomTom North America, Inc., or TomTom, and HERE North America, LLC, or HERE, in the three months ended September 30, 2015 and 2014. To date, we are not aware of circumstances that may impair either party’s intent or ability to continue providing such services to us.
Restricted cash
As of September 30, 2015 and June 30, 2015, we had restricted cash of $4.8 million and $4.9 million, respectively, on our consolidated balance sheets, comprised primarily of an overpayment from a customer that is expected to be refunded.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, during the three months ended September 30, 2015, were as follows (in thousands):
 
 
Foreign Currency
Translation
Adjustments
 
Unrealized
Gains (Losses) on
Available-for-Sale
Securities
 
Total
Balance, net of tax as of June 30, 2015
 
$
(1,377
)
 
$
(163
)
 
$
(1,540
)
Other comprehensive loss before reclassifications, net of tax
 
(184
)
 
6

 
(178
)
Amount reclassified from accumulated other comprehensive loss, net of tax
 

 
2

 
2

Other comprehensive loss, net of tax
 
(184
)
 
8

 
(176
)
Balance, net of tax as of September 30, 2015
 
$
(1,561
)
 
$
(155
)
 
$
(1,716
)

The amounts reclassified from accumulated other comprehensive loss, net of tax, were determined using the specific identification method and the amounts were included in other income (expense), net, for the three months ended September 30, 2015, and 2014.

The amount of income tax benefit allocated to each component of accumulated other comprehensive loss was not material for the three months ended September 30, 2015, and 2014.
Long-term investments
As of September 30, 2015, the carrying value of our investments in privately-held companies totaled $2.0 million. Of this amount, a total of $1.5 million are accounted for as cost-basis investments, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the entities. Our investments are in entities that are not publicly traded and, therefore, no established market for the securities exists. Our cost-basis investments are carried at historical cost in our condensed consolidated balance sheets and measured at fair value on a nonrecurring basis when indicators of impairment exist. If we believe that the carrying value of the cost-basis investments is in excess of estimated fair value, our policy is to record an impairment charge to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. We regularly evaluate the carrying value of these cost-basis investments for impairment. We recorded a $0.4 million impairment charge for cost-method investments during the three months ended September 30, 2015. We did not record any impairment charges for the three months ended September 30, 2014.
In addition to these cost basis investments, in June 2015 we entered into an agreement to spin off a product line developed by our Xian, China team, including certain assets and technology as well as the transfer of 12 employees, and we agreed to invest $800,000 in the form of a convertible note. We are the primary investor; however, we do not have significant influence over the operations of the business. Accordingly, we record the monthly net change in operating results against the carrying value of the convertible note recorded in long-term investments on our consolidated balance sheet. The entity's success is contingent upon its ability to generate revenue and raise additional capital. As of September 30, 2015, the carrying value of our investment was $513,000.




6

Table of Contents
TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Warranty
We warrant our automotive navigation products to be free from defects in materials, workmanship and design for periods ranging from three months to seven years. We accrue costs related to warranty claims when they are probable and reasonably estimable. Our warranty costs have historically not been material. From time to time, we experience incidents where it may be necessary for us to expend resources to investigate and remedy a potential warranty claim.
Recent accounting pronouncements
In February 2015, the Financial Accounting Standards Board, or FASB, issued new guidance related to consolidations. The new standard amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.
In May 2014, the FASB issued guidance related to revenue from contracts with customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. Early adoption is permitted. In August 2015, the FASB deferred by one year the effective date of this guidance. The updated standard will now be effective for us in the first quarter of our fiscal year ending June 30, 2019. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
2.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, restricted stock units and restricted common stock using the treasury-stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
 
 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Net loss
 
$
(10,846
)
 
$
(7,937
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
40,601

 
39,538

Net loss per share, basic and diluted
 
$
(0.27
)
 
$
(0.20
)


7

Table of Contents
TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The following outstanding shares were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):


 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Stock options
 
5,472

 
5,676

Restricted stock units
 
4,750

 
4,529

Restricted common stock
 

 
8

Total
 
10,222

 
10,213

3.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds. Short-term investments consist of readily marketable securities with a remaining maturity of more than three months from the date of purchase. We classify all of our cash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions. These marketable securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income (loss) and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method. We had no material realized gains or losses in the three months ended September 30, 2015 and 2014.
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2015 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
7,343

 
$

 
$

 
$
7,343

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
3,139

 

 

 
3,139

Commercial paper
 
1,499

 

 

 
1,499

Total cash equivalents
 
4,638

 

 

 
4,638

Total cash and cash equivalents
 
11,981

 

 

 
11,981

Short-term securities:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
450

 
1

 

 
451

Asset-backed securities
 
15,577

 
11

 
(6
)
 
15,582

Municipal securities
 
9,279

 
13

 
(6
)
 
9,286

Commercial paper
 
4,242

 
2

 

 
4,244

Agency bonds
 
8,959

 
17

 
(1
)
 
8,975

Corporate bonds
 
61,274

 
48

 
(97
)
 
61,225

Total short-term investments
 
99,781

 
92

 
(110
)
 
99,763

Cash, cash equivalents and short-term investments
 
$
111,762

 
$
92

 
$
(110
)
 
$
111,744



8

Table of Contents
TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2015 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
10,806

 
$

 
$

 
$
10,806

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
7,915

 

 

 
7,915

Total cash equivalents
 
7,915

 

 

 
7,915

Total cash and cash equivalents
 
18,721

 

 

 
18,721

Short-term investments:
 
 
 
 
 
 
 
 
Asset-backed securities
 
16,977

 
9

 
(3
)
 
16,983

Municipal securities
 
10,018

 
8

 
(9
)
 
10,017

Commercial paper
 
1,996

 
2

 

 
1,998

Agency bonds
 
7,642

 
6

 
(2
)
 
7,646

Corporate bonds
 
64,587

 
39

 
(75
)
 
64,551

Total short-term investments
 
101,220

 
64

 
(89
)
 
101,195

Cash, cash equivalents and short-term investments
 
$
119,941

 
$
64

 
$
(89
)
 
$
119,916


The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated maturities as of September 30, 2015 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
52,810

 
$
52,815

Due between one and two years
 
31,004

 
30,964

Due after two years
 
15,967

 
15,984

Total
 
$
99,781

 
$
99,763


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. As of September 30, 2015, we did not consider any of our investments to be other-than-temporarily impaired.
4.
Fair value of financial instruments
We measure certain financial instruments at fair value on a recurring basis. We have established a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Where applicable, we use quoted prices in active markets for similar assets to determine fair value of Level 2 short-term investments. If quoted prices in active markets for identical assets are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, we use third party valuations utilizing underlying assets assumptions.

