management’s discussion and analysis
of financial condition and results of operations

Segment Results of Operations (2 of 2)

Wireline

The Wireline segment provides customers with voice service including long distance, broadband video and data, IP network services, network access and other services. We provide these products and services to consumers and small businesses in the United States, as well as to businesses and government customers and carriers both in the United States and in over 150 other countries around the world.

Reclassifications have been made to reflect comparable operating results for the spin-off of the operations included in the Frontier transaction, which we owned through June 30, 2010 (see ’Acquisitions and Divestitures”).

Operating Revenues and Selected Operating Statistics

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Consumer retail

$

13,606

 

 

$

13,419

 

 

$

13,202

 

 

$

187

 

1.4

 

%

 

$

217

 

1.6

 

%

Small business

 

2,731

 

 

 

2,837

 

 

 

2,913

 

 

 

(106

)

(3.7

)

 

 

 

(76

)

(2.6

)

 

Mass Markets

 

16,337

 

 

 

16,256

 

 

 

16,115

 

 

 

81

 

0.5

 

 

 

 

141

 

0.9

 

 

Strategic services

 

7,607

 

 

 

6,602

 

 

 

6,195

 

 

 

1,005

 

15.2

 

 

 

 

407

 

6.6

 

 

Other

 

8,015

 

 

 

8,714

 

 

 

9,094

 

 

 

(699

)

(8.0

)

 

 

 

(380

)

(4.2

)

 

Global Enterprise

 

15,622

 

 

 

15,316

 

 

 

15,289

 

 

 

306

 

2.0

 

 

 

 

27

 

0.2

 

 

Global Wholesale

 

7,973

 

 

 

8,746

 

 

 

9,533

 

 

 

(773

)

(8.8

)

 

 

 

(787

)

(8.3

)

 

Other

 

750

 

 

 

909

 

 

 

1,514

 

 

 

(159

)

(17.5

)

 

 

 

(605

)

(40.0

)

 

Total Operating Revenues

$

40,682

 

 

$

41,227

 

 

$

42,451

 

 

$

(545

)

(1.3

)

 

 

$

(1,224

)

(2.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Connections (’000):(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total voice connections

 

24,137

 

 

 

26,001

 

 

 

28,323

 

 

 

(1,864

)

(7.2

)

 

 

 

(2,322

)

(8.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Broadband connections

 

8,670

 

 

 

8,392

 

 

 

8,160

 

 

 

278

 

3.3

 

 

 

 

232

 

2.8

 

 

FiOS Internet subscribers

 

4,817

 

 

 

4,082

 

 

 

3,286

 

 

 

735

 

18.0

 

 

 

 

796

 

24.2

 

 

FiOS Video subscribers

 

4,173

 

 

 

3,472

 

 

 

2,750

 

 

 

701

 

20.2

 

 

 

 

722

 

26.3

 

 

(1) As of end of period.

Wireline’s revenues decreased during 2011 compared to 2010 primarily driven by declines in Global Wholesale and Other Global Enterprise revenues, largely as a result of declines in voice connections and in traditional voice and data services provided to business customers, partially offset by increased revenues from our growth markets as well as the impact of the revenues of Terremark.

Mass Markets

Mass Markets operations provide local exchange (basic service and end-user access) and long distance (including regional toll) voice services, broadband services (including high-speed Internet, FiOS Internet and FiOS Video) to residential and small business subscribers.

2011 Compared to 2010

Mass Markets revenues increased slightly during 2011 compared to 2010 primarily due to the expansion of consumer and small business FiOS services (Voice, Internet, Video), partially offset by the continued decline of local exchange revenues.

As we continue to expand the number of premises eligible to order FiOS services and extend our sales and marketing efforts to attract new FiOS subscribers, we have continued to grow our subscriber base and consistently improved penetration rates within our FiOS service areas. Our pricing strategy allows us to provide competitive offerings to our customers and potential customers. As of December 31, 2011, we achieved penetration rates of 35.5% and 31.5% for FiOS Internet and FiOS Video, respectively, compared to penetration rates of 31.9% and 28.0% for FiOS Internet and FiOS Video, respectively, at December 31, 2010.

