News Column

TELENAV, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 22, 2014

The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Telenav and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in "Risk factors" in Item 1A of this Form 10-K, Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Overview Telenav is a leading provider of location-based platform services. These services consist of our map and navigation platform and our advertising delivery platform. Our map and navigation platform allows Telenav to deliver enhanced location based services to developers, auto manufacturers and end users. We use our map and navigation platform as the basis for delivering enhanced mobile applications such as our industry leading mobile navigation. Our advertising delivery platform delivers highly targeted advertising services leveraging our location expertise. Recently, we have focused on enhancing our map and navigation platform by closely aligning our technology to the OSM community. In January 2014, we completed our acquisition of all of the shares of privately held skobbler, a location-based services company based in Germany. We believe the acquisition of skobbler will enable us to combine its OSM-based GPS navigation technology with our existing mobile navigation solutions. We offer our map and navigation platform to customers in a number of ways. We distribute our services through our wireless carrier partners, including AT&T, and directly to consumers through mobile application stores and marketplaces. Generally, we provide our basic services to consumers for free and provide consumers the opportunity to purchase premium versions of the product. We refer to the free to premium distribution as the "freemium" model of distribution. Our free products are designed to be monetized through delivery of advertising to consumers. Our success with the freemium model depends upon our ability to generate a substantial active user base as well as the ability to generate revenue from advertising and conversion of users from free to premium services. We offer our map and navigation platform services to auto manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. Our primary customer to date, Ford, currently distributes our product as an optional feature with the majority of its models in the U.S. Our product is now included on models manufactured in the U.S., Canada, Mexico, South America, Europe and China. We also have a relationship with another automotive OEM that distributes our products with another major auto manufacturer and in January 2014 we announced an agreement with a top five global auto manufacturer for integration of our off-board and connected solutions in its vehicles, which we expect to commence in model year 2017. Our automotive solutions are typically a self-contained solution including software and related services and content within the car, or on-board, and are often enhanced through connection to data services for additional real time capabilities such as traffic. Our history as a cloud based supplier of navigation services provides a unique advantage in the marketplace over our competitors. Our advertising delivery platform offers advertisers 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 offer unique value to brick-and-mortar and brand advertisers through our location targeting capabilities. Our technology focuses on managing the complexity and scale associated with mobile location data to deliver better mobile campaigns for our advertising partners. We deliver mobile advertisements by leveraging our proprietary in-house ad serving technology. Our inventory, or accessible market, is comprised of thousands of mobile applications and mobile websites that are accessed through programmatic RTB tools. In June 2014, our platform had access to over 100 billion potential ad impressions. We derive revenue primarily from wireless carriers, automobile manufacturers and OEMs, and advertisers and advertising agencies. We primarily derive our revenue from automobile manufacturers whose vehicles contain our proprietary software and are able to access our personalized navigation services. We also derive revenue from our partnerships with wireless carriers who sell our mobile navigation services to their subscribers. In addition, we have a growing business in mobile advertising where our customers are primarily advertising agencies that represent national and regional brands and channel partners that work closely with local and small business advertisers. We generate revenue from the delivery of customized software and royalties from the distribution of this customized software in automotive navigation applications. For example, Ford utilizes our on-board automotive navigation product in its 37



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Ford SYNC platform, which includes MyFord Touch and MyLincoln Touch. Ford began shipping this product in certain North American vehicles with the 2011 model year, and our navigation solution is currently deployed in 17 different Ford and Lincoln models in North America. Ford and Lincoln models with our on-board automotive navigation product began shipping to South America with the 2012 model year and China with the 2013 model year. Our automobile manufacturer and OEM customers pay us a royalty fee as the software is reproduced for installation in vehicles with our automotive navigation solutions. We generate revenue from mobile navigation services, based upon our map and navigation platform, through service subscriptions. End users with subscriptions for our services are generally billed for our services through their wireless carrier or through mobile application stores and marketplaces. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage. We generate revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract. Recent Developments In the fourth quarter of fiscal 2014, in order to further align our resources and consolidate facilities, we initiated a restructuring plan consisting of the elimination of approximately 108 full-time positions in the U.S. and China and we recorded restructuring charges of $2.4 million related to severance and benefits for the positions eliminated. Earlier in fiscal 2014, we commenced our consolidation of our Sunnyvale, California headquarters facilities from two buildings into one, and during the fourth quarter we closed our Boston, Massachusetts office. As a result, we recorded restructuring charges of $2.0 million related to the impairment of the facility leases. On January 29, 2014, we completed our acquisition of all of the shares of skobbler. We acquired skobbler for consideration of approximately $23.8 million, consisting of approximately $19.2 million in cash and $4.6 million in shares of our common stock. We believe the acquisition of skobbler will enable us to combine its OSM-based GPS navigation technology with our existing mobile navigation solutions. The transaction has been accounted for under the acquisition method of accounting. In January 2014, we announced that we entered into a contract with one of the five largest global auto manufacturers to provide worldwide embedded and connected navigation services beginning with select model year 2017 vehicles. The agreement covers an initial three-year production cycle, which we expect to commence with select model year 2017 vehicles. Under the terms of the agreement, we expect our connected services to support navigation in more than 100 countries. There are no volume or revenue guarantees provided by this auto manufacturer. As of October 1, 2013, Sprint Nextel Corporation, or Sprint, no longer provided us compensation for our services on a fixed fee basis for bundled offerings provided to its customers. The revenue we receive from Sprint consists primarily of revenue from monthly recurring fees paid by end users for premium services. The current monthly recurring fee revenue is substantially lower than the fee revenue we had previously received from Sprint for the bundling of our services and we anticipate that this trend will continue. Subsequent to October 1, 2013, we have not experienced significant replacement revenue from subscribers who formerly had access to our services through the Sprint bundles. In fiscal 2015, consistent with the last two fiscal years, we expect that subscription revenue from our partnerships with wireless carriers for navigation will decline substantially as AT&T and our entire mobile navigation customer base continue to experience declines in subscribers paying monthly recurring charges for navigation applications.



All information in the following management's discussion and analysis of financial condition and results of operations includes only results from continuing operations (and excludes our discontinued enterprise business, which was sold in April 2013) for all periods presented, unless otherwise noted. 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, non-GAAP income (loss) from continuing operations, net of tax, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, from continuing operations and diluted non-GAAP income (loss) from continuing operations, net of tax, per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance 38



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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. Fiscal Year Ended June 30, 2014 2013 2012 (in thousands) Revenue $ 150,313$ 191,800$ 205,522 Gross margin 60 % 64 % 78 % Non-GAAP gross margin 62 % 65 % 79 % Income (loss) from continuing operations, net of tax $ (29,524 )$ 5,581$ 31,806 Non-GAAP income (loss) from continuing operations, net of tax $ (6,839 )$ 18,183$ 39,180 Adjusted EBITDA from continuing operations $ (12,121 )$ 25,493$ 59,021 Diluted income (loss) from continuing operations, net of tax, per share $ (0.76 )$ 0.13$ 0.72 Diluted non-GAAP income (loss) from continuing operations, net of tax, per share $ (0.18 )$ 0.43$ 0.89 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 navigation offerings provided through wireless carriers. Non-GAAP gross margin measures our GAAP gross margin, excluding the impact of stock-based compensation expense and capitalized software and developed technology amortization expenses. Non-GAAP income (loss) from continuing operations, net of tax, measures GAAP net income (loss) from continuing operations, net of tax, excluding the impact of stock-based compensation expense, capitalized software and developed technology amortization expenses, and other items such as legal settlements, valuation allowances against certain deferred tax assets, and restructuring costs, net of taxes. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Stock-based compensation expense has been and will continue to be a significant recurring non-cash expense for us. While we include the dilutive impact of such equity awards in weighted average shares outstanding, the expense associated with stock-based awards reflects a non-cash charge that we exclude from non-GAAP income (loss) from continuing operations, net of tax, non-GAAP income (loss) from continuing operations, net of tax, per share, and adjusted EBITDA from continuing operations. Capitalized software amortization expense represents internal software costs that are previously capitalized and charged to expense as the software is used in our operations. Developed technology amortization expense relates to the amortization of acquired intangible assets. Legal settlements represent settlements from patent litigation cases in which we are defendants and royalty disputes. The valuation allowance against deferred tax assets related to a valuation allowance established against our deferred tax assets in the U.S. Restructuring costs represent recognition of the estimated amount of costs associated with restructuring activities. Our non-GAAP tax rate from continuing operations differs from the GAAP tax rate from continuing operations due to the elimination of any tax effect of the GAAP stock-based compensation expenses, legal settlements, restructuring costs, and other items that are being eliminated to arrive at the non-GAAP income (loss) from continuing operations, net of tax. Adjusted EBITDA from continuing operations measures our GAAP income (loss) excluding the impact of stock-based compensation expense, depreciation, amortization, interest income, other income (expense), provision (benefit) for income taxes, and other items such as legal settlements and restructuring costs, net of tax. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss. Non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA from continuing operations are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA are key financial measures used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. 39



