Revenue Recognition

3 Months Ended

Mar. 31, 2024

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

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

•Grow, which includes products and services that we anticipate will grow, including our colocation, dark fiber, Edge Cloud services, IP, managed security, Unified Communications and Collaboration ("UC&C"), wavelengths services and software-defined wide area networks ("SD WAN");

•Nurture, which includes our more mature offerings, including ethernet and VPN data network services;

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

•Other, which includes primarily managed and professional service solutions and content delivery network ("CDN") revenue, prior to the sale of substantially all of our CDN contracts in late 2023; and

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

From time to time, we may change the categorization of our products and services.

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the three months ended March 31, 2024 and 2023. It also provides 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 EMEA business revenue prior to it being sold on November 1, 2023. See Note 2—Divestitures of the Latin American and EMEA Businesses in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information on these divestitures.

	Three Months Ended March 31, 2024				Three Months Ended March 31, 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)
Grow	$	921	(125)	796	975	(162)	813
Nurture	385		(4)	381	438	(3)	435
Harvest	195		—	195	260	—	260
Other	30		—	30	54	—	54
Affiliate Services	59		(59)	—	57	(57)	—
Total revenue	$	1,590	(188)	1,402	1,784	(222)	1,562

_____________________________________________________________________

(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 income are included in operating revenue in our consolidated statements of operations.

For the three months ended March 31, 2024 and 2023, our gross rental income was $146 million and $181 million, which represents approximately 9% and 10% of our operating revenue, respectively.

Customer Receivables and Contract Balances

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

	March 31, 2024		December 31, 2023
	(Dollars in millions)
Customer receivables (1)	$	570	544
Contract assets	8		8
Contract liabilities	237		222

_____________________________________________________________________

(1)Reflects gross customer receivables of $581 million and $557 million, net of allowance for credit losses of $11 million and $13 million, at March 31, 2024 and December 31, 2023, respectively.

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 in our consolidated balance sheets. During the three months ended March 31, 2024, we recognized $69 million of revenue that was included in contract liabilities of $222 million as of January 1, 2024. During the three months ended March 31, 2023, we recognized $79 million of revenue that was included in contract liabilities of $281 million as of January 1, 2023, including contract liabilities that were classified as held for sale.

Performance Obligations

As of March 31, 2024, we expect to recognize approximately $4.1 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. As of March 31, 2024, the transaction price related to unsatisfied performance obligations that are expected to be recognized for the remainder of 2024, 2025 and thereafter was $1.5 billion, $1.4 billion and $1.2 billion, 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 table provides changes in our contract acquisition costs and fulfillment costs:

	Three Months Ended March 31, 2024			Three Months Ended March 31, 2023
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance(1)	$	70	97	76	106
Costs incurred	12		17	17	23
Amortization	(12)		(15)	(15)	(16)
Change in contract costs held for sale	—		—	(4)	(14)
End of period balance(2)	$	70	99	74	99

______________________________________________________________________

(1)Beginning of period balance for the three months ended March 31, 2023 excludes $6 million of acquisition costs and no fulfillment costs classified as held for sale related to the EMEA business.

(2)End of period balance for the three months ended March 31, 2023 excludes $10 million of acquisition costs and $14 million fulfillment costs classified as held for sale related to the EMEA business.

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.

We amortize deferred acquisition and fulfillment costs based on the transfer of services on a straight-line basis over the average expected contract life of approximately 36 months for our 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 twelve months in other current assets on our consolidated balance sheets. We include the amount of deferred costs expected to be amortized beyond the next twelve months in other non-current assets on our consolidated balance sheets. We assess deferred acquisition and fulfillment costs for impairment on a quarterly basis.