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Table of Contents
TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. The fair values of these financial instruments were determined using the following inputs at September 30, 2015 (in thousands):
 
 
 
Fair Value Measurements at September 30, 2015 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
3,139

 
$
3,139

 
$

 
$

Commercial paper
 
1,499

 

 
1,499

 

Total cash equivalents
 
4,638

 
3,139

 
1,499

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
451

 
451

 

 

Asset-backed securities
 
15,582

 

 
15,582

 

Municipal securities
 
9,286

 

 
9,286

 

Commercial paper
 
4,244

 

 
4,244

 

Agency bonds
 
8,975

 

 
8,975

 

Corporate bonds
 
61,225

 

 
61,225

 

Total short-term investments
 
99,763

 
451

 
99,312

 

Cash equivalents and short-term investments
 
$
104,401

 
$
3,590

 
$
100,811

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2015 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2015 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
7,915

 
$
7,915

 
$

 
$

Total cash equivalents
 
7,915

 
7,915

 

 

Short-term investments:
 
 
 
 
 
 
 
 
Asset-backed securities
 
16,983

 

 
16,983

 

Municipal securities
 
10,017

 

 
10,017

 

Commercial paper
 
1,998

 

 
1,998

 

Agency bonds
 
7,646

 

 
7,646

 

Corporate bonds
 
64,551

 

 
64,551

 

Total short-term investments
 
101,195

 

 
101,195

 

Cash equivalents and short-term investments
 
$
109,110

 
$
7,915

 
$
101,195

 
$

Amortization of net premium on short-term investments totaled $0.2 million and $0.5 million in the three months ended September 30, 2015 and 2014, respectively.
There were no transfers between Level 1 and Level 2 financial instruments in the three months ended September 30, 2015 and 2014, respectively.
We did not have any financial liabilities measured at fair value on a recurring basis as of September 30, 2015 or June 30, 2015.

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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

5.
Commitments and contingencies
Operating lease and purchase obligations
As of September 30, 2015, we had future minimum non-cancelable financial commitments primarily related to office space under non-cancelable operating leases and license fees due to certain of our third party content providers, regardless of usage level. The aggregate future minimum commitments, net of sublease income, were comprised of the following (in thousands):
 
 
 
Payments Due by Period
 
 
Total
 
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
and Thereafter
Operating lease obligations, net of sublease income
 
$
24,009

 
$
5,057

 
$
5,281

 
$
5,559

 
$
5,847

 
$
2,265

Purchase obligations
 
3,673

 
1,296

 
734

 
507

 
207

 
929

Total contractual obligations
 
$
27,682

 
$
6,353

 
$
6,015

 
$
6,066

 
$
6,054

 
$
3,194


See Note 12. Subsequent Events for information on our lease termination agreement executed in October 2015.
Joint venture investment commitment
In September 2015, we entered into an agreement with Ningbo Huazhong Holdings Company Limited, or Huazhong, a subsidiary of a publicly traded automotive OEM supplier in China, whereby we and Huazhong agreed to form a joint venture limited liability company in China for the development, manufacture and sales of connected navigation systems for the China automotive aftermarket and local OEMs. We agreed to invest RMB 9.95 million (approximately $1.6 million as of September 30, 2015) in cash, which is expected to represent 19.9% of the equity interests of the joint venture. We and Huazhong have also agreed to negotiate a Technology License Agreement, or TLA, whereby we will license our existing navigation platform technologies to the joint venture in exchange for a RMB 5.0 million license fee. Our capital contribution will be made in two installments, with the first installment totaling RMB 4.95 million due on the later date of (a) October 30, 2015, and (b) one week after the date on which the joint venture is established. Our second installment totaling RMB 5.0 million is due upon certain conditions being met, among them completion of the TLA and our receipt of the RMB 5.0 million TLA fee from the joint venture company.
Contingencies
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss or a cost of indemnification is probable and can be reasonably estimated, we accrue the estimated loss or cost of indemnification in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss or cost of indemnification, if any, is probable and can be reasonably estimated or the outcome becomes known. We expense legal fees related to these matters as they are incurred.
On December 31, 2009, Vehicle IP, LLC, or Vehicle IP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware, seeking monetary damages, fees and expenses and other relief. Verizon Wireless, or Verizon, was named as a co-defendant in the Vehicle IP litigation based on the VZ Navigator product and has demanded that we indemnify and defend Verizon against Vehicle IP. At this time, we have not agreed to defend or indemnify Verizon. AT&T was also named as a co-defendant in the Vehicle IP litigation based on the AT&T Navigator and Telenav Track products. AT&T has tendered the defense of the litigation to us and we are defending the case on behalf of AT&T. After the district court issued its claim construction ruling the parties agreed to focus on early summary judgment motions, the defendants filed motions for summary judgment of noninfringement. On April 10, 2013 the district court granted AT&T and our motion for summary judgment of noninfringement. Plaintiff appealed the district court's claim construction and summary judgment rulings to the U.S. Court of Appeals for the Federal Circuit. On November 18, 2014, the U.S. Court of Appeals for the Federal Circuit reversed the district court's claim construction and overturned the district court's grant of summary judgment of noninfringement. The case has been sent back to the U.S. District Court for the District of Delaware and trial is currently scheduled for February 2017. Due to the uncertainties related to litigation, we are unable to evaluate the likelihood of either a favorable or unfavorable outcome. We believe that it is reasonably possible that we will incur a loss; however, we cannot

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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this lawsuit on our financial condition, results of operations, or cash flows.
On February 6, 2015, Location Services IP, LLC filed a complaint against AT&T, Inc. and Telenav, Inc. in the U.S. District Court for the Eastern District of Texas, alleging that the AT&T Navigator, Telenav GPS Plus, and Telenav Scout Mobile applications infringe four U.S. patents. On April 16, 2015, Location Services IP, LLC dismissed all claims against AT&T, Inc. and Telenav, Inc. and filed a new complaint against AT&T Mobility, AT&T Services, Inc. and Telenav, Inc. in the same court, alleging that the AT&T Navigator, Telenav GPS Plus, Telenav GPS Navigator, and Telenav Scout Mobile applications as well as AT&T Store Locator and the myAT&T Mobile Application infringe the same four U.S. patents. The complaint seeks unspecified monetary damages, fees and expenses and injunctive relief. AT&T has requested that we defend and indemnify them in this matter as it relates to the AT&T Navigator product and we have agreed to do so. On October 5, 2015, we entered into a Settlement and License Agreement with Location Services IP, LLC, pursuant to which Location Services IP, LLC granted us a license to the four U.S. patents at issue and settled and dismissed the complaint. On October 13, 2015, Location Services IP, LLC filed a Dismissal with Prejudice of Defendants Telenav, Inc., AT&T Mobility LLC and AT&T Services, Inc. On October 14, 2015, the District Court entered the dismissal. We do not anticipate any additional liability from this matter.
In addition, we have received, and expect to continue to receive, demands for indemnification from our customers, which demands can be very expensive to settle or defend, and we have in the past offered to contribute to settlement amounts and incurred legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands relating to pending litigation, remain outstanding and unresolved as of the date of this Form 10-Q. Furthermore, in response to these demands we may be required to assume control of and bear all costs associated with the defense of our customers in compliance with our contractual commitments. At this time, we are not a party to the following cases; however our customers have requested that we indemnify them in connection with such cases.
In 2008, Alltel, AT&T, Sprint and T-Mobile USA, or T-Mobile, each demanded that we indemnify and defend them against patent infringement lawsuits brought by patent holding companies EMSAT Advanced Geo-Location Technology LLC and Location Based Services LLC (collectively, EMSAT) in the U.S. District Court for the Northern District of Ohio. In March 2011, EMSAT and AT&T settled their claims. The PTO reexamined two of the patents in suit, confirming the validity of only two of the asserted claims from those patents. All patent claims that EMSAT alleged to be infringed by the Telenav GPS Navigator product were cancelled during reexamination. In the suits against T-Mobile, Alltel and Sprint, EMSAT amended its allegations to remove allegations of infringement of the patent claims that were cancelled during reexamination. EMSAT and T-Mobile stipulated to a dismissal and their case was dismissed on January 28, 2015. On March 20, 2015, the Court dismissed and closed the Alltel case and on April 10, 2015 the Court dismissed and closed the Sprint case. We have not yet determined the extent of our indemnification obligations to AT&T. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the overall effects of this matter on our financial condition, results of operations, or cash flows.
In March 2009, AT&T demanded that we indemnify and defend them against a patent infringement lawsuit brought by Tendler Cellular of Texas LLC, or Tendler, in the U.S. District Court for the Eastern District of Texas. In June 2010, AT&T settled its claims with Tendler and we came to an agreement with AT&T as to the extent of our contribution towards AT&T's settlement and the amount of our contribution was not material; however, there continues to be a disagreement as to whether any additional amounts are owed to AT&T for legal fees and expenses related to the defense of the matter. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the overall effects on our financial condition, results of operations, or cash flows.
In connection with a software quality issue that was identified related to maps displayed in software deployed to certain vehicles released in North America in 2015, we have accrued a reserve of $50,000 as of September 30, 2015. The software quality issue does not present a risk to driver safety. The actual costs are uncertain at this time and we are currently working with our customer to evaluate the appropriate solution. If the actual costs exceed our estimates, our results of operations and financial condition may be adversely affected.

