Segment Information

Segment Data

In connection with our acquisition of Level 3 (discussed further in Note 2—Acquisition of Level 3), effective November 1, 2017, we implemented a new organization structure and began managing our operations in two segments: business and consumer. Our consumer segment remains substantially unchanged under this reorganization, and our newly reorganized business segment includes the Legacy CenturyLink enterprise segment operations and the Legacy Level 3 operations. In addition, we reassigned our information technology, managed hosting, cloud hosting and hosting area network operations back into the business segment, thereby eliminating a former non-reportable operating segment. At June 30, 2018, we had the following two reportable segments:

•

Business Segment. This segment consists generally of providing products and services to small, medium and enterprise business, wholesale and government customers, including other communication providers. Our products and services offered to these customers include our local and long-distance voice, VPN data network, private line (including business data services), Ethernet, information technology, wavelength, broadband, colocation and data center services, managed services, professional and other services provided in connection with selling equipment, network security and various other ancillary services, all of which are described further under "Products and Services Categories"; and


•	Consumer Segment. This segment consists generally of providing products and services to residential customers. Our products and services offered to these customers include our broadband, local and long-distance voice, video and other ancillary services.

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018		2017
	(Dollars in millions)
Total reportable segment revenues	$	5,717		3,907		11,479		7,944
Total reportable segment expenses	3,093			2,169		6,275		4,375
Total reportable segment adjusted EBITDA	$	2,624		1,738		5,204		3,569
Total margin percentage	46		%	44	%	45	%	45	%

Business segment:
Revenues	$	4,365		2,470		8,748		5,060
Expenses	2,524			1,538		5,094		3,104
Adjusted EBITDA	$	1,841		932		3,654		1,956
Margin percentage	42		%	38	%	42	%	39	%
Consumer segment:
Revenues	$	1,352		1,437		2,731		2,884
Expenses	569			631		1,181		1,271
Adjusted EBITDA	$	783		806		1,550		1,613
Margin percentage	58		%	56	%	57	%	56	%

Product and Service Categories

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


•	IP and data services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;


•	Transport and infrastructure, which include broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber services and other ancillary services;


•	Voice and collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary service;


•	IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services; and

•

Regulatory revenues, which consists of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenues. We receive federal support payments from both federal and state USF programs and from the federal CAF program. The USF and CAF support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services. We generate other operating revenues from the leasing and subleasing of space in our office buildings, warehouses and other properties and from rental income associated with the failed-sale-leaseback. Because we centrally manage the activities that generate these regulatory 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,
	2018		2017	2018	2017
	(Dollars in millions)
Business segment
IP and data services ⁽¹⁾	$	1,748	744	3,485	1,501
Transport and infrastructure ⁽²⁾	1,342		797	2,691	1,691
Voice and collaboration ⁽³⁾	1,111		767	2,247	1,554
IT and managed services ⁽⁴⁾	164		162	325	314
Total business segment revenues	4,365		2,470	8,748	5,060

Consumer segment
IP and data services ⁽¹⁾	85		107	179	210
Transport and infrastructure ⁽²⁾	722		683	1,451	1,366
Voice and collaboration ⁽³⁾	545		647	1,101	1,308
Total consumer segment revenues	1,352		1,437	2,731	2,884

Non-segment revenues
Regulatory revenues ⁽⁷⁾	185		183	368	355
Total non-segment revenues	185		183	368	355

Total revenues	$	5,902	4,090	11,847	8,299

______________________________________________________________________



(1)	Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(2)	Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
(3)	Includes local, long-distance and other ancillary revenues.
(4)	Includes IT services and managed services revenues.
(5)	Includes retail video revenues (including our facilities-based video revenues).
(6)	Includes primarily broadband and equipment sales and professional services revenues.
(7)	Includes CAF Phase I, CAF Phase 2, federal and state USF support revenue, sublease rental income and failed-sale leaseback 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 $229 million and $133 million for the three months ended June 30, 2018 and 2017, respectively, and $476 million and $263 million for the six months ended June 30, 2018 and 2017, respectively. These USF surcharges, where we record revenue, and transaction taxes are assigned to the products and services categories of each segments based on the underlying 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 business and consumer segments 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 adjusted EBITDA to net income:



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018		2017
	(Dollars in millions)
Total reportable segment adjusted EBITDA	$	2,624		1,738		5,204		3,569
Regulatory revenues	185			183		368		355
Depreciation and amortization	(1,290		)	(949	)	(2,573	)	(1,829	)
Other operating expenses	(752		)	(605	)	(1,482	)	(1,097	)
Total other expense, net	(530		)	(327	)	(1,044	)	(651	)
Income before income tax expense	237			40		473		347
Income tax (benefit) expense	(55		)	23		66		167
Net income	$	292		17		407		180