Segment Information

In January 2019, Jeff Storey, our CODM, announced a new organization structure and began managing our operations in the following five segments: International and Global Accounts Management, Enterprise, Small and Medium Business, Wholesale and Consumer. In addition, our segments are managed based on the direct costs of providing services to their customers and the associated selling, general and administrative costs (primarily salaries and commissions). Shared costs that were previously reported in segments are managed separately and included in operations and other. We reclassified certain prior period amounts to conform to the current period presentation.

At March 31, 2019, we had the following five reportable segments:

•

International and Global Accounts Management ("IGAM") Segment. Under our IGAM segment, we provide our products and services to approximately 200 global enterprise customers and to enterprises and carriers in three operating regions: Asia Pacific, Latin America, Europe Middle East and Africa. IGAM is responsible for working with large multinational organizations in support of their business and IT transformation strategies. We provide a portfolio of services inclusive of dark fiber; content delivery; private and public networking; hybrid IT solutions including private and public cloud services as well as consulting and professional services; and security services; all of which are described further under "Products and Services Categories"; and

•

Enterprise Segment. Under our enterprise segment, we provide our products and services to large and medium domestic and global enterprises, federal, state and local governments. Our products and services offered to these customers include our IP and Data Services suite of products, which includes VPN and hybrid networking, Ethernet and IP services; Transport and Infrastructure, which includes wavelengths and private line, dark fiber, colocation and data center services, and professional services; Voice Services, which includes local, long-distance, toll-free and unified communications services; and IT and Managed services, all of which are described further under "Products and Services Categories"; and

•

Small and Medium Business ("SMB") Segment. Under our SMB segment, we provide our products and services to small and medium businesses directly and through our indirect channel partners. We designate businesses as small or medium based on company employee count. Our products and services offered to these customers include our IP and Data Services suite of products, primarily VPN, IP and Ethernet services; Transport and Infrastructure, which includes broadband, wavelengths and private line services; Voice Services, which includes local, long-distance, national public access, VoIP and toll-free services; and IT and Managed services, all of which are described further under "Products and Services Categories"; and

•

Wholesale Segment. Under our wholesale segment, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. Customers range from large global telecom providers to small regional providers. Our products and services offered to these customers include our IP and Data Services suite of products, primarily Ethernet, VPN and IP services; Transport and Infrastructure, which includes private line, wavelengths, UNE, dark fiber, colocation and data center, and wholesale broadband services; and Voice Services, which includes long-distance, local, toll-free and contact center, and intercarrier tandem services, all of which are described further under "Products and Services Categories"; and

•

Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Our products and services offered to these customers include our broadband, local and long-distance voice, and other ancillary services. Additionally, Universal Service Fund ("USF") federal and state support payments, Connect America Fund ("CAF") federal support revenue, and other revenue from leasing and subleasing including prior year rental income associated with the 2017 failed-sale-leaseback is reported in our consumer segment as regulatory revenue in 2018.

Product and Service Categories

We categorize our products and services revenue among the following four categories for the International and Global Accounts Management, Enterprise, Small and Medium Business and Wholesale segments:


•	IP and Data Services, which includes 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 includes 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 services;


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

We categorize our products and services revenue among the following four categories for the consumer segment:


•	Broadband, which includes consumer broadband revenue; and


•	Voice, which includes consumer local and long-distance revenue; and


•	Regulatory Revenue, which consists of (i) Universal Service Fund, Connect America Fund and other support payments designed to reimburse us for various costs related to certain telecommunications services and (ii) other operating revenue from the leasing and subleasing of space; and


•	Other, which includes consumer retail video revenue (including our facilities-based video revenue), professional services and other ancillary services.

The following table summarizes our segment results and operating revenue detail for our product and services for the three months ended March 31, 2019.



	Three Months Ended March 31, 2019
	International and Global Accounts		Enterprise	Small and Medium Business	Wholesale	Consumer	Total Segments	Operations and Other		Total
	(Dollars in millions)
Revenue:
IP and Data Services	$	420	688	300	341	—	1,749	—		1,749
Transport and Infrastructure	320		364	107	499	—	1,290	—		1,290
Voice and Collaboration	94		397	336	196	—	1,023	—		1,023
IT and Managed Services	57		74	12	1	—	144	—		144
Broadband	—		—	—	—	722	722	—		722
Voice	—		—	—	—	489	489	—		489
Regulatory	—		—	—	—	159	159	—		159
Other	—		—	—	—	71	71	—		71
Total Revenue	$	891	1,523	755	1,037	1,441	5,647	—		5,647
Expenses:
Cost of Services and Products	259		496	153	141	87	1,136	1,384		2,520
Selling, general and administrative	68		149	132	20	109	478	454		932
Less: Share-based compensation	—		—	—	—	—	—	(33	)	(33	)
Total expense	327		645	285	161	196	1,614	1,805		3,419
Total adjusted EBITDA	$	564	878	470	876	1,245	4,033	(1,805	)	2,228

The following table summarizes our segment results and operating revenue detail for our product and services for the three months ended March 31, 2018.



	Three Months Ended March 31, 2018
	International and Global Accounts		Enterprise	Small and Medium Business	Wholesale	Consumer	Total Segments	Operations and Other		Total
	(Dollars in millions)
Revenue:
IP and Data Services	$	440	665	291	339	—	1,735	—		1,735
Transport and Infrastructure	321		399	110	538	—	1,368	—		1,368
Voice and Collaboration	101		410	369	231	—	1,111	—		1,111
IT and Managed Services	73		73	14	2	—	162	—		162
Broadband	—		—	—	—	712	712	—		712
Voice	—		—	—	—	557	557	—		557
Regulatory	—		—	—	—	183	183	—		183
Other	—		—	—	—	117	117	—		117
Total Revenue	$	935	1,547	784	1,110	1,569	5,945	—		5,945
Expenses:
Cost of Services and Products	272		514	153	176	158	1,273	1,530		2,803
Selling, general and administrative	68		152	127	24	135	506	603		1,109
Less: Share-based compensation	—		—	—	—	—	—	(41	)	(41	)
Total expense	340		666	280	200	293	1,779	2,092		3,871
Total adjusted EBITDA	$	595	881	504	910	1,276	4,166	(2,092	)	2,074

We recognize revenue 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 to $248 million and $246 million for the three months ended March 31, 2019 and 2018, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the product and service categories of each segment based on the underlying revenue. 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.

Revenue and Expenses

Our segment revenue includes all revenue from our International and Global Accounts Management, Enterprise, Small and Medium Business, Wholesale and Consumer segments as described in more detail above. Our segment revenue is based upon each customer's classification. We report our segment revenue based upon all services provided to that segment's customers. Our segment expenses include specific cost of service 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. Network expenses not incurred as a direct result of providing services and products to segment customers and centrally managed expenses such as Operations, Finance, Human Resources, Legal, Marketing, Product Management and IT are not assigned to segments as they are managed separately; they are reported as "Operations and Other". 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 CODM by segment. 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. Stock-based compensation and 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 segment adjusted EBITDA to net (loss) income:



	Three Months Ended March 31,
	2019			2018
	(Dollars in millions)
Total segment adjusted EBITDA	$	4,033		4,166
Depreciation and amortization	(1,188		)	(1,283	)
Impairment of goodwill	(6,506		)	—
Other operating expenses	(1,805		)	(2,092	)
Stock-based compensation	(33		)	(41	)
Operating (loss) income	(5,499		)	750
Total other expense, net	(528		)	(514	)
Income (loss) before income tax expense	(6,027		)	236
Income tax expense	(138		)	(121	)
Net (loss) income	$	(6,165	)	115