Segment Information

6 Months Ended

Jun. 30, 2011

Segment Information

Segment Information

(12) Segment Information

        We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business and wholesale customers, including local exchange, long distance, Internet access and broadband services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. In connection with our acquisition of Qwest on April 1, 2011, we revised the way we categorize our products and services and report our related revenues. Currently, we categorize our products and services into the following three categories:

• •

  Strategic services, which include primarily private line (including special access), broadband, MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting, video, voice over Internet Protocol, or VoIP, services and Verizon Wireless services;

  •

  Legacy services, which include primarily local, long-distance, switched access (including public access), integrated services digital network, or ISDN, services and traditional wide area network, or WAN, services; and

  •

  Data integration, which is telecommunications equipment we sell that is located on customers' premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers.

        Our operating revenues for our products and services consisted of the following categories for the three and six months ended June 30, 2011 and 2010:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
	(Dollars in millions)
Strategic services	$	1,737		507		2,276		1,009
Legacy services		2,265		1,083		3,256		2,203
Data integration		151		43		182		83
Other		253		139		388		277
Total operating revenues	$	4,406		1,772		6,102		3,572

        Other operating revenues include revenue from universal support funds which allows us to recover a portion of our costs under federal and state cost recovery mechanisms and certain surcharges to our customers, including billings for our required contributions to several USF programs. These surcharge billings to our customers are reflected on a gross basis in our statements of operations (included in both operating revenues and expenses) and aggregated approximately $150 million for the six months ended June 30, 2011 and $61 million for the six months ended June 30, 2010. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. We centrally manage the activities that generate other operating revenues and consequently these revenues are not included in any of our three segments described below.

        Prior to April 1, 2011, our operations were reported as a single segment. In connection with our acquisition of Qwest on April 1 2011, we now manage our business in three operating segments: (i) regional markets (which consists generally of providing products and services to consumers, small- to medium-sized businesses and regional enterprise customers), (ii) business markets (which consists generally of providing products and services to enterprise and government customers) and (iii) wholesale markets (which consists generally of providing products and services to other communications providers). Our chief operating decision maker now reviews discrete financial information for each of these segments to evaluate performance and allocate resources. The information reviewed by our chief operating decision maker does not include asset information by segment. We will continue to refine our segment reporting to reflect ongoing changes in the way we manage our business.

        Our segment revenues include all revenues from strategic services, legacy services and data integration. Our segment expenses include direct expenses, which are specific, incremental 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. Our segment financial results also reflects allocations, using activity-based costing and other methodologies, of most other expenses that we report in cost of products and services and selling, general and administrative expenses. However, we do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrally managed. Other unassigned operating expenses consist primarily of expenses for administrative functions (such as finance, information technology, legal and human resources), severance expenses, restructuring charges, and pension and postretirement benefits expenses for all employees. Interest expense is also excluded from segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. In addition, other (expense) income does not relate to our segment operations and is therefore excluded from our segment results. We have recast our prior period operating results based on our new segment reporting criteria.

        Segment information for the three and six months ended June 30, 2011 and 2010 is summarized below:

		Three months ended June 30,				Six months ended June 30,
		2011		2010		2011		2010
		(Dollars in millions)
Total segment revenues		$	4,153		1,633		5,714		3,295
Total segment expenses			1,828		594		2,409		1,190
Total segment income		$	2,325		1,039		3,305		2,105
Total margin percentage			56%		64%		58%		64%
Regional markets:
	Revenues	$	2,256		1,165		3,374		2,352
	Expenses		973		432		1,404		875
	Income	$	1,283		733		1,970		1,477
	Margin percentage		57%		63%		58%		63%
Business markets:
	Revenues	$	922		67		986		134
	Expenses		551		31		580		59
	Income	$	371		36		406		75
	Margin percentage		40%		54%		41%		56%
Wholesale markets:
	Revenues	$	975		401		1,354		809
	Expenses		304		131		425		256
	Income	$	671		270		929		553
	Margin percentage		69%		67%		69%		68%

        The following table reconciles segment income to net income for the three and six months ended June 30, 2011 and 2010:

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
	(Dollars in millions)
Total segment income	$	2,325			1,039			3,305			2,105
Other operating revenues		253			139			388			277
Depreciation and amortization		(1,198	)		(358	)		(1,567	)		(711	)
Other unassigned operating expenses		(921	)		(297	)		(1,203	)		(603	)
Other (expense) income, net		(294	)		(136	)		(419	)		(268	)
Income tax expense		(63	)		(149	)		(191	)		(309	)
Net income	$	102			238			313			491