Segment Information

We report the following four segments in our consolidated financial statements: consumer, business, wholesale and hosting. Each of the segments is described further below:


•	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^TM TV services. Our legacy services offered to these customers include local and long-distance services.

•

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

•

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, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include resale of our local access services, the sale of 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 services, pole and floor space rentals, and database services.


•	Hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global, governmental and wholesale customers.

Our segment results are summarized below:



	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014		2013
	(Dollars in millions)
Total segment revenues	$	4,288		4,276		8,572		8,532
Total segment expenses	2,118			2,041		4,217		3,969
Total segment income	$	2,170		2,235		4,355		4,563
Total margin percentage	51		%	52	%	51	%	53	%
Consumer:
Revenues	$	1,500		1,494		3,009		3,005
Expenses	599			574		1,182		1,123
Income	$	901		920		1,827		1,882
Margin percentage	60		%	62	%	61	%	63	%
Business:
Revenues	$	1,564		1,525		3,123		3,030
Expenses	972			912		1,938		1,769
Income	$	592		613		1,185		1,261
Margin percentage	38		%	40	%	38	%	42	%
Wholesale:
Revenues	$	866		910		1,728		1,816
Expenses	283			301		559		575
Income	$	583		609		1,169		1,241
Margin percentage	67		%	67	%	68	%	68	%
Hosting:
Revenues	$	358		347		712		681
Expenses	264			254		538		502
Income	$	94		93		174		179
Margin percentage	26		%	27	%	24	%	26	%

During the first quarter of 2014, we adopted several changes with respect to the assignment of certain expenses to our segments. We have restated the previously reported segment results for the three and six months ended June 30, 2013, to conform to the current presentation. The nature of the most significant changes and the related effect on segment expenses for the three and six months ended June 30, 2013, are as follows:


•	The method for allocating certain shared costs of consumer sales and care, including bad debt expense and credit card fees, was revised, which resulted in an increase in consumer segment expenses of $22 million and $42 million with a corresponding decrease in business segment expenses for the three and six months ended June 30, 2013, respectively; and

•

Hosting segment expenses have been conformed to the reporting of our other segments’ expenses. Specifically, our integration efforts and centralization of certain administrative functions reached the point where it has become more practical to discontinue including certain finance, information technology, legal and human resources expenses in the hosting segment, which resulted in a decrease of $21 million and $39 million in hosting segment expenses for the three and six months ended June 30, 2013, respectively.

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

•

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 service), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), VoIP and Verizon Wireless services;


•	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 allow 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 governmental and business customers; and


•	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,
	2014		2013	2014	2013
	(Dollars in millions)
Strategic services	$	2,298	2,186	4,579	4,350
Legacy services	1,803		1,923	3,632	3,875
Data integration	187		167	361	307
Other	253		249	507	506
Total operating revenues	$	4,541	4,525	9,079	9,038

During 2013, operating revenues attributable to portions of certain bundled services were revised from legacy services to strategic services. Specifically, the revision resulted in a reduction of revenues from legacy services of $33 million and $64 million and a corresponding increase in revenues from strategic services for the three and six months ended June 30, 2013, respectively. The revision was in response to over-allocating a percentage of the discounts to broadband services revenues and under-allocating a percentage of the discounts to local and long-distance services revenues under bundled services arrangements, which resulted in strategic services revenues being understated and legacy services revenues being overstated.

During 2013, operating revenues attributable to certain Competitive Local Exchange Carrier ("CLEC") services were revised from strategic services to legacy services. Specifically, the revision resulted in a reduction of revenue from strategic services of $10 million and $19 million and a corresponding increase in revenues from legacy services for the three and six months ended June 30, 2013, respectively. The revision was in response to recording certain legacy services revenues generated through CLEC services arrangements as strategic services revenues, which resulted in strategic services revenues being overstated and legacy services revenues being understated.

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. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. Because we centrally manage the activities that generate these other operating revenues, we do not allocate these revenues to any of our four segments presented above.

We recognize revenue in our statement of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our statement of operations also reflects the related expense for the amounts we remit to the government agencies. The total amount of such surcharges that we included in revenue aggregated approximately $136 million and $121 million for the three months ended June 30, 2014 and 2013, respectively, and approximately $267 million and $249 million for the six months ended June 30, 2014 and 2013, respectively. Those USF surcharges where we record revenue are included in the "other" operating revenues and transaction tax surcharges are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to include in our bills to customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. We assign each of our customers to a single segment and report all of the revenues we derive from that customer to that segment, with the exception of hosting revenue generated from business and wholesale customers, which is reported as hosting segment revenues. We report our segment expenses for our four segments as follows:


•	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


•	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 or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Similarly, we do not assign to our segments severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources). 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. Similarly, we exclude other income (expense) from our segment results.

The following table reconciles segment income to net income:



	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014		2013
	(Dollars in millions)
Total segment income	$	2,170		2,235		4,355		4,563
Other operating revenues	253			249		507		506
Depreciation and amortization	(1,093		)	(1,123	)	(2,200	)	(2,240	)
Other unassigned operating expenses	(675		)	(646	)	(1,354	)	(1,332	)
Other income (expense), net	(332		)	(321	)	(654	)	(598	)
Income tax expense	(130		)	(125	)	(258	)	(332	)
Net income	$	193		269		396		567

We do not have any single customer that provides more than 10% of our total operating revenues. Substantially all of our revenues come from customers located in the United States.