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 MPLS, private line (including special access), Ethernet, high-speed Internet, colocation, managed hosting, cloud hosting and other ancillary 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. Our data integration offerings include the sale of telecommunications equipment located on customers' premises and related professional services. These services include network management, installation and maintenance of data equipment and the building of proprietary fiber-optic broadband networks for our governmental and business 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 high-speed Internet, 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 September 30,					Nine Months Ended September 30,
	2015			2014 ⁽¹⁾		2015		2014 ⁽¹⁾
	(Dollars in millions)
Total segment revenues	$	4,145		4,264		12,500		12,836
Total segment expenses	2,163			2,161		6,378		6,374
Total segment income	$	1,982		2,103		6,122		6,462
Total margin percentage	48		%	49	%	49	%	50	%
Business:
Revenues	$	2,636		2,773		7,992		8,336
Expenses	1,541			1,549		4,550		4,568
Income	$	1,095		1,224		3,442		3,768
Income margin percentage	42		%	44	%	43	%	45	%
Consumer:
Revenues	$	1,509		1,491		4,508		4,500
Expenses	622			612		1,828		1,806
Income	$	887		879		2,680		2,694
Income margin percentage	59		%	59	%	59	%	60	%

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⁽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 September 30, 2014, the segment recast resulted in an increase in consumer expenses of $1 million, and a decrease in business expenses of $1 million. For the nine months ended September 30, 2014, the segment recast resulted in an increase in consumer expenses of $13 million, and a decrease in business expenses of $17 million.

Product and Service Categories

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

•

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


•	Legacy services, which include primarily local and long-distance services, including the sale of UNEs, switched access and Integrated Services Digital Network ("ISDN") services (which uses regular telephone lines to support voice, video and data applications);


•	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 CAF support, USF support and USF surcharges. We receive federal support from both CAF Phase 1 and CAF Phase 2 programs, and support from both federal and state USF programs, which are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of voice and high-speed internet capable infrastructure and the costs of network deployment, maintenance and operations in high-cost rural areas where we are not able to recover our costs from our customers. USF surcharges are the amounts we collect based on specific items we list on our customers' invoices to fund the FCC's 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 revenue detail for our products and services consisted of the following categories:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2015		2014	2015	2014
	(Dollars in millions)
Strategic services
Business high-bandwidth data services (1)	$	699	655	2,083	1,904
Business low-bandwidth data services (2)	506		574	1,555	1,792
Business hosting services (3)	324		331	961	988
Other business strategic services (4)	27		30	113	55
Consumer high-speed Internet services (5)	658		616	1,945	1,847
Other consumer strategic services (6)	105		96	314	276
Total strategic services revenues	2,319		2,302	6,971	6,862

Legacy services
Business legacy voice services (7)	638		692	1,958	2,103
Other business legacy services (8)	290		307	890	951
Consumer legacy voice services (7)	664		707	2,027	2,170
Other consumer legacy services (9)	81		71	220	204
Total legacy services revenues	1,673		1,777	5,095	5,428

Data integration
Business data integration	152		184	432	543
Consumer data integration	1		1	2	3
Total data integration revenues	153		185	434	546

Other revenues
High cost support revenue (10)	284		134	550	400
Other revenue (11)	125		116	374	357
Total other revenues	409		250	924	757

Total revenues	$	4,554	4,514	13,424	13,593

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(1)	Includes MPLS and Ethernet revenue
(2)	Includes private line and high-speed Internet revenue
(3)	Includes colocation, hosting (including cloud hosting and managed hosting) and hosting area network revenue
(4)	Includes primarily VoIP, video and IT services revenue
(5)	Includes high-speed Internet and related services revenue
(6)	Includes video and Verizon wireless revenue
(7)	Includes local and long-distance voice revenue
(8)	Includes UNEs, public access and other ancillary revenue
(9)	Includes switched access and other ancillary revenue
(10)	Includes CAF Phase 1, CAF Phase 2 and federal and state USF support revenue
(11)	Includes USF surcharges

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 $8 million and $27 million and a corresponding increase in revenue from legacy services for the three and nine months ended September 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 $137 million and $128 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $411 million and $395 million for the nine months ended September 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 September 30,					Nine Months Ended September 30,
	2015			2014		2015		2014
	(Dollars in millions)
Total segment income	$	1,982		2,103		6,122		6,462
Other operating revenues	409			250		924		757
Depreciation and amortization	(1,048		)	(1,097	)	(3,136	)	(3,297	)
Other unassigned operating expenses	(687		)	(637	)	(2,056	)	(1,995	)
Other expense, net	(327		)	(320	)	(968	)	(974	)
Income tax expense	(124		)	(111	)	(346	)	(369	)
Net income	$	205		188		540		584

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.