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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 quarterly period ended September 30, 2017

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)

4655 Great America Parkway, Suite 300
Santa Clara, California 95054
(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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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, 2017, there were approximately 44,312,164 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,
2017
 
June 30,
2017*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
17,463

 
$
20,757

Short-term investments
 
74,224

 
77,598

Accounts receivable, net of allowances of $111 and $75 at September 30, 2017 and June 30, 2017, respectively
 
59,930

 
57,834

Restricted cash
 
3,403

 
3,401

Income taxes receivable
 
34

 
34

Deferred costs
 
16,868

 
11,703

Prepaid expenses and other current assets
 
4,025

 
3,988

Total current assets
 
175,947

 
175,315

Property and equipment, net
 
6,501

 
4,658

Deferred income taxes, non-current
 
819

 
900

Goodwill and intangible assets, net
 
34,561

 
34,844

Deferred costs, non-current
 
57,272

 
42,389

Other assets
 
1,577

 
1,454

Total assets
 
$
276,677

 
$
259,560

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Trade accounts payable
 
$
15,638

 
$
6,151

Accrued expenses
 
45,269

 
51,528

Deferred revenue
 
28,783

 
20,345

Income taxes payable
 
75

 
197

Total current liabilities
 
89,765

 
78,221

Deferred rent, non-current
 
273

 
996

Deferred revenue, non-current
 
87,749

 
67,056

Other long-term liabilities
 
1,174

 
1,139

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; 44,312 and 43,946 shares issued and outstanding at September 30, 2017 and June 30, 2017, respectively
 
44

 
44

Additional paid-in capital
 
161,241

 
159,666

Accumulated other comprehensive loss
 
(1,547
)
 
(1,934
)
Accumulated deficit
 
(62,022
)
 
(45,628
)
Total stockholders’ equity
 
97,716

 
112,148

Total liabilities and stockholders’ equity
 
$
276,677

 
$
259,560

* Derived from audited consolidated financial statements as of and for the year ended June 30, 2017.
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,
 
 
2017
 
2016
Revenue:
 
 
 
 
Product
 
$
23,964

 
$
29,423

Services
 
12,694

 
12,804

Total revenue
 
36,658

 
42,227

Cost of revenue:
 
 
 
 
Product
 
14,674

 
17,761

Services
 
6,173

 
5,715

Total cost of revenue
 
20,847

 
23,476

Gross profit
 
15,811

 
18,751

Operating expenses:
 
 
 
 
Research and development
 
21,082

 
18,018

Sales and marketing
 
5,064

 
5,268

General and administrative
 
5,211

 
5,491

Legal settlement and contingencies
 
250

 

Total operating expenses
 
31,607

 
28,777

Loss from operations
 
(15,796
)
 
(10,026
)
Other income (expense), net
 
(47
)
 
296

Loss before provision (benefit) for income taxes
 
(15,843
)
 
(9,730
)
Provision (benefit) for income taxes
 
255

 
(395
)
Net loss
 
$
(16,098
)
 
$
(9,335
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(0.37
)
 
$
(0.22
)
Weighted average shares used in computing net loss per share:
 
 
 
 
Basic and diluted
 
44,079

 
42,838

 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
Cost of revenue
 
$
35

 
$
29

Research and development
 
1,395

 
1,490

Sales and marketing
 
438

 
494

General and administrative
 
612

 
528

Total stock-based compensation expense
 
$
2,480

 
$
2,541

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,
 
 
2017
 
2016
 
 
 
 
 
Net loss
 
$
(16,098
)
 
$
(9,335
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment, net of tax
 
359

 
66

Available-for-sale securities:
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
 
28

 
(138
)
Reclassification adjustments for gain (loss) on available-for-sale securities recognized, net of tax
 

 
(6
)
Net increase (decrease) from available-for-sale securities, net of tax
 
28

 
(144
)
Other comprehensive income (loss), net of tax
 
387

 
(78
)
Comprehensive loss
 
$
(15,711
)
 
$
(9,413
)
 
 
 
 
 

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,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net loss
 
$
(16,098
)
 
$
(9,335
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
716

 
637

Deferred rent reversal due to lease termination
 
(538
)
 

Tenant improvement allowance recognition due to lease termination
 
(582
)
 

Accretion of net premium on short-term investments
 
59

 
125

Stock-based compensation expense
 
2,480

 
2,541

Loss on disposal of property and equipment
 
8

 

Bad debt expense
 
38

 
67

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(2,109
)
 
(563
)
Deferred income taxes
 
104

 
19

Restricted cash
 
(2
)
 
129

Income taxes receivable
 

 
1

Deferred costs
 
(20,048
)
 
(2,857
)
Prepaid expenses and other current assets
 
(115
)
 
(25
)
Other assets
 
(326
)
 
18

Trade accounts payable
 
9,463

 
4,533

Accrued expenses and other liabilities
 
(6,037
)
 
(6,188
)
Income taxes payable
 
(123
)
 
92

Deferred rent
 
191

 
75

Deferred revenue
 
29,131

 
5,042

Net cash used in operating activities
 
(3,788
)
 
(5,689
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(2,286
)
 
(394
)
Purchases of short-term investments
 
(13,355
)
 
(16,841
)
Proceeds from sales and maturities of short-term investments
 
16,697

 
19,032

Proceeds from sales of long-term investments
 

 
246

Net cash provided by investing activities
 
1,056

 
2,043

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
197

 
23

Tax withholdings related to net share settlements of restricted stock units
 
(1,102
)
 
(1,256
)
Net cash used in financing activities
 
(905
)
 
(1,233
)
Effect of exchange rate changes on cash and cash equivalents
 
343

 
65

Net decrease in cash and cash equivalents
 
(3,294
)
 
(4,814
)
Cash and cash equivalents, at beginning of period
 
20,757

 
21,349

Cash and cash equivalents, at end of period
 
$
17,463

 
$
16,535

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid, net
 
$
304

 
$
910

See accompanying Notes to Condensed Consolidated Financial Statements.

