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 financial information such as 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, for a given segment. Indirect expense refers to costs that management considers to be overhead in running the business.

Operating segment revenues and profitability for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands, except percentages):

	Three Months Ended June 30, 2015									Three Months Ended June 30, 2014
				Network									Network
	Software			Connectivity			Consolidated			Software			Connectivity			Consolidated
Net revenue	$	34,052		$	19,019		$	53,071		$	24,198		$	16,913		$	41,111
Costs of revenue		14,360			11,983			26,343			10,233			10,855			21,088
Gross profit		19,692			7,036			26,728			13,965			6,058			20,023
Gross margin		58	%		37	%		50	%		58	%		36	%		49	%

Operating expenses:
Direct selling and marketing		14,668			936			15,604			11,501			933			12,434
Direct research and development		6,659			-			6,659			5,149			-			5,149
Indirect		8,695			1,217			9,912			7,299			1,018			8,317
Total operating expenses		30,022			2,153			32,175			23,949			1,951			25,900
Income (loss) from operations	$	(10,330	)	$	4,883		$	(5,447	)	$	(9,984	)	$	4,107		$	(5,877	)


	Six Months Ended June 30, 2015									Six Months Ended June 30, 2014
				Network									Network
	Software			Connectivity			Consolidated			Software			Connectivity			Consolidated
Net revenue	$	66,518		$	37,891		$	104,409		$	44,207		$	33,958		$	78,165
Costs of revenue		28,057			23,794			51,851			18,468			21,693			40,161
Gross profit		38,461			14,097			52,558			25,739			12,265			38,004
Gross margin		58	%		37	%		50	%		58	%		36	%		49	%

Operating expenses:
Direct selling and marketing		28,654			1,759			30,413			20,315			1,689			22,004
Direct research and development		12,952			-			12,952			8,623			-			8,623
Indirect		17,730			2,286			20,016			12,774			1,923			14,697
Total operating expenses		59,336			4,045			63,381			41,712			3,612			45,324
Income (loss) from operations	$	(20,875	)	$	10,052		$	(10,823	)	$	(15,973	)	$	8,653		$	(7,320	)