Segment Information | Segment Information General The Company reports segment information along the same lines that its Chief Operating Decision Maker reviews its operating results in assessing performance and allocating resources. The Company's Chief Operating Decision Maker is its Chief Executive Officer. The Company has historically operated two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provided a broad range of data, voice and managed network services to retail and wholesale business customers. The Company’s Consumer Services segment provided nationwide Internet access and related value-added services to residential customers. During the three months ended September 30, 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: Enterprise/Mid-Market, Small Business and Carrier/Transport. The Consumer Services segment was not impacted. The Company's new reportable segments are strategic business units that are aligned around distinct customer categories. The Company reorganized its business around these business units to optimize operations. The Company began reporting the disaggregated information to its Chief Operating Decision Maker during the three months ended September 30, 2015. As a result, the Company now operates the following four reportable segments: • Enterprise/Mid-Market . The Company’s Enterprise/Mid-Market segment provides a broad range of data, voice and managed network services to distributed multi-site business customers. • Small Business . The Company’s Small Business segment provides a broad range of data, voice and managed network services to small, often single-site business customers. • Carrier/Transport . The Company’s Carrier/Transport segment provides transmission capacity and other data, voice and managed network services to telecommunications carriers and large enterprises. • Consumer Services . The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. Segment Results The following table presents segment results under the Company’s new reportable segment structure and a reconciliation to consolidated loss from continuing operations before income taxes for the three and nine months ended September 30, 2015: Three Months Nine Months Ended Ended September 30, 2015 September 30, 2015 (in thousands) Enterprise/Mid-Market Revenues $ 110,051 $ 338,809 Cost of revenues (excluding depreciation and amortization) 54,574 167,062 Gross margin 55,477 171,747 Small Business Revenues 72,876 230,577 Cost of revenues (excluding depreciation and amortization) 34,059 106,577 Gross margin 38,817 124,000 Carrier/Transport Revenues 34,190 101,606 Cost of revenues (excluding depreciation and amortization) 14,839 46,124 Gross margin 19,351 55,482 Consumer Services Revenues 53,787 166,023 Cost of revenues (excluding depreciation and amortization) 18,919 59,138 Gross margin 34,868 106,885 Consolidated Revenues 270,904 837,015 Cost of revenues 122,391 378,901 Gross margin 148,513 458,114 Selling, general and administrative expenses 90,775 280,382 Depreciation and amortization 46,502 141,489 Restructuring, acquisition and integration-related costs 5,486 14,836 Interest expense and other, net 11,731 39,780 Loss on extinguishment of debt 2,482 9,734 Loss from continuing operations before income taxes $ (8,463 ) $ (28,107 ) The Company evaluates performance of its new segment structure based on segment gross margin. Segment gross margin includes revenues from external customers and related cost of revenues. Costs excluded from segment gross margin include selling, general and administrative expenses, depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and interest expense and other, net, as they are not considered in the measurement of segment performance. Management continues to evaluate the segmentation of customers within the distinct customer categories, which may result in changes to segment information in the future. Segment information for the three and nine months ended September 30, 2014 has not been restated to reflect the Company’s new reportable segment structure. The Company began recording revenue and related cost of revenue transactions at the new segment level in 2015. Management has determined that it is impracticable to restate financial information prior to 2015 to conform to the new reportable segment structure due to the level of effort required to segment customers that terminated service prior to 2015 and identify the related cost of revenue associated with those customers, as this information is not currently available. For comparability purposes, the following table presents segment results and a reconciliation to consolidated loss from continuing operations before income taxes under the Company’s previous reportable segment structure for the three and nine months ended September 30, 2014 and 2015: Three Months Ended Nine Months Ended September 30, September 30, 2014 2015 2014 2015 (in thousands) Business Services Revenues $ 237,054 $ 217,117 $ 705,273 $ 670,992 Cost of revenues (excluding depreciation and amortization) 113,785 103,472 358,604 319,763 Gross margin 123,269 113,645 346,669 351,229 Direct segment operating expenses 88,078 77,708 260,523 240,494 Segment operating income $ 35,191 $ 35,937 $ 86,146 $ 110,735 Consumer Services Revenues $ 60,691 $ 53,787 $ 187,150 $ 166,023 Cost of revenues (excluding depreciation and amortization) 21,910 18,919 67,155 59,138 Gross margin 38,781 34,868 119,995 106,885 Direct segment operating expenses 10,573 7,441 33,534 23,095 Segment operating income $ 28,208 $ 27,427 $ 86,461 $ 83,790 Consolidated Revenues $ 297,745 $ 270,904 $ 892,423 $ 837,015 Cost of revenues 135,695 122,391 425,759 378,901 Gross margin 162,050 148,513 466,664 458,114 Direct segment operating expenses 98,651 85,149 294,057 263,589 Segment operating income 63,399 63,364 172,607 194,525 Depreciation and amortization 46,716 46,502 139,186 141,489 Impairment of long-lived assets 589 — 11,360 — Restructuring, acquisition and integration-related costs 1,108 5,486 10,993 14,836 Corporate operating expenses 7,297 5,626 22,973 16,793 Interest expense and other, net 13,970 11,731 42,008 39,780 Loss on extinguishment of debt — 2,482 — 9,734 Loss from continuing operations before income taxes $ (6,281 ) $ (8,463 ) $ (53,913 ) $ (28,107 ) The Company evaluated performance of its previous segment structure based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which included costs over which segment managers had direct discretionary control, such as advertising and marketing programs, customer support expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excluded other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, stock-based compensation expense, and interest expense and other, net, as they were not considered in the measurement of segment performance. The Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. In addition, segment assets are not reported to, or used by, the Chief Operating Decision Maker and therefore, total segment assets and expenditures for additions of long-lived assets have not been disclosed. The Company has not provided information about geographic segments because substantially all of the Company’s revenues, results of operations and identifiable assets are in the United States. Revenues by Products and Services Information on revenues by groups of similar services for the three and nine months ended September 30, 2014 and 2015 is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2014 2015 2014 2015 (in thousands) Business services Retail services $ 189,122 $ 178,207 $ 573,028 $ 554,995 Wholesale services 42,788 34,190 117,200 101,606 Other services 5,144 4,720 15,045 14,391 Total revenues 237,054 217,117 705,273 670,992 Consumer services Access services 49,516 42,392 154,665 132,310 Value-added services 11,175 11,395 32,485 33,713 Total revenues 60,691 53,787 187,150 166,023 Total Revenues $ 297,745 $ 270,904 $ 892,423 $ 837,015 The Company generates business services revenue by providing a broad range of data, voice and managed network services to retail and wholesale business customers. The Company's business services revenue includes revenues from its Enterprise/Mid-Market, Small Business and Carrier/Transport segments. The Company presents its business services revenue in the following three categories: (1) retail services, which includes data, voice and managed network services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity and other services to telecommunications carriers and large enterprises; and (3) other services, which primarily consists of web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and administrative fees. The Company’s generates consumer services revenue by providing nationwide Internet access and related value-added services to residential customers. The Company presents its consumer services revenue in the following two categories: (1) access services, which includes dial-up and high-speed Internet access services; and (2) value-added services, which includes revenues from ancillary services sold as add-on features to the Company's Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and advertising revenues. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and fees for equipment. |