Segments

3 Months Ended

Mar. 31, 2014

Segments

NOTE 13. SEGMENTS

We operate under two business segments: Software and Network connectivity. The Software segment includes all monthly recurring revenue related to the delivery of our software applications, plus the associated professional services and setup fees, and revenue related to quarterly minimum purchase commitments, from a related party reseller (Note 12). The Network connectivity segment includes all voice and data long distance services provided to customers.

Management evaluates segment performance based on operating data (revenue, costs of revenue, and other operating expenses). Management does not evaluate and manage segment performance based on assets.

For segment reporting, we classify operating expenses as either “direct” or “indirect.” Direct expense refers to costs attributable solely to either selling and marketing efforts or research and development efforts. Indirect expense refers to costs that management considers to be overhead in running the business. In evaluating segment performance, management evaluates expenditures for both selling and marketing and research and development efforts at the segment level without the allocation of overhead expenses, such as rent, utilities and depreciation on property and equipment.

Operating segment revenues and profitability for the three months ended March 31, 2014 and 2013 were as follows (in thousands, except percentages):

	Three months ended March 31, 2014									Three months ended March 31, 2013
	Software			Network Connectivity			Consolidated			Software			Network Connectivity			Consolidated
Net revenue	$	20,009		$	17,045		$	37,054		$	16,172		$	15,473		$	31,645
Costs of revenue		8,235			10,838			19,073			6,435			10,033			16,468
Gross profit		11,774			6,207			17,981			9,737			5,440			15,177
Gross margin		59	%		36	%		49	%		60	%		35	%		48	%
Operating expenses:
Direct selling and marketing		8,813			757			9,570			6,963			992			7,955
Direct research and development		3,474			—			3,474			2,539			—			2,539
Indirect		5,266			774			6,040			4,745			999			5,744
(Loss) income from operations	$	(5,779	)	$	4,676		$	(1,103	)	$	(4,510	)	$	3,449		$	(1,061	)