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Diluted non-GAAP income (loss) from continuing operations, net of tax, per share is calculated as non-GAAP income (loss) from continuing operations, net of tax, divided by the diluted weighted average number of shares outstanding during the period. These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are: although depreciation and amortization are non-cash charges, the assets



being depreciated and amortized may have to be replaced in the future, and

adjusted EBITDA from continuing operations does not reflect cash capital

expenditure requirements for such replacements or for new capital expenditures;



non-GAAP gross margin, non-GAAP income (loss) from continuing operations,

net of tax, and adjusted EBITDA from continuing operations do not reflect

the potentially dilutive impact of equity-based compensation; adjusted EBITDA does not reflect tax payments that historically have represented a reduction in cash available to us or tax benefits that may arise as a result of generating net losses; and



other companies, including companies in our industry, may calculate

adjusted EBITDA or similarly titled measures differently, which reduces

its usefulness as a comparative measure.

Because of these and other limitations, you should consider non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, adjusted EBITDA from continuing operations and diluted non-GAAP income (loss) from continuing operations, net of tax, per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP financial results. The following tables present reconciliations of gross margin to non-GAAP gross margin, income (loss) from continuing operations, net of tax, to non-GAAP income (loss) from continuing operations, net of tax, and income (loss) from continuing operations, net of tax, to adjusted EBITDA from continuing operations for each of the periods indicated: Fiscal Year Ended June 30, 2014 2013 2012 Gross margin 60 % 64 % 78 % Adjustments: Capitalized software and developed technology amortization 2 % 1 % 1 % Stock-based compensation expense - % - % - % Non-GAAP gross margin 62 % 65 % 79 % Fiscal Year Ended June 30, 2014 2013 2012 (in thousands) Net income (loss) $ (29,524 )$ 13,067$ 32,408 Income from discontinued operations, net of tax - 7,486 602 Income (loss) from continuing operations, net of tax (29,524 ) 5,581 31,806 Adjustments: Legal settlement - 1,300 1,500 Restructuring costs 4,412 1,671 - Capitalized software and developed technology amortization 3,588 3,680



2,004

Valuation allowance against deferred tax asset 7,398 - - Stock-based compensation expense: Cost of revenue 100 149 91 Research and development 4,489 3,509 2,509 Sales and marketing 3,306 2,290 1,168 General and administrative 3,640 2,699 1,354 Total stock-based compensation 11,535 8,647



5,122

Tax effect of adding back adjustments (4,248 ) (2,696 ) (1,252 ) Non-GAAP income (loss) from continuing operations, net of tax $ (6,839 )$ 18,183$ 39,180 40



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Table of Contents Fiscal Year Ended June 30, 2014 2013 2012 (in thousands) Net income (loss) $ (29,524 )$ 13,067$ 32,408 Income from discontinued operations, net of tax - 7,486 602 Income (loss) from continuing operations, net of tax (29,524 ) 5,581 31,806 Adjustments: Legal settlement - 1,300 1,500 Restructuring costs 4,412 1,671 - Stock-based compensation expense 11,535 8,647



5,122

Depreciation and amortization 6,759 8,408



8,171

Interest and other (income) expense, net (1,288 ) (1,207 ) (1,484 ) Provision (benefit) for income taxes (4,015 ) 1,093



13,906

Adjusted EBITDA from continuing operations $ (12,121 )$ 25,493

$ 59,021

Key components of our results of operations Sources of revenue We classify our revenue as either product or services revenue. Services revenue consists primarily of revenue we derive from our mobile navigation services, off-board automotive navigation services and mobile advertising services. 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. We offer voice-guided, real-time, turn by turn, mobile navigation service under several brand names including Scout by Telenav and Telenav GPS as well as under wireless carrier brands (or "white label" brands). We derive services revenue primarily from our wireless carrier customers for their end users' subscriptions to our mobile navigation services. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage. Certain of our contracts provide our wireless carrier customers with discounts based on the number of end users paying for our services in a given month. In general, our wireless carrier customers pay us a lower monthly fee per end user if an end user subscribes to our mobile navigation services as part of a bundle of mobile data or voice services than if an end user subscribes to our mobile navigation services on a standalone basis. We also offer our applications directly to end users through application stores such as the Apple App Store and the Google Play marketplace. Finally, we provide free versions of our services which can generate revenue through advertising supported arrangements, and subscriber upgrades to premium versions for a fee. We also derive services revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract. In the future, we may have other revenue models. For services that our subscribers purchase through our wireless carriers, our wireless carrier customers are responsible for billing and collecting the fees they charge their subscribers for the right to use our navigation services. With respect to Sprint, through September 30, 2013, we received a guaranteed fixed fee from Sprint for navigation applications provided to subscribers in bundles with other Sprint services. We recognized revenue for the aggregate fees monthly on a straight-line basis over the term of the agreement. When we are paid on a revenue sharing basis with our wireless carrier customers, the amount we receive varies depending on several factors, including the revenue share rate negotiated with the wireless carrier customer, the price charged to the subscriber by the wireless carrier customer, the specific sales channel of the wireless carrier customer in which the service is offered and the features and capability of the service. As a result of these factors, the amount we receive for a subscriber may vary considerably and is subject to change over time. In addition, the amount we are paid per end user in our revenue sharing arrangements may also vary depending upon the metric used to determine the amount of the payment, including the number of end users at any time during a month, the average monthly paying end users, the number and timing of end user billing cycles and end user activity. Although our wireless carrier customers generally have sole discretion about how to price our mobile navigation services to their subscribers, our revenue sharing arrangements generally include monthly minimum fees per end user. To a much lesser extent, we also sell our services directly to consumers through application stores. 41