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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 leading provider of connected car and location-based platform products and services. We utilize our automotive navigation platform and our advertising delivery platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as OEMs. Our advertising delivery platform, which we provide through our Thinknear subsidiary, delivers highly targeted advertising services leveraging our location expertise. 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, 2017 as “fiscal 2017” and the fiscal year ending June 30, 2018 as “fiscal 2018.”
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 financial statements for the three months ended September 30, 2017 and 2016.
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 2017, included in our Annual Report on Form 10-K for fiscal 2017 filed with the U.S. Securities and Exchange Commission, or SEC, on August 25, 2017.
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 2017.
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 and short-term investments, the determination of acquired intangibles and goodwill, the fair value of stock-based 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 products and services provided through Ford Motor Company and affiliated entities, or Ford, comprised 65% and 68% of revenue for the three months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and June 30, 2017, receivables due from Ford were 70% and 74% of total accounts receivable, respectively.

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

Restricted cash
As of September 30, 2017 and June 30, 2017, we had restricted cash of $3.4 million on our consolidated balance sheets, comprised primarily of prepayments from a customer.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, and activity as of September 30, 2017, 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, 2017
 
$
(1,701
)
 
$
(233
)
 
$
(1,934
)
Other comprehensive income (loss) before reclassifications, net of tax
 
359

 
28

 
387

Amount reclassified from accumulated other comprehensive loss, net of tax
 

 

 

Other comprehensive income, net of tax
 
359

 
28

 
387

Balance, net of tax as of September 30, 2017
 
$
(1,342
)
 
$
(205
)
 
$
(1,547
)

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, 2017.
Long-term investments
As of September 30, 2017, the carrying value of our investments in privately held companies totaled $708,000. These investments are accounted for as cost method 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. We regularly evaluate the carrying value of these cost method investments for impairment. We did not record any impairment charges for cost method investments during the three months ended September 30, 2017 and 2016.
Recent accounting pronouncements
In October 2016, the FASB issued new guidance which is intended to eliminate diversity in practice and provide a more accurate depiction of the tax consequences on intercompany asset transfers (excluding inventory). The new guidance removes the current prohibition against immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The new standard is effective for us in our first quarter of fiscal 2019 and requires a modified retrospective method of adoption. We adopted early this standard under the modified retrospective method on July 1, 2017, and the adoption resulted in the elimination of prepaid taxes of $287,000 with a corresponding increase in accumulated deficit.
In March 2016, the FASB issued new guidance to revise aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The new standard is effective for us in our first quarter of fiscal 2018.
We adopted this standard on July 1, 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense are reflected in our condensed consolidated statements of operations as a component of the provision for income taxes rather than paid-in capital on a prospective basis. We also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense are classified as operating activities in our condensed consolidated statements of cash flows. Since we do not recognize tax benefits on our net operating losses as well as excess tax benefits due to our full valuation allowance, this standard does not have a material impact on our condensed consolidated statements of operations or statements of cash flows. The cumulative effect to retained earnings from previously unrecognized excess tax benefits, after offset by the related valuation allowance, was not material to our condensed consolidated balance sheets.
Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. Further, we did not elect an accounting policy change to record forfeitures as they occur and thus we continue to estimate forfeitures at each period.

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

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2017, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for fiscal 2017, that are of significance or potential significance to us, other than the following update:
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 new guidance, ASC 606, Revenue from Contracts with Customers, or ASC 606, 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. In conjunction with this new revenue guidance, a new subtopic, ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, was also issued. 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 and certain cost guidance under GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date of this guidance by one year. The updated standard will be effective for us in the first quarter of fiscal 2019; accordingly, we will adopt ASC 606 effective July 1, 2018.
While we are in the process of selecting a transition method, we anticipate this standard will have a material impact on our consolidated financial statements. Even though our assessment of the impact of this standard is not complete, we currently believe the most significant impact will be to the recognition of revenue for certain of our automotive value-added and combined offerings, such as on-board navigation with map updates and on-board and connected navigation. We anticipate our revenue recognition for certain of these offerings may change and we may no longer recognize revenue associated with certain software-related elements over the life of our contractual obligations. In addition, in conjunction with the adoption of ASC 340-40, we anticipate additional capitalization of certain research and development costs that are expected to be recovered and that are incurred to fulfill obligations under certain actual or anticipated automotive contracts; under the new standard, such costs are then amortized consistent with the transfer of products and services to which the capitalized costs relate.
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 and restricted stock units 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,
 
 
2017
 
2016
Net loss
 
$
(16,098
)
 
$
(9,335
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
44,079

 
42,838

Net loss per share, basic and diluted
 
$
(0.37
)
 
$
(0.22
)

The following potential shares outstanding 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,
 
 
2017
 
2016
Stock options
 
5,599

 
6,316

Restricted stock units
 
3,035

 
3,218

Total
 
8,634

 
9,534


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

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. Short-term investments are classified as current assets, even though maturities may extend beyond one year, because they represent investments of cash available for operations. We classify all 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, 2017 and 2016.
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2017 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
10,280

 
$

 
$

 
$
10,280

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
5,634

 

 

 
5,634

Commercial paper
 
749

 

 

 
749

Corporate bonds
 
800

 

 

 
800

Total cash equivalents
 
7,183

 

 

 
7,183

Total cash and cash equivalents
 
17,463

 

 

 
17,463

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,925

 

 
(5
)
 
1,920

U.S. agency securities
 
2,552

 

 
(14
)
 
2,538

Asset-backed securities
 
9,747

 
6

 
(14
)
 
9,739

Municipal securities
 
4,452

 
1

 
(2
)
 
4,451

Commercial paper
 
5,576

 

 

 
5,576

Corporate bonds
 
50,041

 
29

 
(70
)
 
50,000

Total short-term investments
 
74,293

 
36

 
(105
)
 
74,224

Cash, cash equivalents and short-term investments
 
$
91,756

 
$
36

 
$
(105
)
 
$
91,687



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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, 2017 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
17,316

 
$

 
$

 
$
17,316

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
444

 

 

 
444

Commercial paper
 
2,997

 

 

 
2,997

Total cash equivalents
 
3,441

 

 

 
3,441

Total cash and cash equivalents
 
20,757

 

 

 
20,757

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,476

 

 
(3
)
 
1,473

U.S. agency securities
 
2,553

 

 
(16
)
 
2,537

Asset-backed securities
 
9,707

 
8

 
(10
)
 