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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

6.Guarantees and indemnifications
Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our products and services infringe a third party’s intellectual property rights or for other specified matters. We have in the past received indemnification requests or notices of their intent to seek indemnification in the future from our customers with respect to specific litigation claims in which our customers have been named as defendants. The maximum amount of potential future indemnification is unlimited.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a directors and officers insurance policy that limits our potential exposure. We believe that any financial exposure related to these indemnification agreements is not material.
7.
Stock-based compensation
Under our 2002 Executive Stock Option Plan, 2009 Equity Incentive Plan and 2011 Stock Option and Grant Plan, eligible employees, directors and consultants are able to participate in our future performance through awards of nonqualified stock options, incentive stock options and restricted stock units through the receipt of such awards as authorized by our board of directors. In addition, we have granted restricted common stock in connection with certain acquisitions.
A summary of our stock option activity is as follows (in thousands except per share and contractual life amounts):
 
 
 
Number of
Shares

 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value

Options outstanding as of June 30, 2015
 
4,781

 
$
5.40

 
 
 
 
Granted
 
845

 
 
 
 
 
 
Exercised
 
(64
)
 
 
 
 
 
 
Canceled
 
(90
)
 
 
 
 
 
 
Options outstanding as of September 30, 2015
 
5,472

 
$
5.64

 
5.02
 
$
13,293

As of September 30, 2015:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
5,169

 
$
5.56

 
4.84
 
$
13,011

Options exercisable
 
3,748

 
$
5.06

 
3.69
 
$
11,564

A summary of our restricted stock unit, or RSU, activity is as follows (in thousands except contractual life amounts):
 
 
 
Number of
Shares
 
Weighted
Average
Remaining
Contractual 
Life
(years)
 
Aggregate
Intrinsic 
Value
RSUs outstanding as of June 30, 2015
 
4,290

 
 
 
 
Granted
 
1,230

 
 
 
 
Vested
 
(519
)
 
 
 
 
Canceled
 
(251
)
 
 
 
 
RSUs outstanding as of September 30, 2015
 
4,750

 
1.68
 
$
37,084

As of September 30, 2015:
 
 
 
 
 
 
RSUs expected to vest
 
3,892

 
1.54
 
$
30,396


RSUs vested above includes 187,250 shares withheld for taxes related to net share settlements of RSUs.


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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

During the three months ended September 30, 2015, pursuant to the annual increase provisions of our 2009 Equity Incentive Plan, the number of shares available for grant under this plan increased by 1,621,476 shares. A summary of our shares available for grant activity is as follows (in thousands):

 
 
Number of
Shares
Shares available for grant as of June 30, 2015
 
1,947

Additional shares authorized
 
1,621

Granted
 
(2,075
)
RSUs withheld for taxes in net share settlements
 
187

Canceled
 
341

Shares available for grant as of September 30, 2015
 
2,021

The following table summarizes the stock-based compensation expense recorded for stock options, RSUs and restricted common stock issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Stock option awards
 
$
410

 
$
689

RSU awards
 
2,677

 
2,242

Restricted common stock
 

 
457

Total stock-based compensation expense
 
$
3,087

 
$
3,388

We use valuation pricing models to determine the fair value of stock-based awards. The determination of the fair value of stock-based payment awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The weighted average assumptions used to value stock option awards granted were as follows:
 
 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Expected volatility
 
52
%
 
53
%
Expected term (in years)
 
4.46

 
4.38

Risk-free interest rate
 
1.54
%
 
1.63
%
Dividend yield
 

 


Performance-based RSUs

We established a 2015 Performance Share Program under our 2009 Equity Incentive Plan, under which RSUs and/or cash bonuses may be earned based on the achievement of specified performance conditions measured over periods ranging from approximately 15 to 21 months. Holders of performance-based awards generally have the ability to receive 0% to 100% of the target number of RSUs or cash bonus originally granted. The expense associated with performance-based RSU grants is recorded when the performance condition is determined to be probable. Fully vested restricted stock units and or cash bonuses will be awarded upon management’s certification of the level of achievement.
As of June 30, 2015, we had granted 106,000 performance-based RSUs to certain non-executive employees. No RSUs were vested or canceled during the three months ended September 30, 2015.

In addition, in July 2015, our board of directors approved reserving an aggregate of approximately $1.2 million of shares for performance-based RSUs to be earned by certain non-executive employees based upon the achievement of specified performance milestones measured over approximately six months. Upon achievement and approval of each milestone RSU

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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

grant by our board of directors, 50% of the RSUs will vest immediately and the remaining 50% will vest one year following the vest date of the first grant. The size of each RSU grant will be determined by dividing the value of the reward for each milestone by the price of our common stock on the date of grant. As of September 30, 2015, no performance-based RSUs had been granted under these milestones.
8.
Stock repurchase program
In September 2014, we announced that our board of directors authorized a program for the repurchase of shares of our common stock up to an aggregate of $10.0 million through open market purchases. The timing and amount of repurchase transactions under this program depends on market conditions and other considerations. Under this program, we utilized $0.6 million of cash to repurchase 75,943 shares of our common stock at an average purchase price of $7.50 per share during the three months ended September 30, 2015. As of September 30, 2015, this repurchase program had expired.
Repurchased shares are retired and designated as authorized but unissued shares. We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital, or APIC, based on an estimated average sales price per issued share with the excess amounts charged to retained earnings. As a result of our stock repurchases during the three months ended September 30, 2015, we reduced common stock and APIC by an aggregate of $249,000 and charged $321,000 to retained earnings.
9.
Income taxes
The effective tax rate for the periods presented is the result of the mix of forecasted fiscal year income earned or loss incurred in various tax jurisdictions that apply a broad range of income tax rates. Our effective tax rate, which resulted in the recognition of a tax expense, was 1% in the three months ended September 30, 2015 compared to an effective tax rate, which resulted in the recognition of a tax benefit, of 13% in the three months ended September 30, 2014. Our effective tax rate of 1% for the three months ended September 30, 2015 was less than the tax benefit computed at the U.S. federal statutory income tax rate due primarily to losses for which no benefit will be recognized since they are not more likely than not to be realized due to the lack of current and future income and the inability to carryback losses within the two year carryback period. Our effective tax rate of 13% for the three months ended September 30, 2014 was less than the tax benefit computed at the U.S. federal statutory income tax rate due primarily to the increase in the valuation allowance as a result of the limitations of benefit from the loss carryback.
We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of September 30, 2015 and June 30, 2015, our cumulative unrecognized tax benefits were $6.1 million. Included in the balance of unrecognized tax benefits at September 30, 2015 and June 30, 2015 was $1.7 million that, if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as part of our provision for federal, state and foreign income taxes. We had accrued $517,000 and $493,000 for the payment of interest and penalties at September 30, 2015 and June 30, 2015, respectively.
We file income tax returns with the Internal Revenue Service, or IRS, California and various states and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2012 through fiscal 2015 in the U.S., for fiscal 2011 through fiscal 2015 in state jurisdictions, and for fiscal 2010 through fiscal 2015 in foreign jurisdictions. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
Due to operating losses in previous years and continued earnings volatility, we maintain a valuation allowance on the majority of our deferred tax assets. Our valuation allowance at June 30, 2015 was $17.7 million. In evaluating our ability to recover our deferred tax assets each quarter, we consider all available positive and negative evidence, including current and previous operating results, ability to carryback losses for a tax refund, and forecasts of future operating results.
On December 19, 2014, the Tax Increase Prevention Act of 2014 became effective, which provides one year retroactive tax relief for businesses by reinstating retroactively to January 1, 2014, certain tax benefits and credits that had expired. These provisions automatically expired again on December 31, 2014. The research and development credit was retroactively extended in this legislation.