Mass Markets revenues were negatively impacted by the decline of local exchange revenues primarily due to a 7.2% decline in total voice connections resulting primarily from competition and technology substitution. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. The majority of the decline in total voice connections was sustained in the residential retail market, which experienced a 7.3% voice connection loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. There was also a 5.3% decline in small business retail voice connections, primarily reflecting challenging economic conditions, competition and a shift to both IP and high-speed circuits.

2010 Compared to 2009

The increase in Mass Markets revenue during 2010 compared to 2009 was primarily driven by the expansion of consumer and small business FiOS services (Voice, Internet and Video), which are typically sold in bundles, partially offset by the decline of local exchange revenues principally as a result of a decline in switched access lines as of December 31, 2010 compared to December 31, 2009, primarily as a result of competition and technology substitution. The majority of the decrease was sustained in the residential retail market, which experienced a 9.0% access line loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. Also contributing to the decrease was a decline of nearly 5.0% in small business retail access lines, primarily reflecting economic conditions, competition and a shift to both IP and high-speed circuits.

As of December 31, 2010, we achieved penetration rates of 31.9% and 28.0% for FiOS Internet and FiOS Video, respectively, compared to penetration rates of 28.3% and 24.7% for FiOS Internet and FiOS Video, respectively, at December 31, 2009.

Global Enterprise

Global Enterprise offers strategic services including networking products and solutions, advanced communications services, and other core communications services to medium and large business customers, multinational corporations and state and federal government customers.

2011 Compared to 2010

Global Enterprise revenues increased during 2011 compared to 2010 primarily driven by higher strategic services revenues, in part due to the inclusion of the revenues of Terremark, partially offset by lower local services and traditional circuit-based revenues and decreased revenues from the sale of customer premise equipment. Strategic services revenue increased $1.0 billion, or 15.2%, during 2011 compared to 2010 primarily due to growth in advanced services, such as managed network, call center, IP communications and our cloud offerings. Strategic services continue to be Global Enterprise’s fastest growing suite of offerings. Traditional circuit-based services such as frame relay, private line and ATM services declined compared to the similar period last year as our customer base continues to migrate to next generation IP services. The decline in customer premise equipment revenues reflects our focus on improving margins by de-emphasizing sales of equipment that are not a part of an overall enterprise solutions bundle.

2010 Compared to 2009

Global Enterprise revenues were essentially unchanged during 2010 compared to 2009. Higher customer premise equipment and strategic networking revenues were offset by lower local services and traditional circuit-based revenues. Long distance revenues declined due to the negative effects of the continuing global economic conditions and competitive rate pressures. In addition to increased customer premise equipment revenues, strategic enterprise services revenue increased $0.4 billion, or 6.3%, during 2010 compared to 2009 primarily due to higher information technology, security solution and strategic networking revenues. Strategic enterprise services continue to be Global Enterprise’s fastest growing suite of offerings. Traditional circuit-based services such as frame relay, private line and ATM services declined in 2010 compared to 2009 as our customer base continued its migration to next generation IP services.

Global Wholesale

Global Wholesale provides communications services including data, voice and local dial tone and broadband services primarily to local, long distance and other carriers that use our facilities to provide services to their customers.

2011 Compared to 2010

The decrease in Global Wholesale revenues during 2011 compared to 2010 was primarily due to a $0.4 billion decline in international voice revenues as a result of decreased MOUs in traditional voice products as a result of increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace. Switched access and interexchange wholesale MOUs declined primarily as a result of wireless substitution and connection losses. Domestic wholesale connections declined by 8.3% as of December 31, 2011 compared to December 31, 2010 due to the continued impact of competitors deemphasizing their local market initiatives coupled with the impact of technology substitution. Voice and local loop services declined during 2011 compared to 2010. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services primarily due to fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities. As a result of the upgrading customers, the number of DS1/DS3 circuits experienced a 9.5% decline as compared to the similar period in 2010.

2010 Compared to 2009

The decrease in Global Wholesale revenues during 2010 compared to 2009 was primarily due to decreased MOUs in traditional voice products, primarily as a result of increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace. Switched access and interexchange wholesale MOUs declined primarily as a result of wireless substitution and connection losses. Domestic wholesale connections declined by 9.0% as of December 31, 2010 compared to December 31, 2009 due to the continued impact of competitors deemphasizing their local market initiatives coupled with the impact of technology substitution, as well as the continued level of economic pressure. Voice and local loop services declined during 2010 compared to 2009. Continuing demand for high-capacity, high-speed digital services was partially offset by lower demand for older, low-speed data products and services. As of December 31, 2010, customer demand, as measured in DS1 and DS3 circuits, for high-capacity and high-speed digital data services increased 4.6% compared to 2009.

