Segment Information

Segment Data

During the fourth quarter of 2014, we implemented a new organizational structure designed to strengthen our ability to attain our operational, strategic and financial goals. As a result of this reorganization, we now operate and report the following two segments in our consolidated financial statements:

•

Business. Consists generally of providing strategic, legacy and data integration products and services to enterprise, wholesale and governmental customers, including other communication providers. Our strategic products and services offered to these customers include our private line (including special access), broadband, Ethernet, MPLS, Voice over Internet Protocol ("VoIP"), network management services, colocation, managed hosting and cloud hosting services. Our legacy services offered to these customers primarily include switched access and local and long-distance voice services, including the sale of unbundled network elements ("UNEs") which allow our wholesale customers to use our network or a combination of our network and their own networks to provide voice and data services to their customers; and


•	Consumer. Consists generally of providing strategic and legacy products and services to residential customers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism TV services. Our legacy services offered to these customers include local and long-distance voice services.

The results of our business and consumer segments are summarized below:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014 ⁽¹⁾		2015		2014 ⁽¹⁾
	(Dollars in millions)
Total segment revenues	$	4,161		4,288		8,355		8,572
Total segment expenses	2,142			2,117		4,215		4,213
Total segment income	$	2,019		2,171		4,140		4,359
Total margin percentage	49		%	51	%	50	%	51	%
Business:
Revenues	2,659			2,788		5,356		5,563
Expenses	1,525			1,516		3,009		3,019
Income	$	1,134		1,272		2,347		2,544
Margin percentage	43		%	46	%	44	%	46	%
Consumer:
Revenues	$	1,502		1,500		2,999		3,009
Expenses	617			601		1,206		1,194
Income	$	885		899		1,793		1,815
Margin percentage	59		%	60	%	60	%	60	%

______________________________________________________________________


⁽¹⁾	Reflects the recasting of segment results discussed in the next section entitled "Recent Changes in Segment Reporting."

Recent Changes in Segment Reporting

We have recast our previously reported segment results due to the reorganization of our management structure in the fourth quarter of 2014. Consequently, we have adopted several changes with respect to the assignment of certain expenses to our segments and have restated our previously-reported segment results to conform to the current presentation. The nature of the most significant changes to segment expenses are as follows:


•	Certain business segment expenses were reassigned to consumer segment expense; and


•	Certain business segment expenses were reassigned to corporate overhead.

For the three months ended June 30, 2014, the segment recast resulted in an increase in consumer expenses of $2 million, and a decrease in business expenses of $3 million. For the six months ended June 30, 2014, the segment recast resulted in an increase in consumer expenses of $12 million, and a decrease in business expenses of $16 million.

Product and Service Categories

We currently categorize our products, services and revenues among the following four categories:

•

Strategic services, which include primarily broadband, private line (including special access), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including our facilities-based video services, which we now offer in fourteen markets), VoIP and Verizon Wireless services;


•	Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allow a local communications network to link to networks in remote locations);


•	Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers; and

•

Other revenues, which consist primarily of Universal Service Fund ("USF") support and USF surcharges. We receive both federal and state USF support, which are government subsidies designed to reimburse us for the portion of the cost of providing certain telecommunications services, such as in high-cost rural areas that we are not able to recover from our customers. USF surcharges are the amounts we collect based on specific items we list on our customers' invoices to fund the Federal Communications Commission's ("FCC") universal service programs. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. Because we centrally manage the activities that generate these other operating revenues, these revenues are not included in our segment revenues.

Our operating revenues for our products and services consisted of the following categories:



	Three Months Ended June 30,			Six Months Ended June 30,
	2015		2014	2015	2014
	(Dollars in millions)
Strategic services	$	2,332	2,289	4,652	4,560
Legacy services	1,687		1,812	3,422	3,651
Data integration	142		187	281	361
Other	258		253	515	507
Total operating revenues	$	4,419	4,541	8,870	9,079

During the first quarter of 2015, we determined that certain products and services associated with our acquisition of SAVVIS, Inc. are more closely aligned to legacy services than to strategic services. As a result, these operating revenues are now reflected as legacy services. The revision resulted in a reduction of revenue from strategic services of $9 million and $19 million and a corresponding increase in revenue from legacy services for the three and six months ended June 30, 2014.

We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the related expense for the amounts we remit to the government agencies. The total amount of such surcharges that we included in revenues aggregated approximately $139 million and $136 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $274 million and $267 million for the six months ended June 30, 2015 and 2014, respectively. Those USF surcharges, where we record revenue, are included in "other" operating revenues and transaction tax surcharges are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to include in our bills to customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

Allocations of Revenues and Expenses

Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. Segment revenues are based upon each customer's classification as either business or consumer. We report our segment revenues based upon all services provided to that segment's customers. Our segment expenses for our two segments include specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities and allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses. We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Similarly, severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources) are not assigned to our segments. Interest expense is also excluded from segment results because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments. Other income (expense) is not monitored as a part of our segment operations and is therefore excluded from our segment results.

The following table reconciles segment income to net income:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015		2014
	(Dollars in millions)
Total segment income	$	2,019		2,171		4,140		4,359
Other operating revenues	258			253		515		507
Depreciation and amortization	(1,048		)	(1,093	)	(2,088	)	(2,200	)
Other unassigned operating expenses	(680		)	(676	)	(1,369	)	(1,358	)
Other expense, net	(315		)	(332	)	(641	)	(654	)
Income tax expense	(91		)	(130	)	(222	)	(258	)
Net income	$	143		193		335		396

We do not have any single customer that provides more than 10% of our total consolidated operating revenues. Substantially all of our consolidated revenues come from customers located in the United States.