9,705

Municipal securities
 
7,980

 
3

 
(1
)
 
7,982

Commercial paper
 
4,240

 

 
(1
)
 
4,239

Foreign government securities
 
750

 

 

 
750

Corporate bonds
 
50,987

 
24

 
(99
)
 
50,912

Total short-term investments
 
77,693

 
35

 
(130
)
 
77,598

Cash, cash equivalents and short-term investments
 
$
98,450

 
$
35

 
$
(130
)
 
$
98,355


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, 2017 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
36,192

 
$
36,191

Due between one and two years
 
23,710

 
23,658

Due between two and three years
 
14,391

 
14,375

Total
 
$
74,293

 
$
74,224


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income (expense), 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, 2017, 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 utilize 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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TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)
(unaudited)

All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. As of September 30, 2017 and June 30, 2017, we did not have any investments that require Level 3 valuations. The fair values of these financial instruments were determined using the following inputs at September 30, 2017 (in thousands):

 
 
 
Fair Value Measurements at September 30, 2017 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
5,634

 
$
5,634

 
$

 
$

Commercial paper
 
749

 

 
749

 

Corporate bonds
 
800

 

 
800

 

Total cash equivalents
 
7,183

 
5,634

 
1,549

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,920

 
1,920

 

 

U.S. agency securities
 
2,538

 

 
2,538

 

Asset-backed securities
 
9,739

 

 
9,739

 

Municipal securities
 
4,451

 

 
4,451

 

Commercial paper
 
5,576

 

 
5,576

 

Corporate bonds
 
50,000

 

 
50,000

 

Total short-term investments
 
74,224

 
1,920

 
72,304

 

Cash equivalents and short-term investments
 
$
81,407

 
$
7,554

 
$
73,853

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2017 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2017 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
444

 
$
444

 
$

 
$

Commercial paper
 
2,997

 

 
2,997

 

Total cash equivalents
 
3,441

 
444

 
2,997

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,473

 
1,473

 

 

U.S. agency securities
 
2,537

 

 
2,537

 

Asset-backed securities
 
9,705

 

 
9,705

 

Municipal securities
 
7,982

 

 
7,982

 

Commercial paper
 
4,239

 

 
4,239

 

Foreign government securities
 
750

 

 
750

 

Corporate bonds
 
50,912

 

 
50,912

 

Total short-term investments
 
77,598

 
1,473

 
76,125

 

Cash equivalents and short-term investments
 
$
81,039

 
$
1,917

 
$
79,122

 
$

Amortization of net premium on short-term investments totaled $59,000 and $125,000 in the three months ended September 30, 2017 and 2016, respectively.

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

There were no transfers between Level 1 and Level 2 financial instruments in the three months ended September 30, 2017 and 2016.
We did not have any financial liabilities measured at fair value on a recurring basis as of September 30, 2017 or June 30, 2017.
5.
Balance sheet information
Goodwill and intangible assets, net
Goodwill as of September 30, 2017 and June 30, 2017 was $31.3 million.
Intangible assets consisted of the following (in thousands):
 
 
September 30,
2017
 
June 30,
2017
Acquired developed technology
 
$
13,875

 
$
13,875

Less accumulated amortization
 
(10,642
)
 
(10,359
)
Intangible assets, net
 
$
3,233

 
$
3,516

Acquired developed technology is amortized on a straight-line basis over the expected useful life. Amortization expense related to intangibles was $283,000 and $260,000 for the three months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, remaining amortization expense for intangible assets by fiscal year is as follows: $850,000 in fiscal 2018, $1.0 million in fiscal 2019, $872,000 in fiscal 2020 and $509,000 in fiscal 2021.
Accrued expenses
Accrued expenses consisted of the following (in thousands):
 
 
September 30,
2017
 
June 30,
2017
Accrued compensation and benefits
 
$
6,807

 
$
10,554

Accrued royalties
 
24,728

 
28,179

Customer overpayments and related reserves
 
6,956

 
5,940

Other accrued expenses
 
6,778

 
6,855

Total accrued expenses
 
$
45,269

 
$
51,528

6.
Commitments and contingencies
Operating lease and purchase obligations
In August 2017, we terminated our sublease with Avaya Inc. for our Santa Clara, California headquarters facility and signed a new direct lease agreement, effective in September 2017, for this same facility. The new lease term is six years, expiring in September 2023. We have a one-time option to extend the new facility lease for an additional three years at the prevailing market rate, as defined in the lease agreement.
In connection with the sublease termination agreement, we recorded the following amounts during the three months ended September 30, 2017: i) the reversal of $538,000 of deferred rent related to the sublease, with an offsetting credit to rent expense, as amortization of this deferred rent liability is no longer required, and ii) the recognition of $582,000 of tenant improvement allowance related to the sublease, with an offsetting credit to depreciation expense, as amortization of this allowance is no longer required.
As of September 30, 2017, 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 were comprised of the following (in thousands):
 

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

 
 
Payments Due by Period
 
 
Total
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022
 
Thereafter
Operating lease obligations
 
$
18,740

 
$
2,520

 
$
4,070

 
$
3,918

 
$
2,849

 
$
2,650

 
$
2,733

Purchase obligations
 
6,561

 
2,372

 
1,315

 
798

 
415

 
415

 
1,246

Total contractual obligations
 
$
25,301

 
$
4,892

 
$
5,385

 
$
4,716

 
$
3,264

 
$
3,065

 
$
3,979

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 July 28, 2016, Nathan Gergetz filed a putative class action complaint in the U.S. District Court for the Northern District of California, alleging that Telenav violated the Telephone Consumer Protection Act, or TCPA. The complaint purports to be filed on behalf of a class, and it alleges that Telenav caused unsolicited text messages to be sent to the plaintiff from July 6, 2016 to July 26, 2016. Plaintiffs seek statutory and actual damages under the TCPA law, attorneys’ fees and costs of the action, and an injunction to prevent any future violations. Telenav moved to dismiss the complaint on November 21, 2016. Trial is currently scheduled for January 2020. Due to the preliminary nature of this matter and uncertainties relating to litigation, we are unable at this time to estimate the effects of this lawsuit on our financial condition, results of operations, or cash flows.
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 requested that we indemnify them in connection with such cases.
In August 2017, AT&T Mobility LLC (AT&T) and Sprint Spectrum L.P. (Sprint) sent Telenav indemnification requests relating to patent infringement lawsuits brought by Location Based Services LLC, alleging patent infringement by the AT&T Navigator system and App for iOS and Android, and the Sprint Scout System and the Sprint Scout App for iOS and Android. Location Based Services LLC filed separate lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas, asserting five U.S. Patents. Telenav agreed to indemnify and defend AT&T and Sprint in connection with these matters. We accrued $250,000 related to these matters in the three months ended September 30, 2017, and recorded this amount as legal settlement and contingencies expense in our consolidated statement of operations.
7.
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.