Other

Other revenues include such services as local exchange and long distance services from former MCI mass market customers, operator services, card services and supply sales. The decrease in revenues from other services during 2011 and 2010 was primarily due to reduced business volumes, including former MCI mass market customer losses.

Operating Expenses

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Cost of services and sales

$

22,158

 

 

$

22,618

 

 

$

22,693

 

 

$

(460

)

(2.0

)

%

 

$

(75

)

(0.3

)

%

Selling, general and administrative expense

 

9,107

 

 

 

9,372

 

 

 

9,947

 

 

 

(265

)

(2.8

)

 

 

 

(575

)

(5.8

)

 

Depreciation and amortization expense

 

8,458

 

 

 

8,469

 

 

 

8,238

 

 

 

(11

)

(0.1

)

 

 

 

231

 

2.8

 

 

Total Operating Expenses

$

39,723

 

 

$

40,459

 

 

$

40,878

 

 

$

(736

)

(1.8

)

 

 

$

(419

)

(1.0

)

 

Cost of Services and Sales

Cost of services and sales decreased during 2011 compared to 2010 due to a decrease in access costs resulting primarily from management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes, as well as lower pension and other postretirement benefit expenses. The decrease was partially offset by higher costs related to repair and maintenance expenses caused by storm-related events during the third quarter of 2011, content costs associated with continued FiOS subscriber growth and the acquisition of Terremark in the second quarter of 2011.

Cost of services and sales were essentially unchanged during 2010 compared to 2009. Decreases were primarily due to lower costs associated with compensation and installation expenses as a result of lower headcount and productivity improvements, as well as lower access costs driven mainly by management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes. In addition, our FiOS Video and Internet cost of acquisition per addition also decreased in 2010 compared to 2009. These declines were partially offset by higher customer premise equipment costs and content costs associated with continued FiOS subscriber growth.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased during 2011 compared to 2010 primarily due to lower pension and other postretirement benefits and compensation expense, partially offset by higher costs caused by storm-related events in the third quarter of 2011, as well as the acquisition of Terremark in the second quarter of 2011.

Selling, general and administrative expense decreased during 2010 compared to 2009 primarily due to the decline in compensation expense as a result of lower headcount and cost reduction initiatives, partially offset by higher gains on sales of assets in 2009.

Depreciation and Amortization Expense

Depreciation and amortization expense was effectively flat during 2011 compared to 2010 primarily due to a decrease in amortization expense as a result of a reduction in capitalized non-network software, partially offset by an increase in depreciation expense primarily due to the acquisition of Terremark in the second quarter of 2011.

Depreciation and amortization expense increased during 2010 compared to 2009 due to growth in depreciable assets.

Segment Operating Income and EBITDA

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Segment Operating Income

$

959

 

 

$

768

 

 

$

1,573

 

 

$

191

 

24.9

 

%

 

$

(805

)

(51.2

)

%

Add Depreciation and amortization expense

 

8,458

 

 

 

8,469

 

 

 

8,238

 

 

 

(11

)

(0.1

)

 

 

 

231

 

2.8

 

 

Segment EBITDA

$

9,417

 

 

$

9,237

 

 

$

9,811

 

 

$

180

 

1.9

 

 

 

$

(574

)

(5.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating income margin

 

2.4

 

%

 

1.9

 

%

 

3.7

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA margin

 

23.1

 

%

 

22.4

 

%

 

23.1

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

The changes in Wireline’s Operating income, Segment EBITDA and Segment EBITDA margin during the periods presented were primarily a result of the factors described in connection with operating revenues and operating expenses above.

Non-recurring or non-operational items excluded from Wireline’s Operating income were as follows:

(dollars in millions)

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

Severance, pension and other benefit charges

$

 

$

2,237

 

$

2,253

 

Access line spin-off related charges

 

 

 

79

 

 

51

 

Impact of divested operations

 

 

 

(408

)

 

(980

)

 

$

 

$

1,908

 

$

1,324