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Subscription fee revenue from our mobile navigation services represented 42%, 61% and 86%of our revenue in fiscal 2014, 2013 and 2012, respectively. Subscription fee revenue from our mobile navigation service declined from fiscal 2012 to fiscal 2014, primarily due to the transition to an extension of the fixed fee with Sprint at a lower rate that eventually ceased in September 2013 and a substantial decrease in the number of paying subscribers for navigation services provided through AT&T and others, including T-Mobile, U.S. Cellular and NII Mexico. AT&T represented 24%, 28% and 35% of our revenue in fiscal 2014, 2013 and 2012, respectively. In March 2014, our agreement with AT&T was automatically renewed, under its existing terms through March 2015, and provides that we will continue to be the exclusive provider of white label GPS navigation services to AT&T. AT&T is not required to offer our navigation services. We anticipate that we will continue to depend on AT&T for a material portion of our revenue for the foreseeable future; however, we have seen substantial declines in the number of paying subscribers for our services through AT&T over the past few years. Sprint represented less than 10%, 16% and 36% of our revenue in fiscal 2014, 2013 and 2012, respectively. We operate under an agreement with Sprint, which we most recently amended in April 2013. Under this amended agreement, Sprint continued the fixed fee arrangement related to the Sprint bundle through September 30, 2013, and agreed to partner to generate revenue from mobile navigation and mobile advertising programs through December 31, 2015. Commencing on October 1, 2013, Sprint ceased to bundle our navigation services, which caused our revenue to decrease substantially. A majority of the Sprint subscribers who were receiving our services through bundles as of September 30, 2013 did not convert to our paid navigation services and we have not recouped the lost revenue through freemium or monthly recurring charges paid by those Sprint subscribers. We expect that the percentage of our revenue represented by wireless carrier customers will continue to decline in fiscal 2015 due to the absence of any revenue from Sprint bundles and the anticipated decline of the number of subscribers paying monthly recurring charges with other wireless carrier customers. Revenue from our mobile advertising, which includes the delivery of search and display, location-based ads, represented 8%, 2% and 1% of our revenue in fiscal 2014, 2013 and 2012, respectively. Our advertising revenue is derived from relationships established with advertising agencies, direct customers, and channel partners. Our ad search revenue is earned from the delivery of location-based ad impressions targeted to end users engaged in a specific search task utilizing our mobile navigation solutions. Such ad search revenue represented less than 10% of our overall advertising revenue. Our display revenue relates to the advertising business developed via the Thinknear acquisition that delivers targeted location-based impressions to end users of third party developer applications. Revenue from our automotive navigation solutions represented 50%, 37% and 13% of our revenue in fiscal 2014, 2013 and 2012, respectively. Ford represented 46%, 36% and 13% of our revenue in fiscal 2014, 2013 and 2012, respectively. In April 2014, our contract with Ford was extended through December 2017. The agreement may be renewed for successive 12-month periods if either party provides notice of renewal at least 45 days prior to the expiration of the applicable term and the other party agrees to such renewal. We provide both on-board and off-board connected navigation solutions to Ford. Our on-board solution consists of software, map and POI data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. Our off-board connected solution enables a mobile device that is paired with the vehicle to activate in-vehicle text-based and voice-guided turn by turn navigation. We recognize revenue from our off-board connected solutions monthly based on annual subscriptions, which are subject to a maximum annual fee with Ford. This revenue is classified as services revenue and represented less than 5% of overall automotive navigation solutions revenue. Our product revenue is primarily derived from our automotive be on-board solutions as the related customized software is delivered to, and accepted by our customers. In addition, we recognize royalties earned from our on-board solutions as the software is reproduced for installation in vehicles. We anticipate that we will continue to depend on Ford for a material portion of our revenue for the foreseeable future. For fiscal 2015, we expect automotive and advertising revenue to represent the growing components of our revenue but our expectations may not be realized. However, while we anticipate growing our overall revenue in fiscal 2015, the lower gross margins generally experienced with automotive and advertising revenue are expected to result in an overall lower gross profit in fiscal 2015. 42



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In fiscal 2014, 2013 and 2012, we generated 94%, 92% and 94% of our revenue, respectively, in the United States. With respect to revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify that revenue as being generated in the United States, because we provide deliverables to and receive compensation from the manufacturer's or OEM's United States' entity. Cost of revenue Our cost of revenue consists primarily of the cost of third party content, such as map, geocodes, POI, traffic, gas price and weather data and voice recognition technology that we use in providing our navigation solutions. Our cost of revenue also includes the cost of third party exchange ad inventory as well as expenses associated with data center operations, customer support, the amortization of capitalized software, recognition of deferred development costs on specific projects, stock-based compensation and amortization of developed technology. The largest components of our cost of revenue are the fees we pay to providers of map, POI and traffic data, TomTom and HERE. We have agreements with TomTom and HERE pursuant to which we pay royalties according to a variety of different fee schedules, including on a per use basis, on a per end user per month basis, and on a per installed vehicle basis. With respect to TomTom, we are required to pay certain minimum fees for access to its content by our mobile navigation customers, as well as a usage fee. Although we recently began using OSM for certain of our freemium navigation products, we do not anticipate that we will cease to use TomTom and HERE in the near-term on our paid subscription mobile navigation solutions. For our on-board automotive navigation solutions provided to Ford, we pay royalties on a per installed unit produced basis to HERE as well as other content providers, depending on the geographic distribution of our solution with Ford. . We classify our cost of revenue as either cost of product revenue or cost of services revenue. Cost of product revenue consists primarily of the cost of third party content we incur in providing our on-board automotive navigation solutions and recognition of deferred development costs. Cost of services revenue consists primarily of the costs associated with third party content, third party exchange ad inventory, data center operations, customer support, amortization of capitalized software, stock-based compensation and amortization of developed technology that we incur in providing our navigation and advertising network services. We primarily provide mobile navigation service customer support through a third party provider to whom we provide training and assistance with problem resolution. We use two outsourced, hosted data centers and industry standard hardware to provide our navigation services. We generally offer to our wireless carrier customers and generally maintain at least 99.9% uptime every month, excluding designated periods of maintenance. Our internal targets for service uptime are even higher. We have in the past, and may in the future, not achieve our targets for service availability and may incur penalties for failure to meet contractual service availability requirements, including loss of a portion of subscriber fees for the month or termination of our wireless carrier customer agreement. The largest component of cost of revenue as it relates to our display advertising business is the cost of location-based, third-party advertising inventory which we acquire from advertising exchanges. Our search ad inventory is generated from our user base of paid and freemium users of our Scout and Telenav branded and carrier branded mobile navigation solutions. Other notable costs of our advertising business are the cost of ad delivery via contracted hosted relationships and the cost of our ad trafficking operations. While we expect that services revenue from wireless carrier customers will continue to decline substantially in fiscal 2015, we do not expect to be able to reduce our cost of services revenue at the same rate of decline as services revenue. Although we successfully transitioned to utilizing OSM content on our freemium navigation applications resulting in notable cost savings, we will continue to incur significant costs, especially related to third party content as well as for data center operations. Cost of services revenue related to our advertising business will be impacted by our ability to grow advertising revenue, as well as the cost and availability of display ad inventory sourced from third party exchanges. While our product revenue is expected to increase in fiscal 2015 due to continued growth in automotive, much of this growth will be generated from distribution of our automotive solution with Ford in China and Europe where the underlying content costs are significantly higher on a per unit basis. Consequently, we expect that our overall total cost of revenue will increase as a percentage of revenue as we increase the percentage of our revenue from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad costs, respectively, than our navigation offerings provided through wireless carriers. 43



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Operating expenses We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative. In addition, in fiscal 2013 and 2014 we incurred restructuring costs primarily related to severance and benefits expense associated with reductions in workforce and facility exit costs associated with consolidation of facilities. 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. Our operating expenses have stabilized in absolute dollars in the past fiscal year, as we have reduced certain headcount and achieved greater operational effectiveness in supporting our traditional mobile navigation services. Despite our recent restructuring efforts, we expect that certain costs will continue to increase over time, including compensation and related costs; however, we are continuing to evaluate spending in certain areas and to take actions to create greater efficiencies. We anticipate continued investment of resources, including the hiring of additional headcount in, or reallocation of employee personnel into, our growth areas, which include automotive and mobile advertising, with a recent emphasis on hiring advertising sales personnel and related support functions. Research and development. Research and development expenses consist primarily of personnel costs for our development employees and costs of outside consultants and temporary staffing. We have focused our research and development efforts on improving the ease of use and functionality of our existing services, as well as developing new service and product offerings in our existing markets and in new markets. A significant number of our research and development employees are located in our development centers in China and, as a result, a portion of our research and development expense is subject to changes in foreign exchange rates, notably the Chinese Renminbi, or RMB. In addition, with the January 2014 acquisition of skobbler, we also incur research and development expenses in the Romanian Leu. Sales and marketing. Sales and marketing expenses consist primarily of personnel costs for our sales, product management and marketing staff, commissions earned by our sales personnel and the cost of marketing programs, advertising and promotional activities. Historically, a majority of our revenue has been derived from wireless carriers, which bore much of the expense of marketing and promoting our services to their subscribers, as well as consumers acquired through open market application stores. More recently, our automotive and advertising revenue have represented the most rapidly growing components of our revenue, and we have invested in building our advertising sales team. Our sales and marketing activities supporting our automotive navigation services include product management and business development efforts. Our automotive manufacturer partners and OEMs also provide primary marketing for our on-board and off-board navigation services at the time a vehicle is sold to their end customer. General and administrative. General and administrative expenses consist primarily of personnel costs for our executive, finance, legal, human resources and administrative personnel, legal, audit and tax consulting and other professional services and corporate expenses. Other income, net. Other income, net consists primarily of interest we earn on our cash and cash equivalents and short-term investments, gain or loss on investments and foreign currency transaction gain or loss. Income from discontinued operations, net. Income from discontinued operations, net consists of results of operations of our enterprise business, which was sold in April 2013. Provision (benefit) for income taxes. Our provision (benefit) for income taxes primarily consists of corporate income taxes related to profits or losses earned in the United States or corporate income tax refunds expected to be derived from losses incurred in the United States that may be carried back. Our effective tax rate could fluctuate significantly from year to year, particularly in those years in which we incur losses, due to our ability to benefit from the carryback of net operating losses within the carryback period and the available amount therein, if any. Furthermore, on a quarterly basis our tax rates can fluctuate and could be adversely affected by increases in nondeductible stock compensation or other nondeductible expenses. Our effective tax rate could also fluctuate due to a change in our earnings or loss projections, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items. Critical accounting policies and estimates We prepare our 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 consolidated financial statements also requires us to make estimates and assumptions 44



