Revenue Recognition

9 Months Ended

Sep. 30, 2021

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

Beginning in the first quarter of 2021, we categorize our products, services and 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 tables provide disaggregation of revenue from contracts with customers based on service offering for the three and nine months ended September 30, 2021 and 2020. It also shows 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, 2021				Three Months Ended September 30, 2020
	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	$	287	(126)	161	274	(124)	150
IP and Data Services	890		—	890	878	—	878
Fiber Infrastructure Services	412		(56)	356	379	(55)	324
Voice and Other	345		(3)	342	387	(2)	385
Affiliate Services	56		(56)	—	53	(53)	—
Total revenue	$	1,990	(241)	1,749	1,971	(234)	1,737

	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
	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	$	850	(380)	470	814	(371)	443
IP and Data Services	2,659		—	2,659	2,639	—	2,639
Fiber Infrastructure Services	1,210		(164)	1,046	1,116	(157)	959
Voice and Other	1,078		(8)	1,070	1,213	(6)	1,207
Affiliate Services	167		(167)	—	153	(153)	—
Total revenue	$	5,964	(719)	5,245	5,935	(687)	5,248

_____________________________________________________________________

(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, 2021 and 2020, our gross rental income was $202 million and $197 million, respectively, which represents approximately 10% of our operating revenue for both periods. For the nine months ended September 30, 2021 and 2020, our gross rental income was $601 million and $565 million, respectively, which represents 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, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
	(Dollars in millions)
Customer receivables (1) (2)	$	618	683
Contract assets (3)	32		38
Contract liabilities (4)	259		385

_____________________________________________________________________

(1)Reflects gross customer receivables of $657 million and $728 million, net of allowance for credit losses of $39 million and $45 million, at September 30, 2021 and December 31, 2020, respectively.

(2)As of September 30, 2021, amount excludes customer receivables reclassified as held for sale of $82 million.

(3)As of September 30, 2021, no amounts have been reclassified as held for sale.

(4)As of September 30, 2021, amount excludes contract liabilities reclassified as held for sale of $62 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, 2021, we recognized $30 million and $151 million, respectively, of revenue that was included in contract liabilities as of January 1, 2021. During the three and nine months ended September 30, 2020, we recognized $29 million and $158 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020.

Performance Obligations

As of September 30, 2021, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $3.6 billion. We expect to recognize approximately 85% of this revenue through 2023, 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 divestiture.

Contract Costs

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

	Three Months Ended September 30, 2021			Three Months Ended September 30, 2020
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	75	124	77	122
Costs incurred	15		22	14	21
Amortization	(14)		(21)	(15)	(22)
Reclassified as held for sale (1)	—		(27)	—	—
End of period balance	$	76	98	76	121

	Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	78	122	79	121
Costs incurred	44		68	44	65
Amortization	(46)		(65)	(47)	(65)
Reclassified as held for sale (1)	—		(27)	—	—
End of period balance	$	76	98	76	121

(1)Represents the amounts reclassified as held for sale related to our planned divestiture. See Note 2—Planned Divestiture of the Latin American 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.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average expected customer life of approximately 30 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 an annual basis.