Segment Information

Segment Data

We are organized into operating segments based on customer type, business and consumer. These operating segments are our two reportable segments in our consolidated financial statements:

•

Business Segment. Consists generally of providing strategic, legacy and data integration products and services to small, medium and enterprise business, wholesale and governmental customers, including other communication providers. Our strategic products and services offered to these customers include our MPLS, Ethernet, colocation, hosting (including cloud hosting and managed hosting), broadband, VoIP, information technology and other ancillary services. Our legacy services offered to these customers primarily include local and long-distance voice, including the sale of unbundled network elements ("UNEs"), which allow our wholesale customers to use all or part of our network to provide voice and data services to their customers, private line (including special access), switched access and other ancillary services. Our data integration offerings include the sale of telecommunications equipment located on customers' premises and related products and professional services, all of which are described further below under the heading "Product and Service Categories"; and


•	Consumer Segment. 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, video (including our Prism TV services) and other ancillary services. Our legacy services offered to these customers include local and long-distance voice and other ancillary services.

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016		2015
	(Dollars in millions)
Total segment revenues	$	4,091		4,161		8,184		8,355
Total segment expenses	2,141			2,140		4,192		4,211
Total segment income	$	1,950		2,021		3,992		4,144
Total margin percentage	48		%	49	%	49	%	50	%

Business segment:
Revenues	$	2,597		2,658		5,201		5,355
Expenses	1,487			1,504		2,914		2,967
Income	$	1,110		1,154		2,287		2,388
Margin percentage	43		%	43	%	44	%	45	%
Consumer segment:
Revenues	$	1,494		1,503		2,983		3,000
Expenses	654			636		1,278		1,244
Income	$	840		867		1,705		1,756
Margin percentage	56		%	58	%	57	%	59	%

Changes in Segment Reporting

We continually review, evaluate and refine our expense allocations to better reflect how we view and manage our operations, and as a result, during the first half of 2016, we implemented several changes with respect to the assignment of certain expenses to our reportable segments. We have recast our previously-reported segment results for the three and six months ended June 30, 2015, to conform to the current presentation. The nature of the most significant changes to segment expenses are as follows:


•	Certain marketing and advertising expenses were reassigned from the business segment to the consumer segment;


•	Certain service delivery costs were reassigned from the consumer segment to the business segment;


•	Centralized human resources training costs were reassigned from the business and consumer segments to corporate overhead; and


•	Marketing direct mail costs and certain printing expenses were reassigned from corporate overhead to the business and consumer segments.

For the three months ended June 30, 2015, the segment expense recast resulted in an increase in consumer expenses of $19 million and a decrease in business expenses of $21 million. For the six months ended June 30, 2015, the segment expense recast resulted in an increase in consumer expenses of $38 million and a decrease in business expenses of $42 million.

Product and Service Categories

From time to time, we may change the categorization of our products and services. During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are now more closely aligned with our legacy services than with our strategic services. As a result, we now reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $401 million and $818 million (net of $2 million and $4 million of deferred revenue included in other business legacy services) for the three and six months ended June 30, 2015, respectively. In addition, our business broadband services remain a strategic service and are now included in our other business strategic services.

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

•

Strategic services, which include primarily broadband, MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), Ethernet, colocation, hosting (including cloud hosting and managed hosting), video (including our facilities-based video services, which we now offer in 16 markets), VoIP, information technology and other ancillary services;


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


•	Data integration, which includes the sale of telecommunications equipment located on customers' premises and related products and 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 operating revenues, which consist primarily of CAF support payments, USF support payments and USF surcharges. We receive federal support payments from both CAF Phase 1 and CAF Phase 2 programs, and support payments from both federal and state USF programs. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully 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 the 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 June 30,			Six Months Ended June 30,
	2016		2015	2016	2015
	(Dollars in millions)
Strategic services
Business high-bandwidth data services (1)	$	753	697	1,491	1,384
Business hosting services (2)	305		319	612	637
Other business strategic services (3)	172		155	342	315
Consumer broadband services (4)	682		652	1,349	1,287
Other consumer strategic services (5)	118		106	225	209
Total strategic services revenues	2,030		1,929	4,019	3,832

Legacy services
Business voice services (6)	611		648	1,233	1,318
Business low-bandwidth data services (7)	352		403	718	822
Other business legacy services (8)	281		293	567	597
Consumer voice services (6)	615		675	1,249	1,363
Other consumer legacy services (9)	79		70	159	140
Total legacy services revenues	1,938		2,089	3,926	4,240

Data integration
Business data integration	123		143	238	282
Consumer data integration	—		—	1	1
Total data integration revenues	123		143	239	283

Other revenues
High-cost support revenue (10)	173		132	347	266
Other revenue (11)	134		126	268	249
Total other revenues	307		258	615	515

Total revenues	$	4,398	4,419	8,799	8,870

______________________________________________________________________



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

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 and transaction taxes that we included in revenues aggregated approximately $144 million and $139 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $291 million and $274 million for the six months ended June 30, 2016 and 2015, respectively. These USF surcharges, where we record revenue, are included in "other" operating revenues and these transaction taxes 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 bill our 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 reportable 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 (i) directly associated with specific segment customers or activities and (ii) 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. Generally speaking, 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 and expense items are not monitored as a part of our segment operations and are 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,
	2016			2015		2016		2015
	(Dollars in millions)
Total segment income	$	1,950		2,021		3,992		4,144
Other operating revenues	307			258		615		515
Depreciation and amortization	(987		)	(1,048	)	(1,963	)	(2,088	)
Other unassigned operating expenses	(620		)	(682	)	(1,300	)	(1,373	)
Interest expense and other income, net	(333		)	(315	)	(647	)	(641	)
Income tax expense	(121		)	(91	)	(265	)	(222	)
Net income	$	196		143		432		335

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.