12

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

8.
Stock-based compensation
Under our 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 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, 2017
 
5,708

 
$
6.47

 
 
 
 
Granted(1)
 

 
$
6.35

 
 
 
 
Exercised
 
(37
)
 
$
5.32

 
 
 
 
Canceled or expired
 
(72
)
 
$
6.93

 
 
 
 
Options outstanding as of September 30, 2017
 
5,599

 
$
6.48

 
6.39
 
$
2,323

As of September 30, 2017:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
5,307

 
$
6.51

 
6.27
 
$
2,135

Options exercisable
 
3,477

 
$
6.76

 
5.09
 
$
1,077

__________
(1) Stock options granted in the three months ended September 30, 2017 totaled fewer than 1,000 shares.
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, 2017
 
3,005

 
 
 
 
Granted
 
715

 
 
 
 
Vested
 
(502
)
 
 
 
 
Canceled
 
(183
)
 
 
 
 
RSUs outstanding as of September 30, 2017
 
3,035

 
1.60
 
$
19,270

As of September 30, 2017:
 
 
 
 
 
 
RSUs expected to vest
 
2,498

 
1.45
 
$
15,860




13

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

During the three months ended September 30, 2017, pursuant to the annual increase provisions of our 2009 Equity Incentive Plan, the number of shares available for grant under this plan increased by 1,666,666 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, 2017
 
1,899

Additional shares authorized
 
1,667

Granted
 
(715
)
RSUs withheld for taxes in net share settlements
 
172

Canceled
 
255

Shares available for grant as of September 30, 2017
 
3,278

The following table summarizes the stock-based compensation expense recorded for stock options and RSUs issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
 
 
September 30,
 
 
2017
 
2016
Stock option awards
 
$
596

 
$
474

RSU awards
 
1,884

 
2,067

Total stock-based compensation expense
 
$
2,480

 
$
2,541

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 and the resulting weighted average grant date fair value per share were as follows:
 
 
 
Three Months Ended
 
 
September 30,
 
 
2017
 
2016
Expected volatility
 
49
%
 
39
%
Expected term (in years)
 
6.22

 
4.15

Risk-free interest rate
 
1.64
%
 
1.14
%
Dividend yield
 
%
 
%
Weighted average grant date fair value per share
 
$
3.07

 
$
1.65




14

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

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 provision (benefit) for income taxes was $255,000 in the three months ended September 30, 2017 compared to $(395,000) in the three months ended September 30, 2016. Our provision for income taxes of $255,000 for the three months ended September 30, 2017 was comprised primarily of foreign withholding taxes and income taxes in foreign jurisdictions where we have profit. Our benefit from income taxes of $(395,000) for the three months ended September 30, 2016 was comprised primarily of foreign withholding taxes on revenue generated in China and foreign taxes, offset by a $1.0 million reversal of tax reserves resulting from our July 2016 settlement of the State of New York's audit of our income tax returns for fiscal 2010 through fiscal 2012. Our effective tax rate of 2% and 4% for the three months ended September 30, 2017 and 2016, respectively, was less than the tax amount 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.
We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of September 30, 2017 and June 30, 2017, our cumulative unrecognized tax benefits were $3.8 million and $3.0 million, respectively. Included in the balance of unrecognized tax benefits at September 30, 2017 and June 30, 2017 was $124,000 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 accrued $96,000 and $91,000 for the payment of interest and penalties at September 30, 2017 and June 30, 2017, 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 filing obligations. The statute of limitations remains open for fiscal 2016 through fiscal 2017 for federal tax purposes, fiscal 2013 through fiscal 2017 in state jurisdictions, and fiscal 2012 through fiscal 2017 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, 2017 was $50.1 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.
10.
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 chief executive officer, or CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. In addition, with the exception of accounts receivable and goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

We report results in three business segments:

Automotive - Our automotive segment utilizes our automotive navigation platform to deliver enhanced location-based services to automobile manufacturers, as well as OEMs. We provide both built-in, or on-board, and mobile device-based wireless connectivity, or brought-in, navigation solutions, as well as hybrid solutions that contain elements of on-board and connected functionality. Our on-board solutions consist of software, map and point of interest, or POI, data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. These solutions are often enhanced with connected services which leverage our cloud to provide real-time traffic, online search and map updates.

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 advertisers and advertising agencies.

Mobile Navigation - Our mobile navigation segment provides our map and navigation platform to end users through mobile devices. We distribute our services primarily through our wireless carrier partners.

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



Our segment results for the three months ended September 30, 2017 and 2016 were as follows (dollars in thousands):

 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Automotive
 
 
 
 
Revenue
 
$
25,304

 
$
30,267

Cost of revenue
 
15,885

 
18,545

Gross profit
 
$
9,419

 
$
11,722

Gross margin
 
37
%
 
39
%
Advertising
 
 
 
 
Revenue
 
$
7,615

 
$
6,545

Cost of revenue
 
3,412

 
3,526

Gross profit
 
$
4,203

 
$
3,019

Gross margin
 
55
%
 
46
%
Mobile Navigation
 
 
 
 
Revenue
 
$
3,739

 
$
5,415

Cost of revenue
 
1,550

 
1,405

Gross profit
 
$
2,189

 
$
4,010

Gross margin
 
59
%
 
74
%
Total
 
 
 
 
Revenue
 
$
36,658

 
$
42,227

Cost of revenue
 
20,847

 
23,476

Gross profit
 
$
15,811

 
$
18,751

Gross margin
 
43
%
 
44
%


16

Table of Contents

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, accounting for and future sources of revenue, expectations regarding 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 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, 2017 as “fiscal 2017" and the fiscal year ending June 30, 2018 as "fiscal 2018.”
Overview

