Segment Information

6 Months Ended

Jun. 30, 2019

Segment Reporting [Abstract]

Segment Information

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", in the tables below. We reclassified certain prior period amounts to conform to the current period presentation.

At June 30, 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 June 30, 2019.

	Three Months Ended June 30, 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	681	290	339	—	1,730	—		1,730
Transport and Infrastructure	333		368	106	484	—	1,291	—		1,291
Voice and Collaboration	94		390	328	193	—	1,005	—		1,005
IT and Managed Services	55		66	12	2	—	135	—		135
Broadband	—		—	—	—	718	718	—		718
Voice	—		—	—	—	477	477	—		477
Regulatory	—		—	—	—	158	158	—		158
Other	—		—	—	—	64	64	—		64
Total Revenue	902		1,505	736	1,018	1,417	5,578	—		5,578
Expenses:
Cost of services and products	258		497	147	145	77	1,124	1,322		2,446
Selling, general and administrative	68		143	120	21	110	462	498		960
Less: share-based compensation	—		—	—	—	—	—	(43	)	(43	)
Total expense	326		640	267	166	187	1,586	1,777		3,363
Total adjusted EBITDA	$	576	865	469	852	1,230	3,992	(1,777	)	2,215

The following table summarizes our segment results and operating revenue detail for our product and services for the three months ended June 30, 2018.

	Three Months Ended June 30, 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	$	431	667	299	349	—	1,746	—		1,746
Transport and Infrastructure	309		381	135	539	—	1,364	—		1,364
Voice and Collaboration	94		398	371	226	—	1,089	—		1,089
IT and Managed Services	69		77	14	2	—	162	—		162
Broadband	—		—	—	—	705	705	—		705
Voice	—		—	—	—	546	546	—		546
Regulatory	—		—	—	—	185	185	—		185
Other	—		—	—	—	105	105	—		105
Total Revenue	903		1,523	819	1,116	1,541	5,902	—		5,902
Expenses:
Cost of services and products	263		500	147	167	124	1,201	1,529		2,730
Selling, general and administrative	64		145	136	23	136	504	611		1,115
Less: share-based compensation	—		—	—	—	—	—	(54	)	(54	)
Total expense	327		645	283	190	260	1,705	2,086		3,791
Total adjusted EBITDA	$	576	878	536	926	1,281	4,197	(2,086	)	2,111

The following table summarizes our segment results and operating revenue detail for our product and services for the six months ended June 30, 2019.

	Six Months Ended June 30, 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	$	840	1,369	590	680	—	3,479	—		3,479
Transport and Infrastructure	653		732	213	983	—	2,581	—		2,581
Voice and Collaboration	188		787	664	389	—	2,028	—		2,028
IT and Managed Services	112		140	24	3	—	279	—		279
Broadband	—		—	—	—	1,440	1,440	—		1,440
Voice	—		—	—	—	966	966	—		966
Regulatory	—		—	—	—	317	317	—		317
Other	—		—	—	—	135	135	—		135
Total Revenue	1,793		3,028	1,491	2,055	2,858	11,225	—		11,225
Expenses:
Cost of services and products	517		993	300	286	164	2,260	2,706		4,966
Selling, general and administrative	136		292	252	41	219	940	952		1,892
Less: share-based compensation	—		—	—	—	—	—	(76	)	(76	)
Total expense	653		1,285	552	327	383	3,200	3,582		6,782
Total adjusted EBITDA	$	1,140	1,743	939	1,728	2,475	8,025	(3,582	)	4,443

The following table summarizes our segment results and operating revenue detail for our product and services for the six months ended June 30, 2018.

	Six Months Ended June 30, 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	$	871	1,332	590	688	—	3,481	—		3,481
Transport and Infrastructure	630		780	245	1,077	—	2,732	—		2,732
Voice and Collaboration	195		808	740	457	—	2,200	—		2,200
IT and Managed Services	142		150	28	4	—	324	—		324
Broadband	—		—	—	—	1,417	1,417	—		1,417
Voice	—		—	—	—	1,103	1,103	—		1,103
Regulatory	—		—	—	—	368	368	—		368
Other	—		—	—	—	222	222	—		222
Total Revenue	1,838		3,070	1,603	2,226	3,110	11,847	—		11,847
Expenses:
Cost of services and products	535		1,014	300	343	282	2,474	3,059		5,533
Selling, general and administrative	132		297	263	47	271	1,010	1,214		2,224
Less: share-based compensation	—		—	—	—	—	—	(95	)	(95	)
Total expense	667		1,311	563	390	553	3,484	4,178		7,662
Total adjusted EBITDA	$	1,171	1,759	1,040	1,836	2,557	8,363	(4,178	)	4,185

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 $232 million and $229 million for the three months ended June 30, 2019 and June 30, 2018, respectively, and $480 million and $476 million, for the six months ended June 30, 2019 and June 30, 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 income (loss):

	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019		2018
	(Dollars in millions)
Total segment adjusted EBITDA	$	3,992		4,197		8,025		8,363
Depreciation and amortization	(1,196		)	(1,290	)	(2,384	)	(2,573	)
Impairment of goodwill	—			—		(6,506	)	—
Other operating expenses	(1,777		)	(2,086	)	(3,582	)	(4,178	)
Stock-based compensation	(43		)	(54	)	(76	)	(95	)
Operating income (loss)	976			767		(4,523	)	1,517
Total other expense, net	(474		)	(530	)	(1,002	)	(1,044	)
Income (loss) before income taxes	502			237		(5,525	)	473
Income tax expense (benefit)	131			(55	)	269		66
Net income (loss)	$	371		292		(5,794	)	407