Segment Information

3 Months Ended

Mar. 31, 2012

Segment Information

Segment Information

(9)   Segment Information

        During the three months ended March 31, 2012, our business was organized into the following operating segments:

• •

  Regional markets.  Consists generally of providing strategic and legacy products and services to residential consumers, small to medium-sized businesses and regional enterprise customers. Our strategic products and services offered to these customers include our private line, broadband, Multi-Protocol Label Switching ("MPLS"), hosting, and video services. Our legacy services offered to these customers include local and long-distance service;

  •

  Business markets.  Consists generally of providing strategic and legacy products and services to enterprise and government customers. Our strategic products and services offered to these customers include our private line, broadband, MPLS, hosting, and video services. Our legacy services offered to these customers include local and long-distance service;

  •

  Wholesale markets.  Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access) and MPLS. Our legacy services offered to these customers include unbundled network elements ("UNEs") which allow our wholesale customers the use our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services; and

  •

  Savvis operations.  Currently consists of the entire centrally-managed operations of our Savvis subsidiaries, which provides hosting and network services primarily to business customers when provided by Legacy Savvis. Some of these services are the same as those provided through our business markets segment.

        In the first quarter of 2012, we announced we were restructuring our operating segments effective April 1, 2012. We will consolidate our operations serving our business and government customers into two organizations. National and international business markets customers, all Savvis customers (except as noted below) and federal government customers will be served by the new enterprise markets group which we intend on managing in two segments: the network services segment and the data hosting services segment. Large business customers and state and local government customers in our local service area will be served by the existing regional markets segment. Wholesale customers currently in our Savvis operations segment will be served by the wholesale markets segment after our restructuring.

        Segment information is summarized below:

	Three Months Ended March 31,
	2012		2011
	(Dollars in millions)
Total segment revenues	$	4,344		1,565
Total segment expenses		1,990		582
Total segment income	$	2,354		983
Total margin percentage		54%		63%
Regional markets:
Revenues	$	2,204		1,119
Expenses		922		433
Income	$	1,282		686
Margin percentage		58%		61%
Business markets:
Revenues	$	917		64
Expenses		581		28
Income	$	336		36
Margin percentage		37%		56%
Wholesale markets:
Revenues	$	957		382
Expenses		278		121
Income	$	679		261
Margin percentage		71%		68%
Savvis operations:
Revenues	$	266		—
Expenses		209		—
Income	$	57		—
Margin percentage		21%		—

        We categorize our products and services into the following four categories:

• •

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

  •

  Legacy services, which include primarily local, long-distance, switched access, public access, integrated services digital network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations);

  •

  Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers; and

  •

  Other, which consists primarily of USF revenue and surcharges.

        Our operating revenues for our products and services consisted of the following categories:

	Three Months Ended March 31,
	2012		2011
	(Dollars in millions)
Strategic services	$	2,056		539
Legacy services		2,143		995
Data integration		145		31
Other		266		131
Total operating revenues	$	4,610		1,696

        Other operating revenues include revenues from universal service funds which allow 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 $135 million and $30 million for the three months ended March 31, 2012 and 2011, respectively. 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 these other operating revenues and consequently these revenues are not included in any of our four segments presented above.

        Our segment revenues include all revenues from our strategic services, legacy services and data integration as described in more detail above. We report our segment expenses for regional markets, business markets and wholesale markets as follows:

• •

  Direct expenses, which primarily 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; and

  •

  Allocated expenses, which are determined by applying activity-based costing and other methodologies to include network expenses, facilities expenses and other expenses such as fleet, product management and real estate expenses.

        During the first quarter of 2012, as we transitioned certain of Qwest's legacy systems to our historical company systems, we have updated how we report our direct expenses and have updated our methodology for how we allocate our expenses to our segments. Specifically, we no longer include certain fleet expenses for our regional markets segment in direct expenses; they are now allocated expenses in our regional markets, business markets and wholesale markets segments. In addition, we now more fully allocate network building rent and power expenses to our regional markets, business markets and wholesale markets segments. We have not recast our segment results for prior periods to reflect these changes in methodology, as it was deemed impracticable to do so.

        For Savvis operations, segment expenses incorporate the entire centrally-managed operations of our Savvis subsidiaries as we have yet to fully integrate them with our other segments. Consequently, all Savvis operations segment expenses have been categorized as direct expenses. We intend to continue to refine our expense methodology and begin allocating expenses to Savvis operations as we continue integrating it among our other segments during 2012.

        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 centrally-managed administrative functions (such as finance, information technology, legal and human resources), severance expenses and restructuring expenses. 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 income (expense) does not relate to our segment operations and is therefore excluded from our segment results. Our segment results do not include any intersegment revenue or expenses. Our chief operating decision maker does not review assets and capital expenditures by segment, nor does he include the centrally-managed income and expenses noted above in the calculation of segment income.

        The following table reconciles segment income to net income:

	Three Months Ended March 31,
	2012			2011
	(Dollars in millions)
Total segment income	$	2,354			983
Other operating revenues		266			131
Depreciation and amortization		(1,208	)		(369	)
Other unassigned operating expenses		(758	)		(281	)
Other income (expense)		(323	)		(125	)
Income tax expense		(131	)		(128	)
Net income	$	200			211