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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

10. Restructuring
During fiscal 2014, we recorded restructuring charges of $2.4 million related to severance and benefits for certain eliminated positions and $2.0 million related to the impairment of facility leases in connection with our consolidation of facilities. As of September 30, 2015, our remaining restructuring liabilities are associated with facility exit costs. Activity related to our restructuring liabilities for the three months ended September 30, 2015 is presented in the following table (in thousands):
 
 
 
Balance at June 30, 2015
 
$
2,644

Restructuring expenses
 
28

Cash payments
 
(352
)
Balance at September 30, 2015
 
$
2,320

Of the $2.3 million in total restructuring liabilities, $1.0 million was recorded in other accrued expenses and $1.3 million was recorded in other long-term liabilities on our consolidated balance sheet as of September 30, 2015. See Note 12. Subsequent Events for information on our lease termination agreement executed in October 2015.
11. Segments
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.

Our CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

Commencing July 1, 2014, we began to report results in three business segments:

Automotive - Our Automotive segment provides our map and navigation platform to auto manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. Our automotive solutions are typically a self-contained solution including software and related services and content within the car, or on-board, and are often enhanced through connection to data services for additional real time capabilities such as maps, POI, or traffic.

Advertising - Our Advertising segment provides interactive mobile advertisements on behalf of our advertising clients to consumers based specifically on the location of the user and other sophisticated targeting capabilities. Our customers include advertising agencies, direct advertisers and channel partners.

Mobile Navigation - Our Mobile Navigation segment provides our map and navigation platform to end users through mobile devices. We distribute our services through our wireless carrier partners, and directly to consumers through mobile application stores and marketplaces.

Prior to July 1, 2014, we operated in a single segment: location-based platform services.


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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Our segment results for the three months ended September 30, 2015 and 2014 were as follows (dollars in thousands):


 
 
Three Months Ended September 30,
 
 
2015
 
2014
Revenue
 
 
 
 
Automotive
 
$
31,743

 
$
19,502

Advertising
 
4,851

 
3,975

Mobile Navigation
 
7,467

 
11,510

Total revenue
 
44,061

 
34,987

Cost of revenue
 
 
 
 
Automotive
 
18,521

 
10,396

Advertising
 
2,995

 
2,540

Mobile Navigation
 
1,871

 
3,024

Total cost of revenue
 
23,387

 
15,960

Gross profit
 
 
 
 
Automotive
 
13,222

 
9,106

Advertising
 
1,856

 
1,435

Mobile Navigation
 
5,596

 
8,486

Total gross profit
 
$
20,674

 
$
19,027

Gross margin
 
 
 
 
Automotive
 
42
%
 
47
%
Advertising
 
38
%
 
36
%
Mobile Navigation
 
75
%
 
74
%
Total gross margin
 
47
%
 
54
%

12. Subsequent events
On October 16, 2015, we entered into a lease termination agreement with our landlord for the termination of our office lease dated June 28, 2011 for corporate facilities on DeGuigne Drive in Sunnyvale, California. The lease termination is to become effective on (a) March 31, 2016 with respect to 920 DeGuigne Drive and 950 DeGuigne Drive; and (b) June 30, 2016 with respect to 930 DeGuigne Drive. The effect of this lease termination agreement is to reduce our total operating lease obligations, net of sublease income, as of September 30, 2015 by approximately $19.3 million.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future results of operations, future sources of revenue, expectations of expenses, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this

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Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.
In this Form 10-Q, “we,” “us,” “our” and "Telenav" refer to Telenav, Inc. and its subsidiaries. We operate on a fiscal year ending June 30 and refer to the fiscal year ended June 30, 2015 as “fiscal 2015" and the fiscal year ending June 30, 2016 as "fiscal 2016.”
Overview

Telenav is a leading provider of location-based platform services. These services consist of our automotive and mobile navigation platform and our advertising delivery platform. Our auto and mobile navigation platform allows Telenav to deliver enhanced location-based services to auto manufacturers, developers, and end users through various distribution channels, including wireless carriers. Our advertising delivery platform delivers highly targeted advertising services leveraging our location expertise. We report operating results in three business segments: automotive, advertising and mobile navigation.
For our automotive segment customers, we offer our auto and mobile navigation platform services to vehicle manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. Our primary automotive customer to date, Ford Motor Company, or Ford, currently distributes our on-board product as an optional feature with all of its models in the U.S. Our automotive products are now included on models manufactured in the U.S., Canada, Mexico, Europe and China, as well as offered in models in South America, Australia and New Zealand. In addition, in July 2015, Ford New Zealand and Australia adopted a map update program as part of its Sync 2 product distribution. Under this program, Ford owners with Sync 2 will be eligible to receive annual map updates at no additional cost through December 2023. Ford will pay us an annual fee and a per unit fee for these updates.
In January 2014 we entered into an agreement with General Motors Corporation, or GM, for integration of our on-board and connected navigation solutions in its vehicles, which we expect to launch in model year 2017. Our relationship with GM also includes brought-in services for vehicles, and in January 2015 GM launched the new version of its OnStar RemoteLink® mobile application powered by our location-based services platform, which includes mapping and one-box search. In July 2015, we and Toyota Motor Corporation, or Toyota, announced a partnership for brought-in navigation services where our Scout GPS Link will be available in Entune™ Audio Plus equipped model year 2016 Toyota vehicles in the United States. In August 2015, Toyota began shipping vehicles enabled to connect with our Scout GPS Link mobile application. These models now include select 2016 Camry, Corolla, 4Runner, Sequoia and Tundra models, in addition to the previously announced Tacoma. We believe our history as a supplier of cloud-based navigation services provides a unique advantage in the automotive navigation marketplace over our competitors.
For our advertising segment customers, we believe our advertising delivery platform offers significant audience reach, sophisticated targeting capabilities and the ability to deliver interactive and engaging ad experiences to consumers on their mobile devices. We are experts in location-based advertising and believe we offer unique value to brick-and-mortar and brand advertisers through our location targeting capabilities. Our technology focuses on managing the complexity and scale associated with mobile location data to deliver better mobile campaigns for our advertising partners. We deliver mobile advertisements by leveraging our proprietary in-house ad serving technology. Our inventory, or accessible market, is comprised of thousands of mobile applications and mobile websites that are accessed through programmatic real-time bidding, or RTB, tools.
We derive revenue from automobile manufacturers and OEMs, advertisers and advertising agencies, and wireless carriers. We receive revenue from automobile manufacturers whose vehicles contain our proprietary software and are able to access our personalized navigation services. These manufacturers have typically not provided us with any volume or revenue guarantees. In addition, we have a growing business in mobile advertising where our customers are primarily advertising agencies, which represent national and regional brands, and channel partners, which work closely with local and small business advertisers. We also derive revenue from our partnerships with wireless carriers, who pay us to enable their subscribers to use our mobile navigation services. Some of these wireless carriers bill their subscribers on a monthly recurring basis and the number of those monthly recurring subscribers to which we provide services continues to decline, resulting in substantial declines in our revenue from wireless carriers.

