Segment Information

Segment Data

In January 2017, we implemented a new organizational structure designed to further strengthen our ability to attain our operational, strategic and financial goals. Prior to this reorganization, we operated and reported as two segments, business and consumer. As a result of this reorganization, we changed the name of the predecessor business segment to "enterprise" segment. We now have the following two reportable segments:

•

Enterprise 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, broadband, VoIP 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.

In connection with our January 2017 reorganization, we also reassigned our information technology, managed hosting, cloud hosting and hosting area network services from our former business segment to a new non-reportable operating segment.

The results of our two reportable segments, enterprise and consumer, are summarized below:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017		2016
	(Dollars in millions)
Total reportable segment revenues	$	3,617		3,929		7,385		7,860
Total reportable segment expenses	1,877			2,011		3,807		3,941
Total reportable segment income	$	1,740		1,918		3,578		3,919
Total margin percentage	48		%	49	%	48	%	50	%

Enterprise segment:
Revenues	$	2,215		2,435		4,571		4,877
Expenses	1,285			1,372		2,615		2,691
Income	$	930		1,063		1,956		2,186
Margin percentage	42		%	44	%	43	%	45	%
Consumer segment:
Revenues	$	1,402		1,494		2,814		2,983
Expenses	592			639		1,192		1,250
Income	$	810		855		1,622		1,733
Margin percentage	58		%	57	%	58	%	58	%

Additional Changes in Segment Reporting

As a part of the implementation of the new organizational structure described in "Segment Data", we made several changes with respect to the assignment of certain expenses to our reportable segments, most notably the reassignment of certain marketing and advertising expenses from the consumer segment to the enterprise segment. We have recast our previously-reported segment results for the three and six months ended June 30, 2016, to conform to the current presentation reflected in this report.

Following the consummation of our pending acquisition of Level 3 (discussed further in Note 2—Pending Acquisition of Level 3), we plan to substantially change our organizational structure. We currently expect that these organizational changes will cause us to change our current reportable segments.

Product and Service Categories

From time to time, we change the categorization of our products and services, and we may make similar changes in the future. During the second quarter of 2017, we determined that certain of our legacy services, specifically our dark fiber network leasing, are more closely aligned with our strategic services than with our legacy services. As a result, we now reflect these operating revenues as strategic services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in an increase of revenue from strategic services and a corresponding decrease in revenue from legacy services of $12 million and $24 million for the three and six months ended June 30, 2016, respectively.

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


•	Strategic services, which include primarily broadband, MPLS, Ethernet, hosting (including cloud hosting and managed hosting), video (including our facilities-based video services, which we offer in 16 markets), VoIP, information technology and other ancillary services;


•	Legacy services, which include primarily local and long-distance voice, including the sale of UNEs, private line (including special access), Integrated Services Digital Network ("ISDN") (which uses 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, the building of proprietary fiber-optic broadband networks for our governmental and business customers and the reselling of software; and

•

Other operating revenues, which consist primarily of Connect America Fund ("CAF") support payments, Universal Service Fund ("USF") support payments and USF surcharges. We receive federal support payments from both Phase 1 and Phase 2 of the CAF program, 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. We also collect USF surcharges 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,
	2017		2016	2017	2016
	(Dollars in millions)
Strategic services
Enterprise high-bandwidth data services (1)	$	760	753	1,529	1,491
Other enterprise strategic services (2)	225		328	553	655
IT and managed services (3)	162		161	314	323
Consumer broadband services (4)	661		682	1,322	1,349
Other consumer strategic services (5)	107		118	210	225
Total strategic services revenues	1,915		2,042	3,928	4,043

Legacy services
Enterprise voice services (6)	558		611	1,131	1,233
Enterprise low-bandwidth data services (7)	302		352	616	717
Other enterprise legacy services (8)	247		269	502	544
Consumer voice services (6)	562		615	1,137	1,249
Other consumer legacy services (9)	71		79	144	159
Total legacy services revenues	1,740		1,926	3,530	3,902

Data integration
Enterprise data integration	123		122	240	237
IT and managed services data integration	9		1	10	1
Consumer data integration	1		—	1	1
Total data integration revenues	133		123	251	239

Other revenues
High-cost support revenue (10)	168		173	336	347
Other revenue (11)	134		134	254	268
Total other revenues	302		307	590	615

Total revenues	$	4,090	4,398	8,299	8,799

______________________________________________________________________



(1)	Includes MPLS and Ethernet revenue
(2)	Includes primarily colocation, broadband, VOIP, video and fiber lease revenue
(3)	Includes primarily IT services, managed hosting, cloud hosting and hosting area network 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 and failed-sale-leaseback rental income

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 offsetting 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 $133 million and $144 million for the three months ended June 30, 2017 and 2016, respectively, and $263 million and $291 million for the six months ended June 30, 2017 and 2016, 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. Our segment revenues are based upon each customer's classification. We report our segment revenues based upon all services provided to that segment's customers. Our segment expenses 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 total reportable segment income to net income:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017		2016
	(Dollars in millions)
Total reportable segment income	$	1,740		1,918		3,578		3,919
Non-reportable segment revenues	171			162		324		324
Other operating revenues	302			307		590		615
Depreciation and amortization	(949		)	(987	)	(1,829	)	(1,963	)
Other operating expenses	(897		)	(753	)	(1,665	)	(1,560	)
Total other expense, net	(327		)	(330	)	(651	)	(638	)
Income before income tax expense	40			317		347		697
Income tax expense	(23		)	(121	)	(167	)	(265	)
Net income	$	17		196		180		432

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.