(13) 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 offerings are comprised of various related product groups generally defined around the type of offering to which the customer is licensing access, referred to as SPGs. Each SPG is responsible for the revenue, costs and associated capital expenditures of its respective solutions. The SPGs enable licensing and sales, make pricing and product decisions, engineer networks and deliver solutions to customers, and support customers for specific telecom and Internet infrastructure requirements.

In connection with the Company’s continued increase in scope and scale, effective January 1, 2017, and in 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 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 among the Company’s reportable segments 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 that more closely align to third party pricing on the offerings that 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 solutions 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 Solutions Transfers”).

The Company’s legacy Waves, IP and Sonet SPGs, after giving effect to the Dedicated Solutions 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 Solutions 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 SPGs 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 access to raw bandwidth infrastructure to customers that require more control of their internal networks. These solutions 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 its customers, who “light” the fiber using their own optronics. The Company’s mobile infrastructure solutions permit 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 access to lit bandwidth infrastructure solutions over the Company’s metro, regional, and long-haul fiber networks. The segment uses customer-accessed optronics to light the fiber, and the Company’s customers pay for its offerings based on the amount and type of bandwidth access they acquire. The Company’s offerings within this segment include wavelengths, wholesale IP 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 connectivity and lit bandwidth telecommunication solutions to medium and large enterprises. The Company’s offerings within this segment include Ethernet, enterprise private and connectivity products, managed products and cloud-based computing and storage products. Solutions range from point-to-point data connections to multi-site managed networks to international outsourced IT infrastructure environments. The contract terms in the Enterprise Networks segment tend to range from one to ten years.

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 offerings within this segment include the provision of colocation space, power and interconnection solutions 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 components for the purpose of aggregating and accommodating 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 offerings using a variety of technologies for businesses. Voice provides a full range of local voice offerings 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 functions such as telephony (including cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication offerings, 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 components, media types and geographies. Allstream also offers a range of products that help small and medium business (“SMB”) customers implement the right data and networking solutions for their business. Those scalable products make use of technologies including Ethernet, IP/MPLS VPN Solutions, and wavelength solutions. Allstream provides support to 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 offerings 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. The contract terms typically provide 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 component 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.


	For the three months ended December 31, 2017
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	200.5	$	117.3	$	145.9	$	59.9	$	123.5	$	6.4	$	—	$	653.5
Segment Adjusted EBITDA		161.0		49.2		57.0		31.5		29.9		1.3		—		329.9
Capital expenditures		114.5		31.8		19.5		24.7		2.9		—		—		193.4


	As of and for the six months ended December 31, 2017
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	396.0	$	236.4	$	283.6	$	118.3	$	251.2	$	11.5	$	—	$	1,297.0
Segment Adjusted EBITDA		315.2		100.8		106.5		60.9		60.7		2.4		—		646.5
Total assets		4,701.7		1,257.6		1,293.2		1,007.1		487.1		32.3		156.9		8,935.9
Capital expenditures		221.8		65.5		40.5		52.6		6.4		—		—		386.8


	For the three months ended December 31, 2016
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	177.5	$	106.4	$	114.7	$	52.5	$	51.6	$	4.0	$	—	$	506.7
Segment Adjusted EBITDA		141.0		44.6		39.7		27.6		9.6		0.9		—		263.4
Capital expenditures		130.9		37.4		20.1		23.3		1.9		—		—		213.6


	For the six months ended December 31, 2016
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	351.6	$	212.5	$	229.1	$	103.7	$	106.1	$	8.6	$	—	$	1,011.6
Segment Adjusted EBITDA		279.2		89.2		80.3		53.9		19.3		2.1		—		524.0
Capital expenditures		261.7		70.9		41.0		46.2		2.1		—		—		421.9


	As of June 30, 2017
	Fiber Solutions		Transport		Enterprise Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Total assets	$	4,504.6	$	1,230.0	$	1,385.7	$	994.4	$	406.2	$	33.2	$	185.3	$	8,739.4

Reconciliation from Total Segment Adjusted EBITDA to income from operations before taxes:


	For the three months ended December 31,
	2017		2016
	(in millions)
Total Segment Adjusted EBITDA	$	329.9	$	263.4
Interest expense		(73.1)		(53.7)
Depreciation and amortization expense		(195.9)		(131.4)
Transaction costs		(5.9)		(6.2)
Stock-based compensation		(23.5)		(34.5)
Foreign currency gain/(loss) on intercompany loans		3.1		(17.4)
Non-cash loss on investments		(0.2)		(0.2)
Income from operations before income taxes	$	34.4	$	20.0


	For the six months ended December 31,
	2017		2016
	(in millions)
Total Segment Adjusted EBITDA	$	646.5	$	524.0
Interest expense		(146.7)		(107.0)
Depreciation and amortization expense		(380.0)		(269.9)
Transaction costs		(14.2)		(9.2)
Stock-based compensation		(51.3)		(66.5)
Loss on extinguishment of debt		(4.9)		—
Foreign currency gain/(loss) on intercompany loans		13.9		(28.6)
Non-cash loss on investments		(0.3)		(0.5)
Income from operations before income taxes	$	63.0	$	42.3