Segment Information

9 Months Ended

Sep. 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, as described in more detail below, 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 September 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, including 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, data center, 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. Our wholesale 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, 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 are reported in our consumer segment as regulatory revenue.

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 broadband revenue; and

• Voice, which includes 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 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 September 30, 2019.

	Three Months Ended September 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	$	417	691	295	357	—	1,760	—		1,760
Transport and Infrastructure	331		405	106	467	—	1,309	—		1,309
Voice and Collaboration	96		395	322	200	—	1,013	—		1,013
IT and Managed Services	55		59	11	1	—	126	—		126
Broadband	—		—	—	—	718	718	—		718
Voice	—		—	—	—	462	462	—		462
Regulatory	—		—	—	—	157	157	—		157
Other	—		—	—	—	61	61	—		61
Total Revenue	899		1,550	734	1,025	1,398	5,606	—		5,606
Expenses:
Cost of services and products	269		544	155	144	80	1,192	1,398		2,590
Selling, general and administrative	65		134	112	21	102	434	397		831
Less: share-based compensation	—		—	—	—	—	—	(38	)	(38	)
Total expense	334		678	267	165	182	1,626	1,757		3,383
Total adjusted EBITDA	$	565	872	467	860	1,216	3,980	(1,757	)	2,223

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

	Three Months Ended September 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	$	423	659	294	348	—	1,724	—		1,724
Transport and Infrastructure	317		374	117	537	—	1,345	—		1,345
Voice and Collaboration	90		395	361	210	—	1,056	—		1,056
IT and Managed Services	62		77	13	2	—	154	—		154
Broadband	—		—	—	—	702	702	—		702
Voice	—		—	—	—	565	565	—		565
Regulatory	—		—	—	—	181	181	—		181
Other	—		—	—	—	91	91	—		91
Total Revenue	892		1,505	785	1,097	1,539	5,818	—		5,818
Expenses:
Cost of services and products	254		491	154	158	115	1,172	1,500		2,672
Selling, general and administrative	62		141	129	18	124	474	493		967
Less: share-based compensation	—		—	—	—	—	—	(49	)	(49	)
Total expense	316		632	283	176	239	1,646	1,944		3,590
Total adjusted EBITDA	$	576	873	502	921	1,300	4,172	(1,944	)	2,228

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

	Nine Months Ended September 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	$	1,257	2,060	885	1,037	—	5,239	—		5,239
Transport and Infrastructure	984		1,137	319	1,450	—	3,890	—		3,890
Voice and Collaboration	284		1,182	986	589	—	3,041	—		3,041
IT and Managed Services	167		199	35	4	—	405	—		405
Broadband	—		—	—	—	2,158	2,158	—		2,158
Voice	—		—	—	—	1,428	1,428	—		1,428
Regulatory	—		—	—	—	474	474	—		474
Other	—		—	—	—	196	196	—		196
Total Revenue	2,692		4,578	2,225	3,080	4,256	16,831	—		16,831
Expenses:
Cost of services and products	786		1,537	455	430	244	3,452	4,104		7,556
Selling, general and administrative	201		426	364	62	321	1,374	1,349		2,723
Less: share-based compensation	—		—	—	—	—	—	(114	)	(114	)
Total expense	987		1,963	819	492	565	4,826	5,339		10,165
Total adjusted EBITDA	$	1,705	2,615	1,406	2,588	3,691	12,005	(5,339	)	6,666

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

	Nine Months Ended September 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	$	1,294	1,991	884	1,036	—	5,205	—		5,205
Transport and Infrastructure	947		1,154	362	1,614	—	4,077	—		4,077
Voice and Collaboration	285		1,203	1,101	667	—	3,256	—		3,256
IT and Managed Services	204		227	41	6	—	478	—		478
Broadband	—		—	—	—	2,119	2,119	—		2,119
Voice	—		—	—	—	1,668	1,668	—		1,668
Regulatory	—		—	—	—	549	549	—		549
Other	—		—	—	—	313	313	—		313
Total Revenue	2,730		4,575	2,388	3,323	4,649	17,665	—		17,665
Expenses:
Cost of services and products	789		1,505	454	501	397	3,646	4,559		8,205
Selling, general and administrative	194		438	392	65	395	1,484	1,707		3,191
Less: share-based compensation	—		—	—	—	—	—	(144	)	(144	)
Total expense	983		1,943	846	566	792	5,130	6,122		11,252
Total adjusted EBITDA	$	1,747	2,632	1,542	2,757	3,857	12,535	(6,122	)	6,413

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 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.

The following table provides the amount of USF surcharges and transaction taxes:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019	2018
	(Dollars in millions)
USF surcharges and transaction taxes	$	270	221	750	698

Revenue and Expenses

Our segment revenue includes all revenue from our five 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 September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(Dollars in millions)
Total segment adjusted EBITDA	$	3,980		4,172		12,005		12,535
Depreciation and amortization	(1,235		)	(1,285	)	(3,619	)	(3,858	)
Impairment of goodwill	—			—		(6,506	)	—
Other operating expenses	(1,757		)	(1,944	)	(5,339	)	(6,122	)
Stock-based compensation	(38		)	(49	)	(114	)	(144	)
Operating income (loss)	950			894		(3,573	)	2,411
Total other expense, net	(540		)	(565	)	(1,542	)	(1,609	)
Income (loss) before income taxes	410			329		(5,115	)	802
Income tax expense	108			57		377		123
Net income (loss)	$	302		272		(5,492	)	679