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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 statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates. Revenue recognition. We generate revenue primarily from service subscriptions, customized engineering fees and software licenses. We also generate revenue from the delivery of search and display advertising impressions. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the service or product has occurred, the fee is fixed or determinable and collectability is reasonably assured. We derive our revenue primarily from subscriptions to access our mobile navigation services, which are generally provided through our wireless carrier customers that offer our services to their subscribers or through application stores. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage. Our end users who subscribe to our services through application stores pay us a monthly or annual subscription fee. We recognize monthly fees related to our mobile navigation services in the month we provide the services. We defer amounts received in advance of the service being provided and recognize the deferred amounts when the monthly service has been provided. We recognize revenue for fixed fees for any number of subscribers receiving our services as part of bundles monthly on a straight-line basis over the term of the agreement. Our agreements do not contain general rights of refund once the service has been provided. We also establish allowances for estimated credits subsequently issued to end users by our wireless carrier customers. We recognize as services revenue the amount our wireless carrier customers report to us as we provide our services, which are net of any revenue sharing or other fees earned and deducted by our wireless carrier customers. We are not the principal provider when selling access to our mobile navigation services through our wireless carrier customers as the subscribers directly contract with our wireless carrier customers. In addition, we may earn a fixed fee or fixed percentage of fees charged by our wireless carrier customers and our wireless carrier customers have the sole ability to set the price charged to their subscribers for our service. Our wireless carrier customers have direct responsibility for billing and collecting those fees from their subscribers and we and our wireless carrier customers may offer subscribers a free trial for our service. For end users who purchase our mobile navigation services through application stores, we utilize the application store billing process. We provide tiered pricing to certain of our wireless carrier customers based on the number of paying end users in a given month, which may result in a discounted fee per end user depending on the number of end users. Revenue recognized is based on the discounted fees earned for a given period. We also derive services revenue from the delivery of search and display advertising impressions. We recognize revenue when the related advertising services are delivered based on the specific terms of the advertising contract, which are commonly based on the number of ad impressions delivered, or clicks, drives or actions by users on mobile advertisements. We derive product revenue from the delivery of customized software and royalties earned from the distribution of this customized software in certain automotive navigation applications. We generally recognize customized software revenue using the completed contract method of contract accounting under which revenue is recognized upon delivery to, and acceptance by, the automobile manufacturer of our on-board navigation solutions. We generally recognize royalty revenue as the software is reproduced for installation in vehicles, assuming all other conditions for revenue recognition have been met. In certain instances, due to the nature and timing of monthly revenue and reporting from our customers, we may be required to make estimates of the amount of revenue to recognize from a customer for the current period. For example, certain of our wireless carrier customers do not provide us with sufficient monthly individual subscriber billing period details to allow us to compute the allocation of monthly service fees to the individual end user's service period, and in such cases we make estimates of any required service period revenue cutoff. In addition, if we fail to receive an accurate revenue report from a wireless carrier customer for the month, we will need to estimate the amount of revenue that should be recorded for that month. These estimates may require judgment, and we consider certain factors and information in making these estimates such as: subscriber data supplied by our wireless carrier customers;



customer specific historical subscription and revenue reporting trends;

end user subscription data from our internal systems; and

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data from comparable distribution channels of our other customers.

If we are unable to reasonably estimate recognizable revenue from a customer for a given period, we defer recognition of revenue to the period in which we receive and validate the customer's revenue report and all of our revenue recognition criteria have been met. If we have recorded an estimated revenue amount, we record any difference between the estimated revenue and actual revenue in the period when we receive the final revenue reports from our customer, which typically occurs within the following month. To date, actual amounts have not differed materially from our estimates. Software development costs. We account for the costs of computer software we develop for internal use by capitalizing qualifying costs, which are incurred during the application development stage, and amortizing those costs over the application's estimated useful life, which generally ranges from 18 months to 24 months depending on the type of application. Costs incurred and capitalized during the application development stage generally include the costs of software configuration, coding, installation and testing. Such costs primarily include payroll and payroll related expenses for employees directly involved in the application development, as well as third party developer fees. We expense preliminary evaluation costs as they are incurred before the application development stage, as well as post development implementation and operation costs, such as training, maintenance and minor upgrades. We begin amortizing capitalized costs when a project is ready for its intended use, and we periodically reassess the estimated useful life of a project considering the effects of obsolescence, technology, competition and other economic factors which may result in a shorter remaining life. We capitalized zero, $0.9 million and $2.4 million of software development costs during fiscal 2014, 2013 and 2012, respectively. Amortization expense related to these costs, which was recorded in cost of revenue, totaled $1.0 million, $2.1 million and $1.8 million for fiscal 2014, 2013 and 2012, respectively. We also account for the costs of computer software we develop for customers requiring significant modification or customization by deferring qualifying costs under the completed contract method. All such development costs incurred are deferred until the related revenue is recognized. We deferred $0.9 million, $1.3 million and $2.4 million of software development costs during fiscal 2014, 2013 and 2012, respectively. Development costs expensed to cost of revenue totaled $0.9 million, $4.9 million and $0.4 million for fiscal 2014, 2013 and 2012, respectively. Impairment of long-lived assets. We evaluate long-lived assets held and used for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. We continually evaluate whether events and circumstances have occurred that indicate the balance of our property and equipment, long-term investments and intangible assets with definite lives may not be recoverable. Our evaluation is significantly impacted by our estimates and assumptions of future revenue, costs, and expenses and other factors. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our property and equipment, that revision could result in a non-cash impairment charge that could have a material impact on our financial results. When these factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. We base the impairment, if any, on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows of those assets, and record it in the period in which we make the determination. During fiscal 2013, we recorded a loss of $0.3 million in connection with impairment in the carrying value of capitalized software. Goodwill. Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These tests are based on our single operating segment and reporting unit structure. We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We are not required to calculate the fair value of our reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that the fair value is less than our carrying amount. If we determine it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then we would perform the second step of the goodwill impairment test to determine the amount of the impairment loss, if any. In assessing the fair value of our reporting unit, we make assumptions regarding our estimated future cash flows, including estimate growth rate. If our estimates or related assumptions change in the future, or if our net book value were to exceed our market capitalization, we may be required to record impairment loss related to our goodwill. We have not recognized any impairment of goodwill in the three year period ended June 30, 2014. As of June 30, 2014, we had goodwill of $31.3 million. Stock-based compensation expense. We account for stock-based employee compensation arrangements under the fair value recognition method, which requires us to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value, and recognize the costs in the financial statements over the employees' 46



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requisite service period. We recognize compensation expense for the fair value of these awards with time based vesting on a straight-line basis over an employee's requisite service period of each of these awards, net of estimated forfeitures.