Telenav is a leading provider of connected car and location-based platform products and services. We utilize our automotive navigation platform and our advertising platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as OEMs. Our advertising platform, which we provide through our Thinknear subsidiary, delivers highly targeted advertising services leveraging our location expertise for advertisers and advertising agencies. We report operating results in three business segments: automotive, advertising and mobile navigation.
Our legacy mobile navigation business has declined steadily since fiscal 2013, and we expect it to continue to decline. Mobile navigation represented $3.7 million, or 10%, of our consolidated revenue in the first quarter of fiscal 2018. Telenav began offering its mobile navigation services in 2003. Our mobile navigation business generates revenue from our partnerships with wireless carriers who sell our navigation services to their subscribers either as a standalone service or in a bundle with other data or services. The mobile navigation business has declined both in absolute dollars and as a percentage of revenue from $116.4 million, or 61% of our revenue, in fiscal 2013 to $19.0 million, or 11% of our revenue, in fiscal 2017, as subscriptions for paid navigation services declined in favor of free or freemium navigation services offered by our competitors with greater resources and name recognition, such as Google and Apple. We have experienced and anticipate that we will continue to experience the non-renewal of our agreements for these services by our wireless carrier customers as demand from their subscribers declines. In the event our mobile navigation business ceases to be profitable or we determine that it diverts resources from strategic growth areas of our business, we may ultimately elect to terminate our legacy wireless carrier mobile navigation business. In addition, we expect the continued deterioration of this revenue base will result in an impairment of some or all of the goodwill assigned to this reporting unit during the second half of fiscal 2018. We have not recognized any impairment of goodwill through September 30, 2017. Total goodwill for our mobile navigation segment as of September 30, 2017 was $2.7 million.
We derive revenue primarily from automobile manufacturers and OEMs, advertisers and advertising agencies. We receive revenue from automobile manufacturers whose vehicles contain our proprietary software and are able to access our personalized navigation services and OEMs who provide larger systems in which our automotive navigation services are integrated. These manufacturers and OEMs generally do not provide 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.

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Table of Contents

For our automotive segment customers, we offer our automotive and mobile navigation platform products and services to vehicle manufacturers and OEMs for distribution with vehicles. We believe our history as a supplier of cloud-based navigation services combined with our proven track record of working closely with these automobile manufacturers and OEMs provides a unique advantage in the automotive navigation marketplace over our competitors. We offer embedded navigation products that are integrated into the vehicle, which we refer to as on-board, connected navigation services that utilize our mobile device-based wireless connectivity, which we refer to as brought-in, and hybrid solutions that contain elements of both on-board and connected functionality. We provide our automotive navigation products and services to automobile manufacturers such as Ford Motor Company and affiliated entities, or Ford, which represented 65% of our revenue in the three months ended September 30, 2017, General Motors Holdings and its affiliates, or GM, and Toyota Motor Corporation, or Toyota.
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 differentiated 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 advertising exchanges using programmatic real-time bidding, or RTB, tools.
We generate product revenue from the delivery of customized software and royalties from the distribution of this customized software in certain 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 imaged onto an SD card and shipped for installation in vehicles and pays us a royalty fee on SYNC 3 on-board solutions as our software is installed in the vehicle. We also derive product revenue from map update fees.
We generate automotive services revenue primarily from our brought-in automotive navigation solutions. We earn a fee for each new vehicle owner who downloads and activates the GM OnStar RemoteLink® or associated application, whereby we provide enhanced search capabilities for contracted service periods. We also earn a fee for each new Toyota and Lexus vehicle sold and enabled to connect with our Scout GPS Link mobile application, similarly provided over a contracted service period.
For our on-board and connected navigation solutions, GM pays us a product royalty fee as the software is imaged onto an SD card and shipped for installation in vehicles; this royalty includes a fee for the initial connected service to be provided once the vehicle is sold. GM will pay us an additional service fee for connected solution subscriptions for each end user that elects to renew their OnStar Connected Navigation or Connected Navigation subscription with GM. Due to specified future obligations, we did not recognize any revenue from GM on-board and connected navigation solutions in fiscal 2017 or the three months ended September 30, 2017, although we did experience increases in deferred revenue. We expect that we will not recognize any revenue from GM for our on-board and connected navigation solutions during fiscal 2018 due to specified future obligations.
We generate revenue from advertising network services through the delivery of advertising impressions based on the specific terms of the advertising contract.
We also generate a declining portion of our services revenue from subscriptions to access our mobile navigation services, which are generally provided through our wireless carrier customers that offer our services to their subscribers. Our wireless carrier customers typically pay us based on a revenue sharing arrangement or a monthly subscription fee per end user.
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, changes in deferred revenue and deferred costs, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, and free cash flow are not measures calculated in accordance with 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.
Our key operating and financial performance metrics are as follows (in thousands, except percentages and per share amounts):


18

Table of Contents

 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Revenue
 
$
36,658

 
$
42,227

Revenue from Ford as a percentage of total revenue
 
65
%
 
68
%
Billings (Non-GAAP)
 
$
65,789

 
$
47,269

Billings to Ford as a percentage of total billings (Non-GAAP)
 
68
%
 
64
%
Increase in deferred revenue
 
$
29,131

 
$
5,042

Increase in deferred costs
 
$
20,048

 
$
2,857

Gross profit
 
$
15,811

 
$
18,751

Gross margin
 
43
%
 
44
%
Direct contribution (Non-GAAP)
 
$
24,894

 
$
20,936

Direct contribution margin (Non-GAAP)
 
38
%
 
44
%
Net loss
 
$
(16,098
)
 
$
(9,335
)
Diluted net loss per share
 
$
(0.37
)
 
$
(0.22
)
Adjusted EBITDA (Non-GAAP)
 
$
(13,470
)
 
$
(6,848
)
Free cash flow (Non-GAAP)
 
$
(6,074
)
 
$
(6,083
)

