Revenue Recognition

9 Months Ended

Sep. 30, 2022

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

We categorize our products and services and related revenue among the following categories:

•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and managed security services;

•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;

•Fiber Infrastructure Services, which include dark fiber, optical services and equipment;

•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services; and

•Affiliate Services, which include communications services provided to our affiliates that we also provide to our external customers.

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the nine months ended September 30, 2022 and 2021. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards. The amounts in the tables below include the Latin American business revenues prior to it being sold on August 1, 2022.:

	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
	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)
Compute and Application Services	$	235	(100)	135	287	(126)	161
IP and Data Services	831		—	831	890	—	890
Fiber Infrastructure Services	381		(54)	327	412	(56)	356
Voice and Other	315		(3)	312	345	(3)	342
Affiliate Services	57		(57)	—	56	(56)	—
Total revenue	$	1,819	(214)	1,605	1,990	(241)	1,749

	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	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)
Compute and Application Services	$	795	(354)	441	850	(380)	470
IP and Data Services	2,600		—	2,600	2,659	—	2,659
Fiber Infrastructure Services	1,175		(165)	1,010	1,210	(164)	1,046
Voice and Other	978		(11)	967	1,078	(8)	1,070
Affiliate Services	170		(170)	—	167	(167)	—
Total revenue	$	5,718	(700)	5,018	5,964	(719)	5,245

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(1) Includes lease revenue which is not within the scope of ASC 606.

Operating Lease Income

We lease various dark fiber, office facilities, colocation facilities, switching facilities, other network sites and service equipment 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 September 30, 2022 and 2021, our gross rental income was $175 million and $202 million, which represents approximately 10% of our operating revenue for both periods. For the nine months ended September 30, 2022 and 2021, our gross rental income was $581 million and $601 million, which represents approximately 10% 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, net of amounts reclassified as held for sale as of September 30, 2022 and December 31, 2021:

	September 30, 2022		December 31, 2021
	(Dollars in millions)
Customer receivables (1)	$	593	640
Contract assets (2)	30		35
Contract liabilities (3)	287		247

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(1)Reflects gross customer receivables of $620 million and $679 million, net of allowance for credit losses of $27 million and $39 million, at September 30, 2022 and December 31, 2021, respectively. As of December 31, 2021, this amount excludes customer receivables classified as held for sale of $83 million.

(2)As of December 31, 2021, no amounts have been classified as held for sale.

(3)As of December 31, 2021, amount excludes contract liabilities classified as held for sale of $58 million.

Contract liabilities are consideration we have received from our customers or billed in advance of providing the goods or services promised in the future. We defer recognizing this consideration 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 and liabilities held for sale in our consolidated balance sheets. During the three and nine months ended September 30, 2022, we recognized $20 million and $128 million, respectively, of revenue that was included in contract liabilities of $305 million as of January 1, 2022, including contract liabilities that were classified as held for sale. During the three and nine months ended September 30, 2021, we recognized $30 million and $151 million, respectively, of revenue that was included in contract liabilities of $385 million as of January 1, 2021.

Performance Obligations

As of September 30, 2022, we expect to recognize approximately $3.8 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. We expect to recognize approximately 80% of this revenue through 2024, with the balance recognized thereafter.

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), (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606 and (iii) the value of unsatisfied performance obligations for contracts which relate to our recently completed divestiture.

Contract Costs

The following table provides changes in our contract acquisition costs and fulfillment costs:

	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021
	Acquisition Costs		Fulfillment Costs (1)	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	78	101	75	124
Costs incurred	16		20	15	22
Amortization	(14)		(17)	(14)	(21)
Change in contract costs held for sale (1)	—		1	—	(27)
End of period balance	$	80	105	76	98

	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	Acquisition Costs		Fulfillment Costs (1)	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	76	99	78	122
Costs incurred	45		63	44	68
Amortization	(41)		(57)	(46)	(65)
Change in contract costs held for sale (1)	—		—	—	(27)
End of period balance	$	80	105	76	98

(1)The beginning of period balance for the three and nine months ended September 30, 2022 excluded fulfillment costs classified as held for sale of $28 million and $27 million, respectively.

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 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 expected contract life of approximately 34 months for our 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 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.