(12) SEGMENT REPORTING

The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company's notes to its financial statements. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance.

As the Company has increased in scope and scale, it has developed its management and reporting structure to support this growth. The Company’s bandwidth infrastructure, colocation and connectivity services are comprised of various related product groups generally defined around the type of service the customer is buying, referred to as Strategic Product Groups ("SPG" or "SPGs"). Each SPG is responsible for the revenue, costs and associated capital expenditures of its respective services. The SPGs enable sales, make pricing and product decisions, engineer networks and deliver services to customers, and support customers for their specific telecom and Internet infrastructure services.

In connection with the Company’s continued increase in scope and scale, effective January 1, 2017, and contemplation of the Company’s acquisition of Electric Lightwave which was completed March 1, 2017, the Company's chief operating decision maker ("CODM"), the Company's Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. Under the new structure, the Company’s reportable segments will include: Fiber Solutions, Transport, Enterprise Networks, Zayo Colocation, Allstream and Other. The change in structure had the impact of consolidating and/or regrouping existing SPGs and product offerings between the Company’s reportable segment and disaggregating the legacy Zayo Canada segment among the existing SPGs and a new Allstream reportable segment. The change in structure also resulted in adjustments to intercompany pricing which more closely align to third party pricing on the services which are provided between the Company’s SPGs.

The Company’s legacy SPGs included Dark Fiber and Mobile Infrastructure Group (“MIG”). Effective January 1, 2017, the Dark Fiber and MIG SPGs were merged together and are now reported as part of the Fiber Solutions reporting segment. Waves and Ethernet services that are provided on dedicated dark fiber strands and colocation facilities that support only dark fiber customers which were historically reported as part of the Waves, Ethernet or zColo SPGs were transferred to the Fiber Solutions reportable segment effective January 1, 2017 (the “Dedicated Services Transfers”).

The Company’s legacy Waves, IP and Sonet SPGs, after giving effect to the Dedicated Services Transfers, are now reported under the Company’s Transport reportable segment.

The Company’s legacy Ethernet and Cloud SPGs, after giving effect to the Dedicated Services Transfers, are now reported under the Company’s Enterprise Networks segment.

The Company’s legacy Zayo Canada reporting segment was disaggregated based upon the products offered by the legacy Zayo Canada segment to the Company’s existing SPGs and two new SPG were established: Voice and Small and Medium Business (“SMB”).

The Company’s segments are further described below:

Fiber Solutions. Through the Fiber Solutions segment, the Company provides raw bandwidth infrastructure to customers that require more control of their internal networks. These services include dark fiber, dedicated lit networks and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. The Company leases dark fiber pairs (usually 2 to 12 total fibers) to our customers, who “light” the fiber using their own optronics. The Company’s mobile infrastructure services provide direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Fiber Solutions customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms in the Fiber Solutions segment tend to range from three to twenty years.

Transport. The Transport segment provides lit bandwidth infrastructure solutions over the Company’s metro, regional, and long-haul fiber networks. The segment uses optronics to light the fiber, and the Company’s customers pay for service based on the amount and type of bandwidth they purchase. The Company’s services within this segment include wavelengths, wholesale IP services and SONET. The Company targets customers who require a minimum of 10G of bandwidth across their networks. Transport customers include carriers, content providers, financial services companies, healthcare, government entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to range from two to five years.

Enterprise Networks. The Enterprise Networks segment provides communication solutions to medium and large enterprises. The Company’s services within this segment include Internet, managed Wide Area Network (“WAN”), Ethernet, managed security and cloud based compute and storage products. Solutions range from point-to-point data connections to multi-site managed networks to international outsourced IT infrastructure environments.

Zayo Colocation (zColo). The Colocation segment provides data center infrastructure solutions to a broad range of enterprise, carrier, cloud, and content customers. The Company’s services within this segment include the provision of colocation space, power and interconnection services in North America and Western Europe. Solutions range in size from single cabinet solutions to 1MW+ data center infrastructure environments. The Company’s data centers also support a large component of the Company’s networking equipment for the purpose of aggregating and distributing data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five years.

Allstream. The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data services using a variety of technologies for businesses. Voice provides a full range of local voice services allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified Communications is the integration of real-time communication services such as telephony (including Cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication services, such as integrated voicemail and e-mail. Unified Communications provides a set of products that give users the ability to work and communicate across multiple devices, media types and geographies. Allstream also offers a range of data services that help small and medium customers implement the right data and networking solutions for their business. Those scalable data services make use of technologies including Ethernet services, IP/MPLS VPN Solutions, and wavelength services. Allstream provides services to approximately 70,000 customers in the SMB market while leveraging its extensive network and product offerings. These include IP, internet, voice, IP Trunking, cloud private branch exchange, collaboration services and unified communications.