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.
Billings measure revenue recognized plus the change in deferred revenue from the beginning to the end of the period. Direct contribution from billings reflects GAAP gross profit plus change in deferred revenue less change in deferred costs. Direct contribution margin from billings reflects direct contribution from billings divided by billings. We have also provided a breakdown of the calculation of the change in deferred revenue by segment, which is added to revenue in calculating our non-GAAP metric of billings. In connection with our presentation of the change in deferred revenue, we have provided a similar presentation of the change in the related deferred costs. Such deferred costs primarily include costs associated with third party content and certain development costs associated with our customized software solutions. As deferred revenue and deferred costs become larger components of our operating results, we believe these metrics are useful in evaluating cash flow.
We consider billings, direct contribution from billings and direct contribution margin from billings to be useful metrics for management and investors because billings drive revenue and deferred revenue, which is an important indicator of the viability of our business. We believe direct contribution from billings and direct contribution margin from billings are useful metrics because they reflect the impact of the contribution over time from such billings, exclusive of the incremental costs incurred to deliver any related service obligations. There are a number of limitations related to the use of billings, direct contribution from billings and direct contribution margin from billings versus revenue, gross profit and gross margin calculated in accordance with GAAP. First, billings, direct contribution from billings and direct contribution margin from billings include amounts that have not yet been recognized as revenue or cost 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, customer support and map updates, including certain third party technology and content license fees as applicable. Second, we may calculate billings, direct contribution from billings and direct contribution margin from billings in a manner that is different from peer companies that report similar financial measures, making comparisons between companies more difficult. When we use these measures, we attempt to compensate for these limitations by providing specific information regarding billings and how they relate to revenue, gross profit and gross margin calculated in accordance with GAAP.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation and amortization, other income (expense), provision (benefit) for income taxes, and other applicable items such as legal settlements and contingencies, and deferred rent reversal and tenant improvement allowance recognition due to sublease termination, net of tax. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Legal settlements and contingencies represent settlements and offers made to settle patent litigation cases in which we are a defendant and royalty disputes. Deferred rent reversal and tenant improvement allowance recognition

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represent the reversal of our deferred rent liability and recognition of our deferred tenant improvement allowance, as amortization of these amounts is no longer required due to the termination of our Santa Clara facility sublease and subsequent entry into a new lease agreement with our landlord for this same facility in August 2017. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss.
Adjusted EBITDA is a key measure 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 adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, adjusted EBITDA is a key financial measure 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 adjusted EBITDA generally provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Free cash flow is a non-GAAP financial measure we define as net cash provided by (used in) operating activities less purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash (used) generated by our business after the purchases of property and equipment.
These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as substitutes for our financial results as reported under GAAP. Some of these limitations are:
We expect to incur additional costs in the future due to requirements to provide ongoing provisioning of services such as hosting, monitoring and customer support; accordingly, direct contribution from billings and direct contribution margin from billings do not reflect all costs associated with billings;
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;
adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does 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
adjusted EBITDA, free cash flow or similarly titled measures may be calculated by other companies differently, which reduces their usefulness as comparative measures.
Because of these and other limitations, you should consider billings, direct contribution from billings, direct contribution margin from billings, adjusted EBITDA and free cash flow alongside other GAAP-based financial performance measures.
We reconcile the most directly comparable GAAP financial measure to each non-GAAP financial metric used. The following tables present reconciliations of revenue to billings, deferred revenue to the change in deferred revenue, deferred costs to the change in deferred costs, gross profit to direct contribution from billings, net loss to adjusted EBITDA and net loss to free cash flow for each of the periods indicated (dollars in thousands):

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Reconciliation of Revenue to Billings
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Automotive
 
 
 
 
Revenue
 
$
25,304

 
$
30,267

Adjustments:
 
 
 
 
Change in deferred revenue
 
29,188

 
5,113

Billings
 
$
54,492

 
$
35,380

Advertising
 
 
 
 
Revenue
 
$
7,615

 
$
6,545

Adjustments:
 
 
 
 
Change in deferred revenue
 

 

Billings
 
$
7,615

 
$
6,545

Mobile Navigation
 
 
 
 
Revenue
 
$
3,739

 
$
5,415

Adjustments:
 
 
 
 
Change in deferred revenue
 
(57
)
 
(71
)
Billings
 
$
3,682

 
$
5,344

Total
 
 
 
 
Revenue
 
$
36,658

 
$
42,227

Adjustments:
 
 
 
 
Change in deferred revenue
 
29,131

 
5,042

Billings
 
$
65,789

 
$
47,269


Reconciliation of Deferred Revenue to Increase (Decrease) in Deferred Revenue
Reconciliation of Deferred Costs to Increase (Decrease) in Deferred Costs
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
Deferred revenue, September 30
 
$
115,705

 
$

 
$
827

 
$
116,532

Deferred revenue, June 30
 
86,517

 

 
884

 
87,401

Change in deferred revenue
 
$
29,188

 
$

 
$
(57
)
 
$
29,131

 
 
 
 
 
 
 
 
 
Deferred costs, September 30
 
$
74,140

 
$

 
$

 
$
74,140

Deferred costs, June 30
 
54,092

 

 

 
54,092

Change in deferred costs
 
$
20,048

 
$

 
$

 
$
20,048


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Three Months Ended September 30, 2016
 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
Deferred revenue, September 30
 
$
27,266

 
$

 
$
1,145

 
$
28,411

Deferred revenue, June 30
 
22,153

 

 
1,216

 
23,369

Change in deferred revenue
 
$
5,113

 
$

 
$
(71
)
 
$
5,042

 
 
 
 
 
 
 
 
 
Deferred costs, September 30
 
$
14,933

 
$

 
$

 
$
14,933

Deferred costs, June 30
 
12,076

 

 

 
12,076

Change in deferred costs
 
$
2,857

 
$

 
$

 
$
2,857

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reconciliation of Revenue to Billings - Ford
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Revenue from Ford
 
$
23,963

 
$
28,758

Adjustments:
 
 
 
 
Change in deferred revenue attributed to Ford
 
21,031

 
1,381

Billings to Ford
 
$
44,994

 
$
30,139

Billings to Ford as a percentage of total billings
 
68
%
 
64
%


Reconciliation of Gross Profit to Direct Contribution from Billings
(in thousands, except percentages)
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Gross profit
 
$
15,811

 
$
18,751

Gross margin
 
43
%
 
44
%
 
 
 
 
 
Adjustments to gross profit:
 
 
 
 
Change in deferred revenue
 
29,131

 
5,042

Change in deferred costs(1)
 
(20,048
)
 
(2,857
)
Net change
 
9,083

 
2,185

Direct contribution from billings(1)
 
$
24,894

 
$
20,936

Direct contribution margin from billings(1)
 
38
%
 
44
%
 
 
 
 
 
(1) Deferred costs primarily include costs associated with third party content and in connection with certain customized software solutions, the costs incurred to develop those solutions. We expect to incur additional costs in the future due to requirements to provide ongoing provisioning of services such as hosting, monitoring and customer support. Accordingly, direct contribution from billings and direct contribution margin from billings do not include all costs associated with billings.