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We generate revenue from the delivery of customized software and royalties from the distribution of this customized software in automotive navigation applications. For example, Ford utilizes our on-board automotive navigation product in its Ford SYNC platform. Ford pays us a royalty fee on Sync 2 on-board solutions as the software is reproduced for installation in vehicles with our automotive navigation solutions and pays us a royalty fee on Sync 3 on-board solutions as the hardware that includes our software is received by Ford. In addition, we earn a one-time royalty for each new vehicle owner who downloads the GM OnStar RemoteLink® application, whereby we provide enhanced search capabilities for contracted service periods. We also earn a one-time royalty for each new Toyota enabled to connect with our mobile application.
We generate revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract.
We also generate revenue from subscriptions to our mobile navigation services. End users with subscriptions for our services are generally billed for our services through their wireless carrier or through mobile application stores and marketplaces. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage.
Recent Developments
In September 2015, we entered into an agreement with Ningbo Huazhong Holdings Company Limited, or Huazhong, a subsidiary of a publicly traded automotive OEM supplier in China, whereby we and Huazhong agreed to form a joint venture limited liability company in China for the development, manufacture and sales of connected navigation systems for the China automotive aftermarket and local OEMs. We agreed to invest RMB 9.95 million (approximately $1.6 million as of September 30, 2015) in cash, which is expected to represent 19.9% of the equity interests of the joint venture. We and Huazhong have also agreed to negotiate a Technology License Agreement, or TLA, whereby we will license our existing navigation platform technologies to the joint venture in exchange for a RMB 5.0 million license fee. Our capital contribution will be made in two installments, with the first installment totaling RMB 4.95 million due on the later date of (a) October 30, 2015, and (b) one week after the date on which the joint venture is established. Our second installment totaling RMB 5.0 million is due upon certain conditions being met, among them completion of the TLA and our receipt of the RMB 5.0 million TLA fee from the joint venture company.
On October 16, 2015, we entered into a lease termination agreement with our landlord for the termination of our office lease dated June 28, 2011 for corporate facilities on DeGuigne Drive in Sunnyvale, California. The lease termination is to become effective on (a) March 31, 2016 with respect to 920 DeGuigne Drive and 950 DeGuigne Drive; and (b) June 30, 2016 with respect to 930 DeGuigne Drive. The effect of this lease termination agreement is to reduce our total operating lease obligations, net of sublease income, as of September 30, 2015 by $19.3 million.

Key operating and financial performance metrics
We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Certain of these measures such as billings, non-GAAP net income (loss), adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, and diluted non-GAAP net income (loss) per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do (in thousands, except percentages and per share amounts):


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Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Revenue
 
$
44,061

 
$
34,987

Billings (Non-GAAP)
 
$
47,902

 
$
34,908

Gross margin
 
47
%
 
54
%
Non-GAAP gross margin
 
49
%
 
57
%
Automotive gross margin
 
42
%
 
47
%
Automotive non-GAAP gross margin
 
43
%
 
48
%
Advertising gross margin
 
38
%
 
36
%
Advertising non-GAAP gross margin
 
47
%
 
47
%
Mobile navigation gross margin
 
75
%
 
74
%
Mobile navigation non-GAAP gross margin
 
75
%
 
76
%
Net loss
 
$
(10,846
)
 
$
(7,937
)
Non-GAAP net loss
 
$
(7,051
)
 
$
(3,872
)
Adjusted EBITDA
 
$
(6,390
)
 
$
(5,515
)
Diluted net loss per share
 
$
(0.27
)
 
$
(0.20
)
Diluted non-GAAP net loss per share
 
$
(0.17
)
 
$
(0.10
)
 
 
 
 
 
 
 
September 30,
 
June 30,
 
 
2015
 
2015
Deferred revenue
 
$
10,669

 
$
6,828


Billings measures revenue recognized plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors because billings drives deferred revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. First, billings include amounts that have not yet been recognized as revenue and may require additional services to be provided over contracted service periods; for example, billings related to certain connected solutions cannot be fully recognized as revenue in a given period due to requirements for ongoing provisioning of services such as hosting, monitoring and customer support. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. When we use these measures, we compensate for these limitations by providing specific information regarding revenue and evaluating billings together with revenue calculated in accordance with GAAP.
Gross margin is our gross profit, or total revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be impacted by the increasing percentage of our revenue base derived from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad inventory costs, respectively, than our mobile navigation offerings provided through wireless carriers.
Non-GAAP gross margin measures our gross margin, excluding the impact of stock-based compensation expense and capitalized software and developed technology amortization expenses. Non-GAAP net loss measures GAAP net loss, excluding the impact of stock-based compensation expense, capitalized software and developed technology amortization expenses, and other applicable items such as legal settlements, certain unique tax matters and restructuring costs, net of taxes or tax benefits. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Stock-based compensation expense has been and will continue to be a significant recurring non-cash expense for us. While we include the dilutive impact of such equity awards in weighted average shares outstanding, the expense associated with stock-based awards reflects a non-cash charge that we exclude from non-GAAP net loss, non-GAAP net loss per share, and adjusted EBITDA. Capitalized software amortization expense represents internal software costs that are previously capitalized and charged to expense as the software is used in our operations. Developed technology amortization expense relates to the amortization of acquired intangible assets. Our non-GAAP tax rate differs from the tax rate due to the elimination of any tax effect of the stock-based compensation expenses, capitalized software and developed technology amortization expenses, and applicable legal settlements, restructuring costs, and other items, including unique tax matters, that are being eliminated to arrive at the non-GAAP net income (loss).
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation, amortization, interest income, other income (expense), provision (benefit) for income taxes, and other applicable items such as

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legal settlements and restructuring costs, net of tax. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss and this metric excludes certain non-cash expenses, interest and other income (expense), income taxes, and certain other items that management believes affect the comparability of operating results.
Non-GAAP gross margin, non-GAAP net income (loss) and adjusted EBITDA are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP gross margin, non-GAAP net income (loss) and adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, non-GAAP net income (loss) and adjusted EBITDA are key financial measures used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Diluted non-GAAP net income (loss) per share is calculated as non-GAAP net income (loss) divided by the diluted weighted average number of shares outstanding during the period.
These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;
non-GAAP gross margin, non-GAAP net income (loss) and adjusted EBITDA do not reflect the potentially dilutive impact of equity-based compensation;
non-GAAP net income (loss) and adjusted EBITDA do not reflect the use of cash for net share settlements of RSUs;
adjusted EBITDA does not reflect tax payments that historically have represented a reduction in cash available to us or tax benefits that may arise as a result of generating net losses; and
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider non-GAAP gross margin, non-GAAP net income (loss), adjusted EBITDA and diluted non-GAAP net income (loss) per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP financial results.
The following tables present reconciliations of revenue to billings, gross margin to non-GAAP gross margin, net loss to non-GAAP net loss and net loss to adjusted EBITDA for each of the periods indicated (dollars in thousands):
 
