Segment Information

Segment Data

We are organized into operating segments based on customer type, business and consumer. These operating segments are our two reportable segments in our consolidated financial statements:

•

Business Segment. Consists generally of providing strategic, legacy and data integration products and services to small, medium and enterprise business, wholesale and governmental customers, including other communication providers. Our strategic products and services offered to these customers include our MPLS, private line (including special access), Ethernet, high-speed Internet, colocation, managed hosting and other ancillary services. Our legacy services offered to these customers primarily include switched access and local and long-distance voice services, including the sale of unbundled network elements ("UNEs") which allow our wholesale customers to use all or part of our network to provide voice and data services to their customers. Our data integration offerings include the sale of telecommunications equipment located on customers' premises and related professional services, all of which are described further below under the heading "Product and Service Categories"; and


•	Consumer Segment. Consists generally of providing strategic and legacy products and services to residential customers. Our strategic products and services offered to these customers include our high-speed Internet, video (including our Prism TV services) and wireless services. Our legacy services offered to these customers include local and long-distance voice services.

The results of our business and consumer segments are summarized below:



	Three Months Ended March 31,
	2016			2015 ⁽¹⁾
	(Dollars in millions)
Total segment revenues	$	4,093		4,194
Total segment expenses	2,051			2,071
Total segment income	$	2,042		2,123
Total margin percentage	50		%	51	%

Business segment:
Revenues	$	2,604		2,697
Expenses	1,427			1,463
Income	$	1,177		1,234
Margin percentage	45		%	46	%
Consumer segment:
Revenues	$	1,489		1,497
Expenses	624			608
Income	$	865		889
Margin percentage	58		%	59	%

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⁽¹⁾	Reflects the recasting of segment results discussed in the next section entitled "Changes in Segment Reporting."

Changes in Segment Reporting

We continually review, evaluate and refine our expense allocations to better reflect how we view and manage our operations, and as a result, during the first quarter of 2016, we implemented several changes with respect to the assignment of certain expenses to our reportable segments. We have recast our previously-reported segment results for the three months ended March 31, 2015, to conform to the current presentation. The nature of the most significant changes to segment expenses are as follows:


•	Certain marketing and advertising expenses were reassigned from the business segment to the consumer segment;


•	Certain service delivery costs were reassigned from the consumer segment to the business segment;


•	Centralized human resources training costs were reassigned from the business and consumer segments to corporate overhead; and


•	Marketing direct mail costs and certain printing expenses were reassigned from corporate overhead to the business and consumer segments.

For the three months ended March 31, 2015, the segment expense recast resulted in an increase in consumer expenses of $19 million and a decrease in business expenses of $21 million.

Product and Service Categories

We categorize our products, services and revenues among the following four categories:

•

Strategic services, which include primarily high-speed Internet, MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), private line (including special access), Ethernet, colocation, hosting (including cloud hosting and managed hosting), video (including our facilities-based video services, which we now offer in 16 markets), Voice over Internet Protocol ("VoIP"), Verizon Wireless and other ancillary services;


•	Legacy services, which include primarily local and long-distance voice services, including the sale of UNEs, switched access and Integrated Services Digital Network ("ISDN") services (which use regular telephone lines to support voice, video and data applications);


•	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 operating revenues, which consist primarily of CAF support payments, USF support payments and USF surcharges. We receive federal support payments from both CAF Phase 1 and CAF Phase 2 programs, and support payments from both federal and state USF programs. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and high-speed Internet infrastructure in high-cost rural areas where we are not able to recover our costs from our customers. USF surcharges are the amounts we collect based on specific items we list on our customers' invoices to fund the FCC's universal service 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, these revenues are not included in our segment revenues.

From time to time, we may change the categorization of our products and services.

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



	Three Months Ended March 31,
	2016		2015
	(Dollars in millions)
Strategic services
Business high-bandwidth data services (1)	$	738	687
Business low-bandwidth data services (2)	481		532
Business hosting services (3)	307		318
Other business strategic services (4)	54		45
Consumer high-speed Internet services (5)	667		635
Other consumer strategic services (6)	107		103
Total strategic services revenues	2,354		2,320

Legacy services
Business legacy voice services (7)	622		670
Other business legacy services (8)	287		306
Consumer legacy voice services (7)	634		688
Other consumer legacy services (9)	80		70
Total legacy services revenues	1,623		1,734

Data integration
Business data integration	115		139
Consumer data integration	1		1
Total data integration revenues	116		140

Other revenues
High-cost support revenue (10)	174		134
Other revenue (11)	134		123
Total other revenues	308		257

Total revenues	$	4,401	4,451

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(1)	Includes MPLS and Ethernet revenue
(2)	Includes private line and high-speed Internet revenue
(3)	Includes colocation, hosting (including cloud hosting and managed hosting) and hosting area network revenue
(4)	Includes primarily VoIP, video and IT services revenue
(5)	Includes high-speed Internet and related services revenue
(6)	Includes video and Verizon wireless revenue
(7)	Includes local and long-distance voice revenue
(8)	Includes UNEs, public access, switched access and other ancillary revenue
(9)	Includes other ancillary revenue
(10)	Includes CAF Phase 1, CAF Phase 2 and federal and state USF support revenue
(11)	Includes USF surcharges

We recognize revenues 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 related expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated approximately $146 million and $135 million for the three months ended March 31, 2016 and 2015, respectively. These USF surcharges, where we record revenue, are included in "other" operating revenues and these 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 bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

Allocations of Revenues and Expenses

Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. Segment revenues are based upon each customer's classification as either business or consumer. We report our segment revenues based upon all services provided to that segment's customers. Our segment expenses for our two reportable segments include specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are (i) directly associated with specific segment customers or activities and (ii) 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. Generally speaking, severance expenses, restructuring expenses and 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 consolidated basis and have not allocated assets or debt to specific segments. 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 segment income to net income:



	Three Months Ended March 31,
	2016			2015
	(Dollars in millions)
Total segment income	$	2,042		2,123
Other operating revenues	308			257
Depreciation and amortization	(976		)	(1,040	)
Other unassigned operating expenses	(680		)	(691	)
Other expense, net	(314		)	(326	)
Income tax expense	(144		)	(131	)
Net income	$	236		192

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