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Reconciliation of Net Loss to Adjusted EBITDA
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Net loss
 
$
(16,098
)
 
$
(9,335
)
Adjustments:
 
 
 
 
Legal settlement and contingencies
 
250

 

Deferred rent reversal due to lease termination
 
(538
)
 

Tenant improvement allowance recognition due to lease termination
 
(582
)
 

Stock-based compensation expense
 
2,480

 
2,541

Depreciation and amortization
 
716

 
637

Other income (expense), net
 
47

 
(296
)
Provision (benefit) for income taxes
 
255

 
(395
)
Adjusted EBITDA
 
$
(13,470
)
 
$
(6,848
)


Reconciliation of Net Loss to Free Cash Flow
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Net loss
 
$
(16,098
)
 
$
(9,335
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Change in deferred revenue (1)
 
29,131

 
5,042

Change in deferred costs (2)
 
(20,048
)
 
(2,857
)
Changes in other operating assets and liabilities
 
1,046

 
(1,909
)
Other adjustments (3)
 
2,181

 
3,370

Net cash used in operating activities
 
(3,788
)
 
(5,689
)
Less: Purchases of property and equipment
 
(2,286
)
 
(394
)
Free cash flow
 
$
(6,074
)
 
$
(6,083
)
 
 
 
 
 
(1) Consists of product royalties, customized software development fees, service fees and subscription fees.
(2) Consists primarily of third party content costs and customized software development expenses.
(3) Consist primarily of depreciation and amortization, stock-based compensation expense and other non-cash items.










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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, and map updates to the software. Services revenue consists primarily of revenue we derive from our brought-in automotive navigation services, advertising services and mobile navigation services.
We report revenue, cost of revenue and gross profit 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 10 to the condensed consolidated financial statements in this Form 10-Q for more information about our business segments.
Revenue from our automotive segment represented 69% and 72% of our revenue in the three months ended September 30, 2017 and 2016, respectively. Ford represented 65% and 68% of our revenue in the three months ended September 30, 2017 and 2016, respectively. Our contract with Ford covers a broad range of products and services that we provide to Ford. As of December 31, 2017, material programs covered under the agreement will expire unless we and Ford come to agreement on an extension; however, services under other programs by which our products are installed in new vehicles expire in December 2021, subject to the extension of certain vehicle programs and may be extended to coincide with the service period for the last vehicle enabled to utilize our connected services. 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 are currently negotiating a multi-year extension to our agreement to provide our navigation products and services for SYNC 3 in new vehicles. Although we believe we will achieve a satisfactory outcome, we may enter into changes in the contract structure that may impact our revenue recognition and billings. If we succeed in entering into contracts with Ford for the extension of SYNC 3, we do not yet know what pricing would be, which geographies our products and services would be offered in, which vehicles would include our products and services and which geographies would include future value-added services, such as map updates.  The nature and timing of such offerings can have a significant impact on revenue recognition and gross profit. Furthermore, a substantial portion of our revenue, and, to a lesser extent, gross profit is impacted by the underlying licensed content cost negotiated through HERE and other content providers and we cannot predict the impact on our revenue and gross profit of any changes between Ford and the map or other content providers.
Our automotive product revenue is generated primarily from on-board automotive navigation solutions provided to Ford. Our on-board solutions consist of software, map and point of interest, or POI, data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen.
Our product revenue is primarily derived from Ford's SYNC 2 and SYNC 3 on-board solutions. We recognize as revenue royalties earned from our Ford SYNC 2 on-board solutions as the software is reproduced onto an SD card and shipped for installation in vehicles; however, we recognize revenue from Ford SYNC 3 primarily as our software is installed in the vehicle by Ford. Accordingly, the timing of our revenue recognition changed materially in fiscal 2017 during Ford's global transition from SYNC 2 to SYNC 3. We experienced a lower level of orders and revenue in the three months ended September 30, 2016 as Ford used its existing inventory of SYNC 2 product in conjunction with its transition to SYNC 3. Ford transitioned to SYNC 3 in all major regions as of December 31, 2016. In October 2017, we amended our agreement with Ford to provide certain connected services for SYNC 3 globally.
We have contracted with Ford Europe and Ford Australia and New Zealand to provide annual map updates over the defined period as part of their SYNC 2 and SYNC 3 product distribution. We earn an annual fee and a per unit fee for these updates. As our solutions encompass greater value-added services, such as Ford’s map update program, there is potential for changes in the timing of revenue recognition. We anticipate that we will continue to depend on Ford for a material portion of our revenue for the foreseeable future.
We also have agreements with GM. In February 2017, GM launched its first model featuring integration of our on-board and connected navigation solution, the 2017 Cadillac CTS and CTS-V. Our solution is now available on the 2018 Cadillac CTS, CTS-V, ATS and XTS models, as well as the GM Terrain vehicles. Due to specified future obligations in connection with the launch, we did not recognize any revenue from GM on-board and connected navigation solutions in fiscal 2017 or the three months ended September 30, 2017, although we did experience increases in deferred revenue from these solutions. We expect that we will not recognize any revenue from GM for our on-board and connected navigation solutions during fiscal 2018 due to these specified future obligations. Our on-board and connected navigation solution is scheduled to become available in