Three Months Ended September 30, 2015
 
Auto
 
Ads
 
Mobile
Navigation
 
Total
Revenue
$
31,743

 
$
4,851

 
$
7,467

 
$
44,061

Adjustments:
   Change in deferred revenue
3,817

 
124

 
(100
)
 
3,841

Billings (Non-GAAP)
$
35,560

 
$
4,975

 
$
7,367

 
$
47,902



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Three Months Ended September 30, 2014
 
Auto
 
Ads
 
Mobile
Navigation
 
Total
Revenue
$
19,502

 
$
3,975

 
$
11,510

 
$
34,987

Adjustments:
   Change in deferred revenue
22

 

 
(101
)
 
(79
)
Billings (Non-GAAP)
$
19,524

 
$
3,975

 
$
11,409

 
$
34,908


 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Gross margin
 
42
%
 
47
%
 
38
%
 
36
%
 
75
%
 
74
%
 
47
%
 
54
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized software and developed technology amortization
 
1
%
 
1
%
 
9
%
 
11
%
 
%
 
2
%
 
2
%
 
3
%
Non-GAAP gross margin
 
43
%
 
48
%
 
47
%
 
47
%
 
75
%
 
76
%
 
49
%
 
57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The impact of adjusting for stock-based compensation in determining non-GAAP gross margin is less than 1% for all periods presented.
 
 
Three Months Ended
September 30,
 
 
2015
 
2014
GAAP net loss
 
$
(10,846
)
 
$
(7,937
)
Adjustments:
Capitalized software and developed technology amortization
 
708

 
903

Stock-based compensation expense:
 
 
 
 
Cost of revenue
 
32

 
24

Research and development
 
1,458

 
1,500

Sales and marketing
 
840

 
764

General and administrative
 
757

 
1,100

Total stock-based compensation expense
 
3,087

 
3,388

Tax effect of adding back adjustments
 

 
(226
)
Non-GAAP net loss
 
$
(7,051
)
 
$
(3,872
)
 
 
 
 
 
Non-GAAP net loss per share, basic and diluted
 
$
(0.17
)
 
$
(0.10
)
Weighted average shares used in computing non-GAAP net loss per share, basic and diluted
 
40,601

 
39,538




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Three Months Ended
September 30,
 
 
2015
 
2014
GAAP net loss
 
$
(10,846
)
 
$
(7,937
)
Adjustments:
 
 
 
 
Stock-based compensation expense
 
3,087

 
3,388

Depreciation and amortization
 
1,069

 
1,477

Interest and other income (expense), net
 
187

 
(1,303
)
Provision (benefit) for income taxes
 
113

 
(1,140
)
Adjusted EBITDA
 
$
(6,390
)
 
$
(5,515
)

Key components of our results of operations
Sources of revenue
We classify our revenue as either product or services revenue. Product revenue consists primarily of revenue we receive from the delivery of customized software and royalties from the distribution of this customized software in certain automotive navigation applications. Services revenue consists primarily of revenue we derive from our brought-in automotive navigation services, advertising services and mobile navigation services.
We report operating results in three business segments: Automotive, Advertising and Mobile Navigation. Our chief executive officer, or CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. See " - Results of operations" and Note 11 to the financial statements in this Form 10-Q for more information about our business segments.
Revenue from our Automotive segment represented 72% and 56% of our revenue in the three months ended September 30, 2015 and 2014, respectively. Ford represented 69% and 53% of our revenue in the three months ended September 30, 2015 and 2014, respectively. Our contract with Ford expires in December 2017. The agreement may be renewed for successive 12-month periods if either party provides notice of renewal at least 45 days prior to the expiration of the applicable term and the other party agrees to such renewal.
We provide both on-board and brought-in connected navigation solutions to Ford. Our on-board solution consists of software, map and POI data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. Our brought-in connected solution enables a mobile device that is paired with the vehicle to activate in-vehicle text-based and voice-guided turn by turn navigation. We recognize revenue from our brought-in connected solutions monthly based on annual subscriptions, which are subject to a maximum annual fee with Ford. This revenue is classified as services revenue and represented less than 5% of overall automotive navigation solutions revenue.
Our product revenue is primarily derived from our automotive on-board solutions as the related customized software is delivered to, and accepted by our customers. In addition, we recognize royalties earned from our Ford Sync 2 on-board solutions as the software is reproduced for installation in vehicles; however, we currently recognize revenue from Ford Sync 3 as the hardware that includes our software is received by Ford. By June 2016, we anticipate that our Ford Sync 3 arrangement will transition to title transfer as our software is installed in the vehicle and, accordingly, the timing of our revenue recognition will change. As Ford ramps up sales of vehicles with Sync 3, this transition could result in a lag period during which we have reduced revenue. The effect of this change in timing of revenue recognition may be greater for vehicles manufactured outside North America. We anticipate that we will continue to depend on Ford for a material portion of our revenue for the foreseeable future.
In January 2015, GM launched the new version of its OnStar RemoteLink® mobile application powered by our location-based services platform. We earn a one-time royalty for each new vehicle owner who downloads the RemoteLink® application. We record the royalty earned as deferred revenue and recognize this revenue over the estimated service period.
In July 2015, Ford New Zealand and Australia adopted a map update program as part of its Sync 2 product distribution. Under this program, Ford owners with Sync 2 will be eligible to receive annual map updates at no additional cost through December 2023. Ford will pay us an annual fee and a per unit fee for these updates. We record the amount billed for these map updates as deferred revenue and recognize this revenue over the estimated service period.
In August 2015, Toyota began shipping vehicles enabled to connect with our Scout GPS Link mobile application. We earn a one-time royalty for each new Toyota sold and equipped with Entune™ Audio Plus, and we record the royalty earned as

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deferred revenue. Upon delivery of all elements of the contract, we will recognize this revenue over the estimated service period. Royalties earned and revenue recognized related to Toyota were not material in the three months ended September 30, 2015.
Revenue from our Advertising segment, which includes the delivery of search and display, location-based ads, represented 11% of our revenue in each of the three months ended September 30, 2015 and 2014. Our advertising revenue is derived from ad insertion orders contracted with advertising agencies, direct customers, and channel partners. Our ad search revenue is earned from the delivery of location-based ad impressions targeted to end users engaged in a specific search task utilizing our mobile navigation solutions. Such ad search revenue represented less than 10% of our overall advertising revenue. Our display revenue relates to the advertising business developed via our Thinknear acquisition that delivers targeted location-based impressions to end users of third party developer applications.

We also offer voice-guided, real-time, turn by turn, mobile navigation service under several brand names including Scout by Telenav and Telenav GPS as well as under wireless carrier brands (or “white label” brands). Revenue from our Mobile Navigation segment represented 17% and 33% of our revenue in the three months ended September 30, 2015 and 2014, respectively. Subscription fee revenue from our mobile navigation service declined from the three months ended September 30, 2014 to 2015, primarily due to the termination of the fixed fee with Sprint in September 2013 and a substantial decrease in the number of paying subscribers for navigation services provided through AT&T and others, including T-Mobile USA, or T-Mobile, U.S. Cellular Corporation, or USCC, and Comunicaciones Nextel de Mexico, S.A. de C.V., a subsidiary of NII Holdings, Inc., or NII Mexico.