Our stock-based compensation expense was as follows:

Fiscal Year Ended June 30, 2014 2013 2012 (in thousands) Cost of revenue $ 100$ 149$ 91 Research and development 4,489 3,509 2,509 Selling and marketing 3,306 2,290 1,168 General and administrative 3,640 2,699 1,354



Total stock-based compensation expense $ 11,535$ 8,647$ 5,122

As of June 30, 2014, there was $3.2 million of unrecognized stock-based compensation expense related to unvested stock option awards, net of estimated forfeitures, that we expect to be recognized over a weighted average period of 1.5 years. At June 30, 2014, the total unrecognized stock-based compensation cost related to restricted stock units was $21.5 million, net of estimated forfeitures, and will be amortized over a weighted average period of 3.1 years. We generally utilize the Black-Scholes option-pricing model to determine the fair value of our stock option awards, which requires a number of estimates and assumptions. In valuing share-based awards under the fair value accounting method, significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. The expected volatility of our stock is based on the historical volatility of various comparable companies, as we do not have sufficient historical data with regards to the volatility of our own stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected term was based on an analysis of our historical exercise and cancellation activity. In the future, as we gain historical data for volatility in our own stock, the expected volatility and expected term may change which could substantially change the grant date fair value of future awards of stock options and ultimately the expense we record. In addition, the estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. For fiscal 2014, 2013 and 2012, we calculated the fair value of options granted to employees with the following weighted average assumptions: Fiscal Year Ended June 30, 2014 2013 2012 Expected volatility 62 % 72 % 64 % Expected term (in years) 4.45 4.79 4.50 Risk-free interest rate 1.44 % 0.67 % 0.77 % Dividend yield - - - We recognize the estimated stock-based compensation cost of restricted stock units, net of estimated forfeitures, over the vesting term. The estimated stock-based compensation cost is based on the fair value of our common stock on the date of grant. Provision (benefit) for income taxes. We use the liability method of accounting for income taxes. Under this method, income tax expense (benefit) is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax effect of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments and estimates relative to the current provision (benefit) for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the periodic examination of our income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of 47



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the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income and predictions of the amount and category of future taxable loss that may be carried back for a tax refund. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets, on a jurisdiction by jurisdiction basis, will be realized. Actual operating results and the underlying amount and category of income in future years as well as expectations regarding the generation of operating losses could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations or refunds to differ from our estimates, thus materially impacting our financial position and results of operations. Results of operations The following tables set forth our results of operations for fiscal 2014, 2013 and 2012, as well as a percentage that each line item represents of our revenue for those periods. The period to period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. The results of operations of our enterprise business, including the related gain on sale, have been classified as discontinued operations in our statement of operations for periods presented through fiscal 2013. The following discussion focuses solely on results of continuing operations. Fiscal Year Ended June 30, Consolidated Statements of Operations Data 2014 2013 2012 Revenue: (in thousands) Product $ 72,747$ 69,162$ 24,186 Services 77,566 122,638 181,336 Total revenue 150,313 191,800 205,522 Cost of revenue: Product 36,775 38,164 13,615 Services 24,066 30,949 30,833 Total cost of revenue 60,841 69,113 44,448 Gross profit 89,472 122,687 161,074 Operating expenses: Research and development 60,573 60,349 65,764 Sales and marketing 33,138 30,435 25,345 General and administrative 26,176 24,765 26,084 Restructuring costs 4,412 1,671 - Total operating expenses 124,299 117,220 117,193 Operating income (loss) (34,827 ) 5,467 43,881 Other income, net 1,288 1,207 1,484 Income (loss) before provision for income taxes (33,539 ) 6,674 45,365 Provision (benefit) for income taxes (4,015 ) 1,093 13,559 Income (loss) from continuing operations, net of tax (29,524 ) 5,581 31,806 Income from discontinued operations, net of tax - 7,486 602 Net income (loss) $ (29,524 )$ 13,067$ 32,408 48



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Table of Contents Fiscal Year Ended June 30, 2013 2014 2013 2012 Revenue: (as a percentage of revenue) Product 48 % 36 % 12 % Services 52 % 64 % 88 % Total revenue 100 % 100 % 100 % Cost of revenue: Product 24 % 20 % 7 % Services 16 % 16 % 15 % Total cost of revenue 40 % 36 % 22 % Gross profit 60 % 64 % 78 % Operating expenses: Research and development 41 % 31 % 32 % Sales and marketing 22 % 16 % 12 % General and administrative 17 % 13 % 13 % Restructuring costs 3 % 1 % - % Total operating expenses 83 % 61 % 57 % Operating income (loss) (23 )% 3 % 21 % Other income, net 1 % - % 1 % Income (loss) before provision for income taxes (22 )% 3 % 22 % Provision (benefit) for income taxes (2 )% - % 6 % Income (loss) from continuing operations, net of tax (20 )% 3 % 16 % Income from discontinued operations, net of tax - % 4 % - % Net income (loss) (20 )% 7 % 16 % Comparison of the fiscal years ended June 30, 2014 and 2013 Revenue. Product 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. Product revenue increased 5% to $72.7 million in fiscal 2014 from $69.2 million in fiscal 2013. The increase was due primarily to increased royalty revenue from automotive navigation solutions we provide for Ford vehicles, including the launch of our solutions in additional Ford and Lincoln models and further geographic distribution. Product revenue in fiscal 2014 and fiscal 2013 included $2.8 million and $9.2 million, respectively, of customized software revenue from Ford. Product revenue in fiscal 2014 and 2013 also included $0.9 million and $8.7 million, respectively, related to a map content update separately purchased by Ford. Excluding customized software and map navigation replacement unit revenue, our automotive royalty revenue increased 31% from fiscal 2013 to fiscal 2014. Services revenue. Services revenue consists primarily of revenue we derive from our mobile navigation services and advertising. Services revenue decreased 37% to $77.6 million in fiscal 2014 from $122.6 million in fiscal 2013. Of the decrease, a decline of $51.8 million was due to the termination of our fixed fee revenue from Sprint for bundled users, lower subscription fees resulting from decreases in the number of paying subscribers for mobile navigation services provided through AT&T, T-Mobile and U.S. Cellular Corporation, or USCC, and a decrease in mobile navigation revenue internationally. These decreases were offset in part by growth in revenue from advertising network services of $7.8 million. Going forward, we anticipate that mobile navigation services revenue from wireless carriers will continue to decline. Revenue concentrations. In fiscal 2014 and 2013, Ford represented 46% and 36% of our total revenue, respectively. In fiscal 2014 and 2013, revenue from AT&T represented 24% and 28% of our total revenue, respectively, and revenue from Sprint represented less than 10% and 16% of our total revenue, respectively. Revenue from our automotive navigation solutions represented 50% and 37% of our total revenue in fiscal 2014 and 2013, respectively. Subscription fees from our mobile navigation services represented 42% and 61% of our total revenue in fiscal 2014 and 2013, respectively. Revenue from our mobile advertising services represented 8% and 2% of our total revenue in fiscal 2014 and fiscal 2013, respectively. 49