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additional regions and GM models for model years 2018 to 2025. We have been selected to provide entry level on-board navigation through LG, a Tier 1 supplier for the Opel and Vauxhall line of vehicles, for the European market. This solution launched in Adam, Corsa, Karl and Zafira model vehicles equipped with NAVI 4.0 IntelliLink beginning in July 2017. These products are expected to be made available in other select vehicles for model years 2018 to 2022.
We derive automotive services revenue primarily from our brought-in automotive navigation solutions. Billings for these services are recorded as deferred revenue and amortized to revenue over the estimated service periods. GM offers its OnStar RemoteLink mobile application powered by our location-based services platform, and we earn a one-time fee for each new vehicle owner who downloads the OnStar RemoteLink or associated branded application.
We have a partnership with Toyota for brought-in navigation services where our Scout GPS Link mobile application is available in Entune® Audio Plus equipped Toyota vehicles in the United States and in certain of its Lexus models equipped with Lexus Display Audio multimedia. Toyota and Lexus vehicles enabled to connect with our Scout GPS Link began shipping in August 2015 and September 2016, respectively. We earn a one-time fee for each new Toyota or Lexus sold and enabled to connect to our Scout GPS Link mobile application.
In January 2017, Telenav and Xevo Inc. announced that Scout GPS Link and Xevo Engine Link were chosen to provide brought-in navigation services, including a fully interactive moving map, for select model year 2018 Toyota vehicles equipped with Entune 3.0, as well as certain Lexus vehicles. Our fully interactive solution is available on select model year 2018 Toyota Camry and Lexus NX models, and is expected to become available on additional models for model years 2018 to 2023. On these same Toyota and Lexus models, a premium embedded connected navigation option is also available that provides connected search, powered by our platform. We anticipate that Toyota and Lexus will offer both our current solution and the new fully interactive solution in model year 2018 vehicles, with the availability of each solution dependent upon the Toyota and Lexus model and trim level.
Revenue from our advertising segment, which includes the delivery of display, location-based advertising impressions, represented 21% and 15% of our revenue in the three months ended September 30, 2017 and 2016, respectively. Our advertising revenue is derived primarily from ad insertion orders contracted with advertising agencies, direct customers, and channel partners.

Revenue from our mobile navigation segment represented 10% and 13% of our revenue in the three months ended September 30, 2017 and 2016, respectively. We offer voice-guided, real-time, turn by turn, mobile navigation service under several brand names including Telenav GPS as well as under wireless carrier brands (or “white label” brands). Subscription fee revenue from our mobile navigation service has declined steadily from fiscal 2013 through the three months ended September 30, 2017, primarily due to a substantial decrease in the number of paying subscribers for navigation services provided through AT&T and other wireless carriers, including Sprint Corporation, or Sprint. We expect that mobile navigation revenue will continue to decline. We have experienced and anticipate that we will continue to experience the non-renewal of our agreements for these services by our wireless carrier customers as demand from their subscribers declines.

We derive mobile navigation 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 a revenue sharing arrangement or a monthly subscription fee per end user, and they 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 fiscal 2018, we expect automotive and advertising revenue to represent the strategic growth segments of our business, but our expectations may not be realized. We expect that services revenue from wireless carrier customers, which has a higher gross margin than automotive and advertising revenue, will continue to decline substantially in fiscal 2018 due to the continued decline in the number of monthly recurring subscribers.


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We generated 93% and 90% of our revenue in the United States in the three months ended September 30, 2017 and 2016, respectively. With respect to revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify the majority of 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. It is possible that this classification may change in the future, as existing and new customers may elect to contract through subsidiaries. For example, in the three months ended September 30, 2016, Ford assigned certain contract rights for its production of vehicles with our SYNC 3 products to its joint ventures in China.
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 we incur in providing our brought-in automotive navigation solutions, third party exchange ad inventory, data center operations and outsourced hosting services, customer support, 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 brought-in automotive solutions and certain of our on-board solutions, and we recognize these deferred costs over the requisite service period. 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, customer service support, and other related costs over time.
We primarily provide 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 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, which could result in penalties for failure to meet contractual service availability requirements or termination of our 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. Other notable costs of our advertising business are the cost of technologies that we license to deliver customized solutions, costs 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 2018 and beyond, 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 OpenStreetMap, or 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.
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 significant additional headcount, or reallocation of employee personnel to automotive and advertising.
Research and development. Research and development expenses consist primarily of personnel costs for our development and product management employees and related 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 and developing products and services. 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 Romania; 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, and the Romanian Leu, or RON.

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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, automotive revenue has comprised the largest portion of our revenue and automotive and advertising revenue have represented the growing components of our revenue. Our sales and marketing activities supporting our automotive navigation solutions include the costs of our business development efforts. Our automobile manufacturer partners and OEMs also provide primary marketing for our on-board and brought-in navigation services.
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. With our settlement of the Vehicle IP case in fiscal 2017, we anticipate that reduced legal expenses will drive decreased general and administrative expenses during fiscal 2018. We may also be required to pay judgments, indemnification claims or other amounts, which we are unable to predict or estimate at this time.
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 gains or losses.
Provision (benefit) for income taxes. Our provision (benefit) for income taxes primarily consists of corporate income taxes related to profits earned in foreign jurisdictions, foreign withholding taxes, and changes to our tax reserves. 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 due to changes in our tax reserves resulting from the settlement of tax audits or the expiration of the statute of limitations. 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 the expiration and retroactive reinstatement of tax holidays.

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.

There have been no material changes in our critical accounting policies and estimates during the three months ended September 30, 2017 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 2017.
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.

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Results of operations
The following tables set forth our results of operations for the three months ended September 30, 2017 and 2016, 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
 
2017
 
2016
 
 
(in thousands)
Revenue:
 
 
 
 
Product
 
$
23,964

 
$
29,423

Services
 
12,694

 
12,804

Total revenue
 
36,658

 
42,227

Cost of revenue:
 
 
 
 
Product
 
14,674

 
17,761

Services
 
6,173

 
5,715

Total cost of revenue
 
20,847

 
23,476

Gross profit
 
15,811

 
18,751

Operating expenses:
 
 
 
 
Research and development
 
21,082

 
18,018

Sales and marketing
 
5,064

 
5,268

General and administrative
 
5,211

 
5,491

Legal settlement and contingencies
 
250

 

Total operating expenses
 
31,607

 
28,777

Loss from operations
 
(15,796
)
 
(10,026
)
Other income (expense), net
 
(47
)
 
296