Revenue Recognition

9 Months Ended

Sep. 30, 2023

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

We categorize our revenue derived from our operations serving our mass markets customers, primarily within the first three categories listed below, and our revenue derived from our operations servicing our business customers, primarily in the 'Harvest', 'Nurture' and 'Grow' categories listed below:

•Other Broadband, under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure;

•Voice and Other, under which we derive revenues from (i) providing local and long-distance voice services, professional services, and other ancillary services, (ii) federal broadband and state support programs, and (iii) equipment, IT solutions and other services;

•Fiber Broadband, under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure;

•Harvest, which includes our legacy services managed for cash flow, including Time Division Multiplexing ("TDM") voice, private line and other legacy services;

•Nurture, which includes our more mature offerings, including primarily ethernet;

•Grow, which includes products and services marketed to our business customers that we anticipate will grow, including dark fiber and wavelengths services; and

•Affiliate Services, which are communications services that we also provide to external customers. In

addition, we provide to our affiliates application development and support services and network support.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following tables provide our total revenue by product and service category as well as the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:

	Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
	Total Revenue		Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Other Broadband	$	271	(23)	248	315	(27)	288
Voice and Other	145		(4)	141	164	(4)	160
Fiber Broadband	119		(3)	116	118	(3)	115
Harvest	261		(36)	225	283	(41)	242
Nurture	96		(2)	94	104	(2)	102
Grow	32		—	32	40	(2)	38
Affiliate Services	526		(11)	515	594	(11)	583
Total revenue	$	1,450	(79)	1,371	1,618	(90)	1,528

	Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
	Total Revenue		Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Other Broadband	$	847	(72)	775	975	(82)	893
Voice and Other	451		(12)	439	532	(24)	508
Fiber Broadband	362		(9)	353	342	(9)	333
Harvest	804		(109)	695	858	(123)	735
Nurture	295		(6)	289	323	(6)	317
Grow	110		—	110	118	(8)	110
Affiliate Services	1,589		(33)	1,556	1,758	(34)	1,724
Total revenue	$	4,458	(241)	4,217	4,906	(286)	4,620

____________________________________________________________

(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.

Operating Lease Revenue

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in our consolidated statements of operations.

For the three months ended September 30, 2023 and 2022, our gross rental income was $76 million and $87 million, respectively, which represents approximately 5% of our operating revenue for both the three months ended September 30, 2023 and 2022. For the nine months ended September 30, 2023 and 2022, our gross rental income was $234 million and $263 million, respectively, which represents approximately 5% of our operating revenue for both the nine months ended September 30, 2023 and 2022.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2023 and December 31, 2022:

	September 30, 2023		December 31, 2022
	(Dollars in millions)
Customer receivables (1)	$	238	297
Contract assets	8		9
Contract liabilities	280		343

______________________________________________________________________

(1)Reflects gross customer receivables, including gross affiliate receivables, of $267 million and $324 million, respectively, net of allowance for credit losses of $29 million and $27 million, at September 30, 2023 and December 31, 2022, respectively.

Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2023, we recognized $10 million and $159 million, respectively, of revenue that was included in contract liabilities of $343 million as of January 1, 2023. During the three and nine months ended September 30, 2022, we recognized $14 million and $178 million, respectively, of revenue that was included in contract liabilities of $317 million as of January 1, 2022.

Performance Obligations

As of September 30, 2023, we expect to recognize approximately $1.9 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. As of September 30, 2023, the transaction price related to unsatisfied performance obligations that are expected to be recognized for the remainder of 2023, 2024 and thereafter was $334 million, $736 million and $867 million, respectively.

These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.

Contract Costs

The following tables provide changes in our contract acquisition costs and fulfillment costs:

	Three Months Ended September 30, 2023			Three Months Ended September 30, 2022
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning Balance	$	59	45	62	47
Cost Incurred	10		9	13	9
Amortization	(12)		(9)	(13)	(10)
Ending Balances	$	57	45	62	46

	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning Balance	$	61	46	64	47
Cost incurred	32		28	38	28
Amortization	(36)		(29)	(40)	(29)
Ending Balances	$	57	45	62	46

Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities.

We amortize deferred acquisition and fulfillment costs based on the transfer of services on a straight-line basis over the average contract life of 36 months for mass markets customers and average contract life of 33 months for business customers. We include amortized fulfillment costs in cost of services and products and amortized acquisition costs in selling, general and administrative expenses in our consolidated statements of operations. We include the amount of these deferred costs that are anticipated to be amortized in the next 12 months in other current assets on our consolidated balance sheets. We include the amount of deferred costs expected to be amortized beyond the next 12 months in other non-current assets on our consolidated balance sheets. We assess deferred acquisition and fulfillment costs for impairment on a quarterly basis.