Other. The Other segment is primarily comprised of ZPS. ZPS provides network and technical resources to customers who wish to leverage our expertise in designing, acquiring and maintaining networks. Services are typically provided for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication equipment sales.

Effective January 1, 2017, revenues for all of the Company’s products are included in one of the Company’s six segments. This segment presentation has been recast for all periods presented for comparability. The results of operations for each segment include an allocation of certain indirect costs and corporate related costs, including overhead and third party-financed debt. The allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of indirect and corporate costs. Management has evaluated the allocation methods utilized to allocate these costs and determined they are systematic, rational and consistently applied. Identifiable assets for each reportable segment are reconciled to total consolidated assets including unallocated corporate assets and intersegment eliminations. Unallocated corporate assets consist primarily of cash and deferred taxes.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is the primary measure used by the Company’s CODM to evaluate segment operating performance.

The Company defines Segment Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, and non-cash income/(loss) on equity and cost method investments. The Company uses Segment Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting of future periods. The Company believes that the presentation of Segment Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of the Company’s results with the results of other companies that have different financing and capital structures.

Segment Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by the Company and its Compensation Committee for purposes of determining bonus payouts to employees.

Segment Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of the Company’s results from operations and operating cash flows as reported under GAAP. For example, Segment Adjusted EBITDA:

does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

does not reflect changes in, or cash requirements for, working capital needs;

does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on the Company’s debt; and

does not reflect cash required to pay income taxes.

The Company’s computation of Segment Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate segment Adjusted EBITDA in the same fashion.


	As of and for the three months ended March 31, 2017
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	179.6	$	110.5	$	121.7	$	53.6	$	79.3	$	5.5	$	—	$	550.2
Segment Adjusted EBITDA		137.6		45.7		46.6		28.7		22.0		1.4		—		282.0
Capital expenditures		119.9		40.2		22.6		23.7		1.9		—		—		208.3


	As of and for the nine months ended March 31, 2017
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	531.2	$	323.0	$	350.8	$	157.3	$	185.4	$	14.1	$	—	$	1,561.8
Segment Adjusted EBITDA		416.8		134.9		126.9		82.6		41.3		3.5		—		806.0
Total assets		4,319.7		1,252.3		1,180.0		931.0		644.8		31.5		189.1		8,548.4
Capital expenditures		381.6		111.1		63.6		69.9		4.0		—		—		630.2


	As of and for the three months ended March 31, 2016
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	169.4	$	102.6	$	105.3	$	47.9	$	48.0	$	4.8	$	—	$	478.0
Segment Adjusted EBITDA		131.3		42.5		37.4		24.2		6.1		1.3		—		242.8
Capital expenditures		111.0		30.3		24.3		17.2		2.3		—		—		185.1


	As of and for the nine months ended March 31, 2016
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	476.6	$	284.4	$	244.4	$	145.0	$	48.0	$	16.0	$	—	$	1,214.4
Segment Adjusted EBITDA		364.2		122.6		105.8		74.5		6.1		3.9		—		677.1
Capital expenditures		315.1		90.1		63.7		45.5		2.3		—		—		516.7


	As of June 30, 2016
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Total assets	$	3,780.9	$	964.8	$	849.2	$	884.3	$	72.6	$	33.5	$	142.2		$	6,727.5

Reconciliation from Total Segment Adjusted EBITDA to income/(loss) from operations before taxes:


	For the three months ended March 31,
	2017		2016
	(in millions)
Total Segment Adjusted EBITDA	$	282.0	$	242.8
Interest expense		(63.0)		(57.7)
Depreciation and amortization expense		(155.7)		(137.2)
Transaction costs		(8.4)		(14.2)
Stock-based compensation		(26.5)		(33.5)
Loss on extinguishment of debt		(4.5)		—
Foreign currency gain/(loss) on intercompany loans		3.9		(11.1)
Non-cash loss on investments		(0.2)		(0.6)
Income/(loss) from operations before income taxes	$	27.6	$	(11.5)


	For the nine months ended March 31,
	2017		2016
	(in millions)
Total Segment Adjusted EBITDA	$	806.0	$	677.1
Interest expense		(170.0)		(162.7)
Depreciation and amortization expense		(425.6)		(368.0)
Transaction costs		(17.6)		(17.5)
Stock-based compensation		(93.0)		(122.5)
Loss on extinguishment of debt		(4.5)		—
Foreign currency gain/(loss) on intercompany loans		(24.7)		(28.9)
Non-cash loss on investments		(0.7)		(1.2)
Income/(loss) from operations before income taxes	$	69.9	$	(23.7)