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We primarily sell our services in the United States. In fiscal 2014 and 2013, revenue derived from U.S. sources represented 94% and 92% of our total revenue, respectively. With respect to revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify that revenue as being generated in the United States, because we provide deliverables to and receive compensation from the manufacturer's or OEM's United States' entity. Cost of revenue. Cost of product revenue. Our cost of product revenue decreased 4% to $36.8 million in fiscal 2014 from $38.2 million in fiscal 2013, as compared to the 5% increase in our product revenue. Our cost of product revenue decreased due primarily to a decrease in amortization of capitalized software and recognition of deferred costs $4.0 million, partially offset by an increase in third party content costs of $2.6 million. The increase in third party content costs was lower than would be expected commensurate with the growth in our product revenue, as it was offset by a decrease due to the costs associated with the fiscal 2013 map content update provided to Ford that did not recur. In addition, the $8.7 million of revenue related to the map content update separately purchased by Ford in fiscal 2013 had substantially higher associated content costs as a percentage of revenue than our on-board navigation royalty revenue earned from Ford for production vehicles. As we have not adopted OSM for automobile navigation services and do not anticipate that we will do so in the near term, we do not expect to realize any material savings from the use of OSM in our cost of product revenue. Cost of services revenue. Our cost of services revenue decreased 22% to $24.1 million in fiscal 2014 from $30.9 million in fiscal 2013. Cost of services revenue did not decline commensurate with the 37% decrease in services revenue during fiscal 2014. Cost of services revenue in fiscal 2014 was impacted by a decrease in third party content costs of $4.4 million and decreased network operations, customer support and data center costs of $2.4 million, partially offset by increased amortization expense of $0.9 million, primarily related to developed technology acquired from Thinknear and skobbler. As more of our mobile navigation subscribers use our freemium products, we do not recoup the costs of providing those services. Late in fiscal 2014 we released iPhone and Android versions of our Scout mobile navigation applications that use OSM for map data and we anticipate that we will migrate other mobile navigation products to OSM over time. We anticipate that the use of OSM will offset in part the expense we incur in providing freemium mobile navigation services. Gross profit. Our gross profit decreased to $89.5 million in fiscal 2014 from $122.7 million in fiscal 2013. Our gross margin decreased to 60% in fiscal 2014 from 64% in fiscal 2013. The decrease in gross margin was due to lower services revenue and the increased proportion of product revenue contributed from our on-board automotive navigation solutions provided to our automotive customers, which generally have higher associated content costs and resulting lower gross margins than our mobile navigation services provided through our wireless carrier customers. We expect our gross margin to continue to decline as the percentage of our revenue from automotive offerings increases, and as a result of increased competition on our offering of mobile navigation services, especially from other free offerings, resulting in declining services revenue from mobile navigation. In addition, our gross margin will continue to be negatively impacted in the future by the amortization of developed technology acquired as part of our January 2014 acquisition of skobbler. Research and development. Our research and development expenses were comparable at $60.6 million in fiscal 2014 and $60.3 million in fiscal 2013. The change was primarily comprised of decreased compensation and benefits costs of $0.9 million associated with decreased average headcount, primarily in our China offices, a decrease in amortization and depreciation expense of $0.7 million and a decrease in rent expense of $0.3 million, primarily due to lease impairment restructuring charges recorded separately in restructuring costs, partially offset by a decrease in capitalization and deferral of software development costs of $1.3 million. This net decrease was offset by the reimbursement of $1.0 million of costs in connection with a cost recovery contract with a third party that was included fiscal 2013. As a percentage of revenue, research and development expenses increased to 41% in fiscal 2014 from 31% in fiscal 2013. The total number of research and development personnel decreased 7% to 431 at June 30, 2014 from 464 at June 30, 2013. Although research and development personnel have decreased in the short-term, we expect research and development expenses will not reflect a proportionate decrease as we retain research and development personnel in higher cost geographic areas. We also believe that as we continue to invest in expanding the navigation services we offer, establish relationships with new automotive manufacturers, OEMs and advertisers and develop new services and products, revenue from those investments and development efforts will lag the related research and development expenses. We expect that research and development expenses will not change materially in absolute dollars, as the savings realized from our restructuring efforts in June 2014 will be offset by a full year of expenses from our acquisition of skobbler. Sales and marketing. Our sales and marketing expenses increased 9% to $33.1 million in fiscal 2014 from $30.4 million in fiscal 2013. The increase was primarily due to increases in compensation, benefits and commissions of $2.3 million and contracted services of $0.7 million, partially offset by a decrease in advertising and promotion expense of $0.8 million. As a percentage of revenue, sales and marketing expenses increased to 22% in fiscal 2014 from 16% in fiscal 2013. The total number 50



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of sales and marketing personnel increased 9% to 101 at June 30, 2014 from 93 at June 30, 2013. We expect that our sales and marketing expenses will continue to increase over time in absolute dollars as we invest in sales personnel and related support functions fort our growing advertising business. General and administrative. Our general and administrative expenses increased 6% to $26.2 million in fiscal 2014 from $24.8 million in fiscal 2013, including $1.1 million in skobbler acquisition related costs. The increase was primarily due to increased compensation and benefits of $0.8 million, increased stock compensation expense of $0.9 million and increased professional services fees of $0.8 million, partially offset by decreased legal costs of $1.4 million. The total number of general and administrative personnel decreased 7% to 66 at June 30, 2014 from 71 at June 30, 2013. As a percentage of revenue, general and administrative expenses increased to 17% in fiscal 2014 from 13% in fiscal 2013. We anticipate that our general and administrative expenses may vary substantially from period to period as we incur legal expenses associated with ongoing intellectual property litigation and requests for indemnification related to intellectual property litigation proceed, as well as one-time costs related to the acquisition of companies such as skobbler. Restructuring costs. We incurred restructuring costs of $4.4 million in fiscal 2014 in order to further align our resources and consolidate facilities. We initiated a restructuring plan consisting of reductions of approximately 108 full-time positions in the U.S. and China and we recorded restructuring charges of $2.4 million related to severance and benefits for the positions eliminated. In addition, we closed our Boston office and consolidated our Sunnyvale headquarters facilities from two buildings into one and recorded restructuring charges of $2.0 million related to the impairment of our facility leases. We incurred restructuring costs of $1.7 million in fiscal 2013 in order to better align and focus our resources around our strategic growth areas. We initiated a restructuring plan consisting of reductions of approximately 83 full-time positions in the U.S. and China and we recorded restructuring charges of $1.5 million related to severance and benefits for the positions eliminated. In addition, we consolidated our Shanghai office facilities and recorded restructuring charges of $0.1 million related to the forfeiture of our lease deposit. We also recorded restructuring charges of $0.1 million related to the write-off of certain assets that were no longer useful to us based upon the changes in our business. Other income, net. Our other income, net was $1.3 million in fiscal 2014 and $1.2 million in fiscal 2013. Income from discontinued operations, net. Our income from discontinued operations, net was $7.5 million in fiscal 2013 and includes a gain of $6.5 million realized on the sale of our enterprise business, net of tax. We had no discontinued operations in fiscal 2014. Provision (benefit) for income taxes. Our provision (benefit) for income taxes, excluding discontinued operations, decreased to $(4.0) million in fiscal 2014 from $1.1 million in fiscal 2013. Our effective tax rate, excluding discontinued operations, was 12% in fiscal 2014 compared to 16% in fiscal 2013. Our effective tax rate in fiscal 2014 was lower than the tax computed at the U.S. federal statutory income tax rate due primarily to the increase to the valuation allowance which resulted in additional federal tax expense of $7.0 million. The usage of our remaining U.S. federal and state loss carryforwards at June 30, 2014 of approximately $2.3 million and $26.5 million, respectively, is substantially limited each fiscal year by Section 382 of the Internal Revenue Code. As of June 30, 2014, our cumulative unrecognized tax benefit was $6.9 million, of which $1.5 million was netted against deferred tax assets. Included in the other long-term liabilities are unrecognized tax benefits at June 30, 2014 of $5.5 million that, if recognized, would affect the annual effective tax rate. We believe it is reasonably possible that, as of June 30, 2014, the gross unrecognized tax benefits could decrease (whether by payment, release, or a combination of both) by approximately $1.6 million in the next 12 months. We recognize interest and penalties related to unrecognized tax benefits as part of our provision for income taxes. We had $0.6 million and $0.3 million accrued for the payment of interest and penalties at June 30, 2014 and 2013, respectively. In fiscal 2014, we recorded a valuation allowance on the majority of our deferred tax assets, net of liabilities, since the assets are not more likely than not to be realized based upon our assessment of all positive and negative evidence. Realization of deferred tax assets is dependent upon future taxable earnings, the timing of which is uncertain. Due to losses in fiscal 2014 and expected losses in fiscal 2015 and potentially future years in the U.S., we established in fiscal 2014 a valuation allowance on deferred tax assets in the U.S. that we believe will not be realized by the carryback provisions of U.S. tax law. U.S. tax law allows for the two-year carryback of losses and one-year carryback of credits to previous tax years which can generate a tax refund to the extent taxes were paid. Due to foreign operating losses in previous years and continued foreign earnings volatility, we continued to maintain a full valuation allowance for our foreign deferred tax assets. Our valuation allowance increased from the prior fiscal year by approximately $10.1 million, $0.7 million and $0.3 million in fiscal 2014, 2013 and 2012, respectively. 51



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The $10.1 million increase in our valuation allowance in fiscal 2014 included a $7.4 million valuation allowance against deferred tax assets in the U.S.