AT&T represented 11% and 20% of our revenue in the three months ended September 30, 2015 and 2014, respectively. In March 2015, our agreement with AT&T was automatically renewed, under its existing terms through March 2016, and provides that we will continue to be the exclusive provider of white label GPS navigation services to AT&T. AT&T is not required to offer our navigation services. During fiscal 2016, we anticipate that we will continue to depend on AT&T for a material portion of our revenue; however, we have seen substantial declines in the number of paying subscribers for our services through AT&T over the past few years and we expect them to continue to decline substantially.

We derive services revenue primarily from our wireless carrier customers for their end users' subscriptions to our mobile navigation services. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage. Certain of our contracts provide our wireless carrier customers with discounts based on the number of end users paying for our services in a given month. In general, our wireless carrier customers pay us a lower monthly fee per end user if an end user subscribes to our mobile navigation services as part of a bundle of mobile data or voice services than if an end user subscribes to our mobile navigation services on a standalone basis. We also offer our applications directly to end users through application stores such as the Apple App Store and the Google Play marketplace. Finally, we provide free versions of our services which can generate revenue through advertising supported arrangements, and subscriber upgrades to premium versions for a fee. We also derive services revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract. In the future, we may have other revenue models.

For services that our subscribers purchase through our wireless carriers, our wireless carrier customers are responsible for billing and collecting the fees they charge their subscribers for the right to use our navigation services. When we are paid on a revenue sharing basis with our wireless carrier customers, the amount we receive varies depending on several factors, including the revenue share rate negotiated with the wireless carrier customer, the price charged to the subscriber by the wireless carrier customer, the specific sales channel of the wireless carrier customer in which the service is offered and the features and capability of the service. As a result of these factors, the amount we receive for a subscriber may vary considerably and is subject to change over time.

In addition, the amount we are paid per end user in our revenue sharing arrangements may also vary depending upon the metric used to determine the amount of the payment, including the number of end users at any time during a month, the average monthly paying end users, the number and timing of end user billing cycles and end user activity. Although our wireless carrier customers generally have sole discretion about how to price our mobile navigation services to their subscribers, our revenue sharing arrangements generally include monthly minimum fees per end user. To a much lesser extent, we also sell our services directly to consumers through application stores and marketplaces.

For fiscal 2016, we expect automotive and advertising revenue to represent the growing components of our revenue but our expectations may not be realized. However, while we anticipate our revenue to increase in fiscal 2016, the lower gross margins generally experienced with automotive and advertising revenue are expected to result in an overall lower gross profit in

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fiscal 2016. We expect that services revenue from wireless carrier customers will continue to decline substantially in fiscal 2016 due to the continued decline in the number of monthly recurring subscribers.

In the three months ended September 30, 2015 and 2014, we generated 97% and 94% of our revenue, in the United States, respectively. 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.

As we continue to increase our offering of various embedded and connected solutions for automotive customers, it is likely that the complexity of various accounting rules and required criteria may make revenue recognition more challenging in the years to come. Consequently, we believe that billings, a non-GAAP metric, in conjunction with revenue and deferred revenue will be important metrics to measure in assessing the growth and health of the business. See " - Key operating and financial performance metrics" for further discussion about billings.
Cost of revenue
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 also capitalize and defer recognition of certain licensed map and POI content costs from third parties in a manner similar to deferred revenue for our connected and value-added automotive solutions. Such deferred costs are recognized over the requisite service period and amounted to $5.8 million as of September 30, 2015. As the deferred revenue and related deferred costs are recognized as the underlying services are provided, we will also incur ongoing costs of revenue for network operations, hosting and data center, and customer service support over time.
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 for the majority of our mobile user base 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.

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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, 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. 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. 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, with our January 2014 acquisition of skobbler, we have a significant number of employees in Romania and incur research and development expenses in the Romanian Leu.
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, advertising and promotional activities. Historically, a majority of our revenue has been derived from wireless carriers, which bore much of the expense of marketing and promoting our services to their subscribers, as well as consumers acquired through open market application stores. More recently, our automotive and advertising revenue have represented the most rapidly growing components of our revenue, and we have recently invested significantly in building our advertising sales team. Our sales and marketing activities supporting our automotive navigation services include the costs of our business development efforts. Our automotive manufacturer partners and OEMs also provide primary marketing for our on-board and brought-in navigation services at the time a vehicle is sold to their end customer.
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 (expense), net. Other income (expense), net consists primarily of interest we earn on our cash and cash equivalents and short-term investments, gain or loss on investments and foreign currency transaction gains or losses.
Provision (benefit) for income taxes. Our provision (benefit) for income taxes primarily consists of corporate income taxes related to profits earned or losses incurred in the United States or corporate income tax refunds expected to be derived from losses incurred in the United States that may be carried back to prior fiscal years. Our effective tax rate could fluctuate significantly from period to period, particularly in those periods in which we incur losses, due to our ability to benefit from the carryback of net operating losses within the carryback period and the available amount therein, if any. Furthermore, on a quarterly basis our tax rates can fluctuate and could be adversely affected by increases in nondeductible stock-based compensation or other nondeductible expenses, as well as changes in our tax reserves. Our effective tax rate could also fluctuate due to a change in our earnings or loss projections, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

Critical accounting policies and estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. In other cases, our judgment is required in selecting among available alternative accounting policies that allow different accounting treatment for similar transactions. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial condition, results of operations and cash flows will be affected.

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There have been no material changes in our critical accounting policies and estimates during the three months ended September 30, 2015 as compared to the critical accounting policies and estimates disclosed in Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2015.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.
Results of operations

The following tables set forth our results of operations for the three months ended September 30, 2015 and 2014, as well as a percentage that each line item represents of our total revenue for those periods. The additional key metrics presented are used in addition to the financial measures reflected in the condensed consolidated statements of operations data to help us evaluate growth trends, establish budgets and measure the effectiveness of our sales and marketing efforts. The period to period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.


 
 
Three Months Ended
 
 
September 30,
Consolidated Statements of Operations Data
 
2015
 
2014
 
 
(in thousands)
Revenue:
 
 
 
 
Product
 
$
31,109

 
$
18,916

Services
 
12,952

 
16,071

Total revenue
 
44,061

 
34,987

Cost of revenue:
 
 
 
 
Product
 
18,083

 
10,178

Services
 
5,304

 
5,782

Total cost of revenue
 
23,387

 
15,960

Gross profit
 
20,674

 
19,027

Operating expenses:
 
 
 
 
Research and development
 
17,987

 
16,998

Sales and marketing
 
6,998

 
6,196

General and administrative
 
6,235

 
6,213

Total operating expenses
 
31,220

 
29,407

Loss from operations
 
(10,546
)
 
(10,380
)
Other income (expense), net
 
(187
)
 
1,303

Loss before provision (benefit) for income taxes
 
(10,733
)
 
(9,077
)
Provision (benefit) for income taxes
 
113

 
(1,140
)
Net loss
 
$
(10,846
)
 
$
(7,937
)


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Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Revenue:
 
(as a percentage of revenue)
Product
 
71
 %
 
54
 %
Services
 
29
 %
 
46
 %
Total revenue
 
100
 %
 
100
 %
Cost of revenue:
 
