OPERATING SEGMENTS

3 Months Ended

Mar. 31, 2016

Segment Reporting [Abstract]

OPERATING SEGMENTS

8. OPERATING SEGMENTS

During the three months ended March 31, 2016, we changed our organizational structure in an effort to create more effective and efficient business operations and to improve customer and product focus. In that regard, our CODM revised the information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2016, we report our financial performance based on our two new reportable segments, Data Center and Network Services and Cloud and Hosting Services, as follows:

Data Center and Network Services

Our Data Center and Network Services segment consists of colocation and Internet Protocol (“IP”) services.

Colocation

Colocation involves providing physical space within data centers and associated services such as power, interconnection, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure data centers. We sell our colocation services at 50 data centers across North America, Europe and the Asia-Pacific region. We refer to 15 of these facilities as “company-controlled,” meaning we control the data center operations, staffing and infrastructure and have negotiated long-term leases for the facilities. For company-controlled facilities, in most cases we design the data center infrastructure, procure the capital equipment, deploy the infrastructure and are responsible for the operation and maintenance of the facility. We refer to the remaining 35 data centers as “partner” sites. In these locations, a third party designs and deploys the infrastructure and provides for the operation and maintenance of the facility.

IP Connectivity

IP connectivity includes our patented Performance IP™ service, content delivery network services, IP routing hardware and software platform and Managed Internet Route Optimizer™ Controller. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our IP connectivity provides high-performance and highly-reliable delivery of content, applications and communications to end users globally. We deliver our IP connectivity through 85 IP service points around the world.

Our patented and patent-pending network route optimization technologies address inherent weaknesses of the Internet, allowing businesses to take advantage of the convenience, flexibility and reach of the Internet to connect to customers, suppliers and partners, and to adopt new IT delivery models in a scalable, reliable and predictable manner.

Cloud and Hosting Services

Our cloud and hosting services segment consists of hosted Infrastructure-as-a-Service as a cloud platform or via managed hosting. For both Infrastructure-as-a-Service options, we provision and maintain the hardware, data center infrastructure and interconnection, while allowing our customers to own and manage their software applications and content.

Cloud

Cloud services involve providing compute and storage services via an integrated platform that includes servers, storage and network. We built our next generation cloud platform with our high-density colocation, Performance IP service and OpenStack, a leading open source technology for cloud services. We deliver our cloud services in eight locations across North America, Europe and the Asia-Pacific region.

Our cloud services provide customers’ DevOps teams and IT organizations access to the entire OpenStack ecosystem of tools without the risk of vendor lock in. Combining the dedicated processing power of bare-metal servers with the agility of the virtual servers, our cloud services enable companies to achieve peak performance and on-demand scalability with the newest Intel-based single, dual and quad socket processors, and a wide range of memory options. This allows our customers to rapidly build out high-performance infrastructure environments for their applications on a global scale.

Managed Hosting

Managed hosting involves providing a single tenant infrastructure environment consisting of servers, storage and network. We deliver this customizable infrastructure platform based on enterprise-class technology to support complex application and compliance requirements for our customers. We deliver our managed hosting services in 11 locations across North America, Europe and the Asia-Pacific region.

Our managed hosting services include managed services options such as installation, configuration, administration and maintenance of operating systems, network security services, anti-virus and backup. We customize these managed services to meet our customers’ needs through a flexible statement of work and we deliver them via a secure management network. We offer eCommerce and physical retail customers a secure infrastructure environment for storing, processing and transmitting cardholder data.

Segment Results

The following table provides segment results, with prior period amounts reclassified to conform to the current presentation (in thousands):

	Three Months Ended  March 31,
	2016			2015
Revenues:
Data center and network services	$	50,872		$	54,068
Cloud and hosting services		25,052			26,718
Total revenues		75,924			80,786
Direct costs of sales and services, exclusive of depreciation and amortization:
Data center and network services		24,373			26,481
Cloud and hosting services		6,704			6,865
Total direct costs of sales and services, exclusive of depreciation and amortization		31,077			33,346
Segment profit:
Data center and network services		26,499			27,587
Cloud and hosting services		18,348			19,853
Total segment profit		44,847			47,440
Exit activities, restructuring and impairments		201			265
Other operating expenses, including direct costs of customer support, SGA and depreciation and amortization		46,847			51,294
Loss from operations		(2,201	)		(4,119	)
Non-operating expenses		7,341			6,335
Loss before income taxes and equity in earnings of equity-method investment	$	(9,542	)	$	(10,454	)

The prior year reclassifications, which did not affect total segment profit, are summarized as follows (in thousands):

	Three Months Ended March 31, 2015
	As Previously Reported		Reclassification			As Reported
Segment profit:
Data center services	$	34,834	$	(34,834	)	$	—
IP services		12,606		(12,606	)		—
Data center and network services		—		27,587			27,587
Cloud and hosting services		—		19,853			19,853
Total segment profit	$	47,440	$	—		$	47,440

Segment profit is calculated as segment revenues less direct costs of sales and services, exclusive of depreciation and amortization for the segment, and does not include any depreciation or amortization associated with direct costs. We view direct costs of sales and services as generally less-controllable, external costs and we regularly monitor the margin of revenues in excess of these direct costs. We have excluded depreciation and amortization from segment profit because it is based on estimated useful lives of tangible and intangible assets. We base depreciation and amortization on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures.