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Commercial Services Revenue, Cost of Revenue, and Gross Profit:
Our commercial services revenue is generated from hosting and maintaining software and networks for public safety 9-1-1
service for wireless, and Voice over Internet Protocol (“VoIP”) service providers, and operators of next generation 9-1-1 infrastructure
(mainly state and local governments). It also includes revenue from hosted applications and infrastructure software for Location-
Based Services (“LBS”) including turn-by-turn navigation and locator applications, and maintenance of text messaging platform
software. This revenue primarily consists of monthly recurring service fees recognized in the month earned. Hosted LBS service and
9-1-1 fees are generally priced based on units served during the period, such as the number of customer cell sites, the number of
connections to Public Service Answering Points (“PSAPs”), or the number of customer subscribers or sessions using our technology.
Revenue generated by client software applications for wireless subscribers is generally on a per-subscriber per month basis. We also
earn services revenue through nonrecurring engineering (“NRE”) custom software development contracts. Maintenance fees on our
systems and software licenses are usually collected in advance and recognized ratably over the contractual maintenance period.
Unrecognized maintenance fees are included in deferred revenue. Services also include custom software development, implementation
and related service projects under time and materials or fixed-fee contracts, which are reported using percentage-of-completion
accounting.
Commercial services revenue in 2013 was $8.7 million, or 5% lower than in 2012, reflecting 7% higher revenue from 9-1-1
related services, offset by 16% lower application services revenue. Commercial services revenue in 2012 was $15.7 million or 9%
lower than for 2011 due mainly to lower volume from the navigation and locator applications and lower software maintenance
revenue, partly offset by the higher revenue from 9-1-1 services including $2.0 million from the acquired microDATA business.
The direct cost of our services revenue consists primarily of compensation and benefits, licensed location-based application
content, network access, data feed and circuit costs for network operation centers and co-location facilities, and equipment and
software maintenance. Direct cost of commercial services revenue decreased $6.4 million, or 9% in 2013 compared to 2012 due
mainly to lower contractor labor and other direct costs as part of cost containment actions taken during the year. Direct cost of
commercial services revenue were $10.6 million, or 13% lower in 2012 than in 2011 mainly due to lower direct labor and other direct
costs, including licensed content. The direct cost of commercial services includes amortization of capitalized software development
costs of $2.5 million, $2.7 million, and $6.9 million in 2013, 2012, and 2011, respectively. The decrease in capitalized software
development amortization cost in 2012 over 2011 reflects the write-down of amortizable intangible assets in the second quarter of
2012.
Commercial services gross profit in 2013 was $2.3 million, or 3% lower than in 2012 due mainly to lower volume of
application services revenue from white label wireless carrier revenue-sharing arrangements. Commercial services gross profit in 2012
was $5.1 million, or 5% lower than in 2011 due mainly to the impact of lower applications revenue including the effect of a pricing
adjustment by a major navigation application wireless carrier customer effective mid-year 2012.
Commercial Systems Revenue, Cost of Revenue, and Gross Profit:
We sell communications systems to wireless carriers and state and local governments incorporating our licensed software for
enablement of Next Generation 9-1-1 call routing and computer-aided responder dispatch, as well as licenses for location-based
wireless services and text messaging infrastructure software. We also earn revenue from the sale of patents and licensing of our
intellectual property including payments for past patent infringement liabilities, upfront and non-refundable license fees, and royalty
fees. Revenue from larger deployments of Next Generation 9-1-1 technology, incorporating our software and third party components,
are long term contracts reported using percentage of completion accounting. Licensing fees for our carrier software are generally a
function of its volume of usage in our customers’ networks during the relevant period. In all cases, revenue from the licensing of our
intellectual property is recognized when all four of the requisite revenue recognition criteria are met.
Commercial systems revenue in 2013 was $3.9 million or 16% lower than in 2012 as a result of about 60% lower Next
Generation 9-1-1 revenue due to delays of system deployments dependent on the readiness of our channel partners and customers,
partially offset by approximately 35% higher LBS platform sales. Revenue from patent sales and other intellectual property
transactions remained about the same at $2.8 million, for 2013 and 2012. The Next Generation 9-1-1 operations of microDATA,
acquired in July 2012, contributed $5.2 million in 2013 compared to $8.7 million systems revenue in 2012 primarily due to funding
delays. Commercial systems revenue increased $7.2 million, or 44% in 2012 compared to 2011.
The direct cost of commercial systems revenue consists primarily of compensation and benefits, third-party hardware and
software purchased for integration and resale, travel expenses, and consulting fees as well as the amortization of acquired and
capitalized software development costs. The direct cost of commercial systems increased $1.4 million, or 9% in 2013 compared to
2012 reflecting an increase in labor and direct costs for customer-related custom messaging and location-based system development
projects. The direct cost of commercial systems increased $1.9 million, or 14%, in 2012 compared to 2011 reflects an increase in labor
and other direct costs of the acquired microDATA operations. The direct cost of systems includes amortization of capitalized software
development costs of $4.9 million, $5.0 million, and $3.9 million, respectively, in 2013, 2012, and 2011. The increase in capitalized
