Segment Information

6 Months Ended

Jun. 30, 2013

Segment Information

Segment Information

(8)   Segment Information

        During the first quarter of 2013, we announced a reorganization of our operating segments. Consequently, beginning with the first quarter of 2013, we are reporting the following four segments in our consolidated financial statements: consumer, business, wholesale and data hosting. The primary purpose of the reorganization was to strengthen our focus on the business market while continuing our commitment to our wholesale, hosting and consumer customers. The reorganization combined business sales and operations functions that formerly resided in the enterprise markets—network segment and the regional markets segment into the new unified business segment. The remaining customers serviced by the regional markets segment became the new consumer segment.

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  Consumer.  Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism TV services. Our legacy services offered to these customers include local and long-distance service;

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  Business.  Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and government customers. Our strategic products and services offered to these customers include our private line (including special access), broadband, Ethernet, Multiprotocol Label Switching ("MPLS"), Voice over Internet Protocol ("VoIP"), and network management services. Our legacy services offered to these customers include local and long-distance service;

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  Wholesale.  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), dedicated internet access and MPLS. Our legacy services offered to these customers include resale, unbundled network elements ("UNEs") which allow our wholesale customers the use of 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 other services, including billing and collection, pole rental, floor space and database services; and

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  Data hosting.  Consists primarily of providing colocation, managed hosting and cloud hosting services to national and international enterprise and government customers.

        We have restated previously reported segment results for the three and six months ended June 30, 2012, due to the above-described restructuring of our business. Segment results are summarized below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Dollars in millions)
Total segment revenues	$	4,276		4,346		8,532		8,690
Total segment expenses		2,062		2,063		4,007		4,083
Total segment income	$	2,214		2,283		4,525		4,607
Total margin percentage		51.8%		52.5%		53.0%		53.0%
Consumer:
Revenues	$	1,494		1,540		3,005		3,104
Expenses		551		568		1,077		1,135
Income	$	943		972		1,928		1,969
Margin percentage		63.1%		63.1%		64.2%		63.4%
Business:
Revenues	$	1,525		1,537		3,029		3,045
Expenses		937		943		1,818		1,853
Income	$	588		594		1,211		1,192
Margin percentage		38.6%		38.6%		40.0%		39.1%
Wholesale:
Revenues	$	910		946		1,817		1,908
Expenses		301		313		575		625
Income	$	609		633		1,242		1,283
Margin percentage		66.9%		66.9%		68.4%		67.2%
Data hosting:
Revenues	$	347		323		681		633
Expenses		273		239		537		470
Income	$	74		84		144		163
Margin percentage		21.3%		26.0%		21.1%		25.8%

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

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

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  Legacy services, which include primarily local, long-distance, switched 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);

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  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

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  Other revenues, which consist primarily of Universal Service Fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Dollars in millions)
Strategic services	$	2,164		2,078		4,306		4,136
Legacy services		1,945		2,098		3,919		4,239
Data integration		167		170		307		315
Other		249		266		506		532
Total operating revenues	$	4,525		4,612		9,038		9,222

        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 $249 million and $272 million for the six months ended June 30, 2013 and 2012, 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 in the segment results table above.

        Our segment revenues include all revenues from our strategic, legacy and data integration as described in more detail above. Segment revenues are based upon each customer's classification to an individual segment. We report our segment revenues based upon all services provided to that segment's customers, with the exception of data hosting revenue generated from business and wholesale customers, which is reported in data hosting segment revenues. We report our segment expenses for our four segments as follows:

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  Direct expenses, which primarily are specific 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

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  Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses.

        We do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrally managed. Similarly, severance expenses, restructuring expenses and, subject to an exception for our data hosting segment, certain centrally managed administrative functions (such as finance, information technology, legal and human resources) are not assigned to our segments. 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. Other income (expense) does not relate to our segment operations and is therefore excluded from our segment results. In addition, our assets and capital expenditures are not monitored by or reported to the chief operating decision maker ("CODM") by segment.

        The following table reconciles segment income to net income:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Dollars in millions)
Total segment income	$	2,214		2,283		4,525		4,607
Other operating revenues		249		266		506		532
Depreciation and amortization		(1,123)		(1,208)		(2,240)		(2,416)
Other unassigned operating expenses		(625)		(684)		(1,294)		(1,412)
Other income (expense), net		(321)		(534)		(598)		(857)
Income tax expense		(125)		(49)		(332)		(180)
Net income	$	269		74		567		274