We anticipate that a significant portion of our fiscal 2014 tax benefit of $(11.4) million, net of the $7.4 million valuation allowance against deferred tax assets in the U.S., will be realized in the form of a refund during fiscal 2015. On December 31, 2013, the research and development credit expired for federal tax purposes. The 2012 Taxpayer Relief Act extended the research and development credit for two years until December 31, 2013. Although the research and development credit has been extended every year since enactment, a tax benefit cannot be recorded for the expired period until the extenders bill has been passed and signed by the President. If and when the extenders bill is passed and signed with retroactive effect, a retroactive tax benefit will be recorded in the period the extenders bill is passed and signed. We have recorded a tax benefit for the federal research and development credit through December 31, 2013. We file income tax returns with the Internal Revenue Service, or IRS, California, various states and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2011 through fiscal 2013 in the U.S., for fiscal 2010 through fiscal 2013 in state jurisdictions, and for fiscal 2009 through fiscal 2013 in foreign jurisdictions. Fiscal years outside the normal statute of limitations 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. Comparison of the fiscal years ended June 30, 2013 and 2012 Revenue. Product revenue. Product revenue increased 186% to $69.2 million in fiscal 2013 from $24.2 million in fiscal 2012. The increase was due primarily to increased revenue from automotive navigation solutions we provide for Ford vehicles, including the launch of our solutions in additional Ford and Lincoln models. In addition, product revenue in fiscal 2013 included $9.2 million of customized software revenue received from Ford. Services revenue. Services revenue decreased 32% to $122.6 million in fiscal 2013 from $181.3 million in fiscal 2012. The decrease was due primarily to lower revenue from Sprint resulting from our July 2012 Sprint amendment, which resulted in a significant reduction in our fixed fee revenue from Sprint for bundled users beginning July 1, 2012, and lower subscription fees resulting from decreases in the number of paying subscribers for mobile navigation services provided through AT&T and T-Mobile. These decreases were partially offset by growth in revenue from monetization of freemium offerings through wireless carriers and application stores and growth in mobile navigation revenue internationally. Accordingly, in fiscal 2013, services revenue from Sprint, AT&T and T-Mobile decreased by $65.3 million, and the decrease was partially offset by an increase in services revenue of $5.4 million driven by growth in monetization of freemium offerings and international. Revenue concentrations. In fiscal 2013 and 2012, Ford represented 36% and 13% of our total revenue, respectively. In fiscal 2013 and 2012, revenue from AT&T represented 28% and 35% of our total revenue, respectively, and revenue from Sprint represented 16% and 36% of our total revenue, respectively. Subscription fees from our mobile navigation service represented 61% and 86% of our total revenue in fiscal 2013 and 2012, respectively. Revenue from our automotive navigation solutions represented 37% and 13% of our total revenue in fiscal 2013 and 2012, respectively. Revenue from our mobile advertising represented 2% and 1% of our total revenue in fiscal 2013 and 2012, respectively. We primarily sell our services in the United States. In fiscal 2013 and 2012, revenue derived from U.S. sources represented 92% and 94% of our total revenue, respectively. With respect to revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify that revenue as being generated in the United States, because we provide deliverables to and receive compensation from the manufacturer's or OEM's United States' entity. In absolute dollars, revenue from our international operations increased in fiscal 2013. Cost of revenue. Cost of product revenue. Our cost of product revenue increased 180% to $38.2 million in fiscal 2013 from $13.6 million in fiscal 2012, which was lower than the 186% increase in product revenue. Our cost of product revenue increased due primarily to an increase in third party content costs of $20.0 million, commensurate with the growth in our product revenue. However, cost of product revenue increased at a lower rate than product revenue due primarily to the $9.2 million of customized engineering revenue from Ford, which had substantially lower associated costs as a percentage of revenue than our on-board navigation revenue earned from Ford for the sale of vehicles with our navigation products. 52



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Cost of services revenue. Our cost of services revenue was comparable at $30.9 million in fiscal 2013 and $30.8 million in fiscal 2012. Cost of services revenue did not decline commensurate with the 32% decrease in services revenue during fiscal 2013. Cost of services revenue in fiscal 2013 was impacted by increased network operations and customer support costs of $1.2 million and increased amortization expense of $1.4 million, primarily related to the developed technology acquired from Thinknear, that were offset by a decrease in third party content costs of $2.5 million. Gross profit. Our gross profit decreased to $122.7 million in fiscal 2013 from $161.1 million in fiscal 2012. Our gross margin decreased to 64% in fiscal 2013 from 78% in fiscal 2012. The decrease in gross margin was due to lower services revenue from Sprint and the increased proportion of product revenue contributed from our on-board automotive navigation solutions provided to Ford, which generally have higher associated content costs and resulting in lower gross margins than our mobile navigation services provided through our wireless carrier customers. However, the higher content costs of product revenue in fiscal 2013 were partially offset by the higher gross margin we earned on the $9.2 million of customized engineering revenue from Ford. Research and development. Our research and development expenses decreased 8% to $60.3 million in fiscal 2013 from $65.8 million in fiscal 2012. The decrease was primarily due to decreased compensation and benefits costs of $5.6 million associated with decreased average headcount, primarily in our China offices. As a percentage of revenue, research and development expenses decreased to 31% in fiscal 2013 from 32% in fiscal 2012. The total number of research and development personnel decreased 22% to 480 at June 30, 2013 from 615 at June 30, 2012. A substantial portion of the decrease in personnel occurred in June 2013 in conjunction with our restructuring efforts. Sales and marketing. Our sales and marketing expenses increased 20% to $30.4 million in fiscal 2013 from $25.3 million in fiscal 2012. The increase was primarily due to increased advertising and promotion expenses of $2.2 million, increased stock-based compensation of $1.1 million and increased recruiting expenses of $0.4 million. As a percentage of revenue, sales and marketing expenses increased to 16% in fiscal 2013 from 12% in fiscal 2012. The total number of sales and marketing personnel decreased 18% to 93 at June 30, 2013 from 113 at June 30, 2012. General and administrative. Our general and administrative expenses decreased 5% to $24.8 million in fiscal 2013 from $26.1 million in fiscal 2012. The decrease was primarily due to decreased legal costs of $5.4 million, partially offset by increased compensation and benefits costs of $1.2 million, increased stock compensation expense of $1.3 million and professional services fees of $0.4 million. The total number of general and administrative personnel decreased 3% to 71 at June 30, 2013 from 73 at June 30, 2012. As a percentage of revenue, general and administrative expenses were comparable at 13% in fiscal 2013 and 2012. Restructuring costs. We incurred restructuring costs of $1.7 million in fiscal 2013 in order to better align and focus our resources around our strategic growth areas. We initiated a restructuring plan consisting of reductions of approximately 83 full-time positions in the U.S. and China and we recorded restructuring charges of $1.5 million related to severance and benefits for the positions eliminated. In addition, we consolidated our Shanghai office facilities and recorded restructuring charges of $0.1 million related to the forfeiture of our lease deposit. We also recorded restructuring charges of $0.1 million related to the write-off of certain assets that were no longer useful to us based upon the changes in our business. Other income, net. Our other income, net was $1.2 million in fiscal 2013 and $1.5 million in fiscal 2012. The change was primarily due to decreased interest income due to lower cash and cash equivalents and short-term investments balances. Income from discontinued operations, net. Our income from discontinued operations, net was $7.5 million in fiscal 2013 and $0.6 million in fiscal 2012. Income from discontinued operations in fiscal 2013 includes a gain of $6.5 million realized on the sale of our enterprise business, net of tax. Provision for income taxes. Our provision for income taxes, excluding discontinued operations, decreased to $1.1 million in fiscal 2013 from $13.6 million in fiscal 2012. Our effective tax rate, excluding discontinued operations, was 16% in fiscal 2013 compared to 30% in fiscal 2012. Our effective tax rate in fiscal 2013 was lower than the tax computed at the U.S. federal statutory income tax rate due primarily to the R&D credit and changes in intercompany arrangements, partially offset by nondeductible stock compensation. 53



