Revenue Recognition

6 Months Ended

Jun. 30, 2024

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 services, professional services, and other ancillary services, (ii) federal broadband and state support payments, 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 and private line services;

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

•Grow, which includes existing and emerging products and services in which we are significantly investing, including dark fiber and wavelengths services; and

•Affiliate Services, which are (i) communications services that we provide to our affiliates and also provide to external customers and (ii) application development and support services that we provide to our affiliates, as described further in Note 8—Affiliate Transactions.

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 June 30, 2024				Three Months Ended June 30, 2023
	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	$	237	(20)	217	283	(24)	259
Voice and Other	132		(4)	128	150	(4)	146
Fiber Broadband	98		(3)	95	123	(3)	120
Harvest	240		(31)	209	275	(36)	239
Nurture	89		(2)	87	94	(2)	92
Grow	33		(2)	31	39	—	39
Affiliate Services	560		(12)	548	503	(11)	492
Total revenue	$	1,389	(74)	1,315	1,467	(80)	1,387

	Six Months Ended June 30, 2024				Six Months Ended June 30, 2023
	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	$	489	(41)	448	576	(49)	527
Voice and Other	265		(8)	257	306	(8)	298
Fiber Broadband	197		(6)	191	245	(6)	239
Harvest	479		(63)	416	542	(73)	469
Nurture	178		(4)	174	199	(4)	195
Grow	67		(2)	65	77	—	77
Affiliate Services	1,106		(24)	1,082	1,063	(22)	1,041
Total revenue	$	2,781	(148)	2,633	3,008	(162)	2,846

____________________________________________________________

(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 revenue are included in Operating Revenue in our consolidated statements of operations.

For the three months ended June 30, 2024 and 2023, our gross rental revenue was $71 million and $78 million, respectively, which represented approximately 5% of our operating revenue for both periods. For the six months ended June 30, 2024 and 2023, our gross rental revenue was $142 million and $158 million, respectively, which represented approximately 5% of our operating revenue for both periods.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of June 30, 2024 and December 31, 2023:

	June 30, 2024		December 31, 2023
	(Dollars in millions)
Customer receivables (1)	$	228	210
Contract assets	7		7
Contract liabilities	245		269

______________________________________________________________________

(1)Reflects gross customer receivables, including gross affiliate receivables, of $258 million and $239 million, net of allowance for credit losses of $30 million and $29 million, at June 30, 2024 and December 31, 2023, 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 six months ended June 30, 2024, we recognized $13 million and $148 million, respectively, of revenue that was included in contract liabilities of $269 million as of January 1, 2024. During the three and six months ended of June 30, 2023, we recognized $10 million and $149 million, respectively, of revenue that was included in contract liabilities of $343 million as of January 1, 2023.

Performance Obligations

As of June 30, 2024, we expect to recognize approximately $2.7 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. As of June 30, 2024, the transaction price related to unsatisfied performance obligations that are expected to be recognized for the remainder of 2024, 2025 and thereafter was $721 million, $1.0 billion and $996 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 June 30, 2024			Three Months Ended June 30, 2023
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning Balance	$	57	47	58	46
Cost Incurred	9		9	13	9
Amortization	(10)		(9)	(12)	(10)
Ending Balances	$	56	47	59	45

	Six Months Ended June 30, 2024			Six Months Ended June 30, 2023
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning Balance	$	58	46	61	46
Cost incurred	19		19	22	19
Amortization	(21)		(18)	(24)	(20)
Ending Balances	$	56	47	59	45

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.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of 50 months for mass markets customers and average contract life of 35 months for business customers. Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in Other Current Assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next 12 months is included in Other Non-Current Assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.