 
 
 
Product
 
41
 %
 
29
 %
Services
 
12
 %
 
17
 %
Total cost of revenue
 
53
 %
 
46
 %
Gross profit
 
47
 %
 
54
 %
Operating expenses:
 
 
 
 
Research and development
 
41
 %
 
48
 %
Sales and marketing
 
16
 %
 
18
 %
General and administrative
 
14
 %
 
18
 %
Total operating expenses
 
71
 %
 
84
 %
Loss from operations
 
(24
)%
 
(30
)%
Other income (expense), net
 
(1
)%
 
4
 %
Loss before provision (benefit) for income taxes
 
(25
)%
 
(26
)%
Provision (benefit) for income taxes
 
 %
 
(3
)%
Net loss
 
(25
)%
 
(23
)%


Comparison of the three months ended September 30, 2015 and 2014
Revenue, cost of revenue and gross profit.
Consolidated overview. Product revenue increased 64% to $31.1 million in the three months ended September 30, 2015 from $18.9 million in the three months ended September 30, 2014. The increase in product revenue was due primarily to an increase in royalty revenue from automotive navigation solutions we provide for our automotive customers. Services revenue decreased 19% to $13.0 million in the three months ended September 30, 2015 from $16.1 million in the three months ended September 30, 2014. The decrease in services revenue for the comparable three month period was due primarily to lower subscription fees resulting from decreases in the number of paying subscribers for mobile navigation services, partially offset by an increase in advertising revenue.
Our cost of product revenue increased 78% to $18.1 million in the three months ended September 30, 2015 from $10.2 million in the three months ended September 30, 2014. The increase was due primarily to an increase in third party content costs associated with automotive navigation solutions as our business shifts from deriving a majority of revenue from carrier-based revenue to automobile navigation-based revenue. Our cost of service revenue decreased 8% to $5.3 million in the three months ended September 30, 2015 from $5.8 million in the three months ended September 30, 2014. The decrease in the comparable three month period was due primarily to a decrease in cost of mobile navigation revenue associated with the decline in such revenue, partially offset by an increase in cost of advertising revenue resulting from increases in third party ad exchange inventory costs and hosting services associated with the increased impressions delivered.
Our gross profit increased to $20.7 million in the three months ended September 30, 2015 from $19.0 million in the three months ended September 30, 2014. Our gross margin decreased to 47% in the three months ended September 30, 2015 from 54% in the three months ended September 30, 2014. The decrease in gross margin for the comparable three month period was primarily due to lower services revenue and the increased proportion of product revenue contributed from our on-board automotive navigation solutions provided to our automotive customers, which generally has higher associated content costs and resulting lower gross margins than our mobile navigation services provided through our wireless carrier customers. We expect our overall gross margin to continue to decline as the percentage of our revenue from automotive offerings increases, and as a result of increased competition on our offering of mobile navigation services, especially from other freemium offerings. In addition, our gross margin will continue to be negatively impacted in the future by the amortization of developed technology acquired as part of our January 2014 acquisition of skobbler.

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Revenue concentrations. In the three months ended September 30, 2015 and 2014, revenue from Ford represented 69% and 53% of our total revenue, respectively, and revenue from AT&T represented 11% and 20% of our total revenue, respectively. No other customer represented more than 10% of our total revenue in such periods.
We primarily sell our services in the United States. In the three months ended September 30, 2015 and 2014, revenue derived from U.S. sources represented 97% and 94% of our total revenue, respectively.
Segments information. The information below is organized in accordance with our three reportable business segments (dollars in thousands):
 
 
Three Months Ended September 30,
 
 
2015
 
2014
Revenue
 
 
 
 
Automotive
 
$
31,743

 
$
19,502

Advertising
 
4,851

 
3,975

Mobile Navigation
 
7,467

 
11,510

Total revenue
 
44,061

 
34,987

Cost of revenue
 
 
 
 
Automotive
 
18,521

 
10,396

Advertising
 
2,995

 
2,540

Mobile Navigation
 
1,871

 
3,024

Total cost of revenue
 
23,387

 
15,960

Gross profit
 
 
 
 
Automotive
 
13,222

 
9,106

Advertising
 
1,856

 
1,435

Mobile Navigation
 
5,596

 
8,486

Total gross profit
 
$
20,674

 
$
19,027

Gross margin
 
 
 
 
Automotive
 
42
%
 
47
%
Advertising
 
38
%
 
36
%
Mobile Navigation
 
75
%
 
74
%
Total gross margin
 
47
%
 
54
%

Automotive. Automotive revenue increased 63% to $31.7 million in the three months ended September 30, 2015 from $19.5 million in the three months ended September 30, 2014. The increase in the comparable three month period was due primarily to an increase in production royalty revenue of $11.9 million. Automotive revenue included customized software and map content revenue of $0.3 million and zero in the three months ended September 30, 2015 and 2014, respectively. In addition, during the three months ended September 30, 2015, our automotive deferred revenue increased $3.8 million, primarily related to royalties earned from new vehicle owner downloads of GM's OnStar RemoteLink® mobile application powered by our location-based services platform, the new Ford New Zealand and Australia map update program and, to a lesser extent, our agreement with Toyota utilizing our Scout GPS Link in select 2016 model Toyotas. Automotive revenue represented 72% and 56% of total revenue in the three months ended September 30, 2015 and 2014, respectively.
Cost of automotive revenue increased 78% to $18.5 million in the three months ended September 30, 2015 from $10.4 million in the three months ended September 30, 2014. The increase in the comparable three month period was due primarily to an increase in third party content costs of $7.9 million associated with the increased royalty revenue and mix of revenue from Ford on vehicles sold in Europe and China, which generally has higher associated content costs.
Automotive gross profit increased 45% to $13.2 million in the three months ended September 30, 2015 from $9.1 million in the three months ended September 30, 2014. Automotive gross margin decreased to 42% in the three months ended September 30, 2015 from 47% in the three months ended September 30, 2014. The decrease in gross margin in the comparable

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three month period was due primarily to the higher proportion of revenue from vehicles sold in Europe and China, which generally has higher associated content costs.
Advertising. Advertising revenue increased 22% to $4.9 million in the three months ended September 30, 2015 from $4.0 million in the three months ended September 30, 2014. The increase in the comparable three month period was due primarily to an increase in the value of contracted insertion orders along with the number of impressions delivered. Advertising revenue represented 11% of total revenue in the three months ended September 30, 2015 and 2014.
Cost of advertising revenue increased 18% to $3.0 million in the three months ended September 30, 2015 from $2.5 million in the three months ended September 30, 2014. The increase in the comparable three month period was due primarily to increased third party ad exchange inventory costs of $0.4 million and increased third party hosting service fees of $0.1 million, associated with the increased impressions delivered.
Advertising gross profit increased 29% to $1.9 million in the three months ended September 30, 2015 from $1.4 million in the three months ended September 30, 2014. Advertising gross margin increased slightly to 38% in the three months ended September 30, 2015 from 36% in the three months ended September 30, 2014.
Mobile Navigation. Mobile navigation revenue decreased 35% to $7.5 million in the three months ended September 30, 2015 from $11.5 million in the three months ended September 30, 2014. The decrease in the comparable three month period was primarily due to lower subscription revenue resulting from decreases in the number of paying subscribers for mobile navigation services provided through AT&T, T-Mobile and USCC and a decrease in mobile