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Liquidity and capital resources The following table sets forth the major sources and uses of cash and cash equivalents for each of the periods set forth below:

Fiscal Year Ended June 30, 2014 2013 2012 (in thousands) Net cash provided by (used in) operating activities $ (22,553 )$ 42,913$ 29,307 Net cash provided by (used in) investing activities 20,132 (185 ) (36,713 ) Net cash used in financing activities (8,883 ) (23,874 ) (9,640 ) Effect of exchange rate changes on cash and cash equivalents 51 13 (87 ) Net increase (decrease) in cash and cash equivalents (11,253 ) $ 18,867



$ (17,133 )

At June 30, 2014, we had cash and cash equivalents and short-term investments of $136.8 million, which primarily consisted of money market mutual funds, municipal securities, corporate bonds and commercial paper held by well-capitalized financial institutions. Our accounts receivable are heavily concentrated in a small number of customers. As of June 30, 2014, our accounts receivable balance was $25.8 million, of which Ford and AT&T represented 47% and 19%, respectively. Our future capital requirements will depend on many factors, including our ability to stabilize our revenue and control expenses in fiscal 2015 and beyond, whether we return to profitability, the timing and extent of expenditures to support development efforts, the expansion of research and development and sales and marketing activities and headcount, the introduction of our new and enhanced service and product offerings and the growth in our end user base. We believe our cash, cash equivalents and short-term investments will be sufficient to satisfy our financial obligations through at least the next 12 months. However, we expect to use cash in operating activities in fiscal 2015 and we may experience greater than expected cash usage in operating activities if revenue is lower than we anticipate or we incur greater than expected cost of revenue or operating expenses. Our revenue and operating results could be lower than we anticipate if, among other reasons, our customers, two of which we are substantially dependent upon for a large portion of our revenue, were to limit or terminate our relationships with them; we were to fail to successfully compete in our highly competitive market, including against competitors who offer their services for free; our revenue did not grow as expected or we were unable to reduce our costs by using OSM. In the future, we may acquire businesses or technologies or license technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions or license these technologies. However, additional financing may not be available to us on favorable terms, if at all, at the time we make such determinations, which could have a material adverse effect on our business, operating results, financial condition and liquidity and cash position. Net cash provided by (used in) operating activities. Net cash provided by (used in) operating activities was $(22.6) million, $42.9 million and $29.3 million in fiscal 2014, 2013 and 2012, respectively. Cash provided by (used in) operating activities has historically been affected by growth in our end user base and increases in our operating costs. In fiscal 2014, cash used in operating activities was driven principally by a net loss of $29.5 million and a $23.0 million change in our operating assets and liabilities, partially offset by non-cash charges for depreciation and amortization of $6.8 million, stock-based compensation of $11.5 million, and valuation allowance on deferred tax assets of $7.4 million. In fiscal 2013, cash provided by operating activities was provided principally by net income of $13.1 million, non-cash charges for depreciation and amortization of $8.4 million, stock-based compensation of $8.6 million and a $7.1 million change in our operating assets and liabilities. In fiscal 2012, cash provided by operating activities was generated principally by net income of $32.4 million, non-cash charges for depreciation and amortization of $8.2 million and stock-based compensation of $5.1 million, partially offset by a $20.4 million change in our operating assets and liabilities. Net cash provided by (used in) investing activities. Net cash provided by (used in) investing activities was $20.1 million, $(0.2) million and $(36.7) million during fiscal 2014, 2013 and 2012, respectively. In fiscal 2014, cash was provided primarily by proceeds from sales and maturities of short-term investments, net of purchases, of $40.2 million, partially offset by our acquisition of skobbler for $19.2 million and purchases of property and equipment of $1.1 million. In fiscal 2013, we used cash primarily for our acquisition of Thinknear of $18.3 million and purchases of property and equipment of $2.2 million, which were offset by proceeds from sales and maturities of short-term investments, net of purchases, of $22.2 million. In fiscal 2012, cash was used primarily for purchases of property and equipment of $13.5 million ($7.3 million of which was related to tenant improvements in our new headquarters building), internal software development costs of $2.4 million and net purchases of $18.0 million of short-term investments. We expect our capital expenditures in future periods to remain in line with fiscal 2014 54



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as we continue to invest in the infrastructure needed for our strategic growth areas of automotive and advertising, while also leveraging the benefits of hosted environments for which we no longer have to make large upfront capital expenditure investments. Net cash used in financing activities. During fiscal 2014, 2013 and 2012, we used cash in our financing activities of $8.9 million, $23.9 million and $9.6 million, respectively. In fiscal 2014, 2013 and 2012, these activities reflect the repurchases of our outstanding stock under our stock repurchase programs and tax withholdings paid related to net share settlements of restricted stock units upon vesting, and were partially offset by proceeds from the exercise of options for our common stock. Contractual obligations, commitments and contingencies We generally do not enter into long term minimum purchase commitments. However, we have agreed to pay minimum annual license fees to certain of our third party content providers. Our principal commitments, in addition to those related to our third party content providers, consist of obligations under facility leases for office space in Sunnyvale and Culver City, California; Northlake, Washington; Reston, Virginia; Southfield, Michigan; Boston, Massachusetts; Chicago, Illinois; New York, New York; Shanghai, China; Xi'an, China; SÃo Paulo, Brazil; Berlin, Germany; and Cluj, Romania. The following table summarizes our outstanding noncancelable contractual obligations as of June 30, 2014: Payments due by period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands)



Operating lease obligations(1) $ 27,072$ 4,760$ 10,477

$ 9,772$ 2,063 Purchase obligations(2) 6,023 4,416 1,482 125 -



Total contractual obligations $ 33,095$ 9,176$ 11,959

$ 9,897$ 2,063

(1) Consists of contractual obligations for office space under noncancelable

operating leases, net of sublease income.

(2) Consists of minimum noncancelable financial commitments primarily related

to fees owed to certain third party content providers, regardless of usage

level.

At June 30, 2014, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $6.1 million. Due to uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate of when cash settlements with the taxing authority will occur. Warranties and indemnifications Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our navigation services or products infringe a third party's intellectual property rights or for other specified reasons. 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 litigation in which our customers have been named as defendants. See Part I, Item 3, "Legal Proceedings." As it relates to past indemnification requests or notices, in certain situations we have agreed to defend or indemnify our customers for the indemnity demands. For those notices where we have not agreed to provide indemnity or defense to date, or future demands for indemnity, we may in the future agree to defend and indemnify our customers, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe our navigation services and products infringe the asserted intellectual property rights. Alternatively, we may reject certain of our customers' indemnity demands, including the outstanding demands, which may lead to disputes with our customers, negatively impact our relationships with them or result in litigation against us. Our customers may also claim that any rejection of their indemnity demands constitutes a material breach of our agreements with them, allowing them to terminate such agreements. If, as a result of indemnity demands, we make substantial payments, our relationships with our customers are negatively impacted, or any of our customer agreements is terminated, our business, operating results and financial condition could be materially harmed. As of June 30, 2014, any costs in connection with such indemnity demands which are probable and estimable have been recorded in our consolidated financial statements. 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 director and officer insurance policy that limits our potential exposure. We believe the 55



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fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as of June 30, 2014. Off-balance sheet arrangements During fiscal 2014, 2013 and 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Recent accounting pronouncements In June 2013, the FASB ratified Emerging Issues Task Force (EITF) Issue 13-C, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" which concludes an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. We will adopt this amendment beginning July 1, 2014. The result of adoption may be to reclassify certain long term liabilities for uncertain income tax positions to reduce the carrying value of long term deferred tax assets. However, the adoption is not expected to result in a material change to the tax provision. We do not believe that the impact on our consolidated financial statements will be significant. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (ASU No. 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of fiscal 2018. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.


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