What changed in this filing

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Item 1. Business

2023-02-23 compared with 2022-02-24 · 46 added, 34 removed, 154 unchanged (34% of the section changed)

Business Overview and Purpose

We are an integrated facilities-based communications company engaged primarily in providing our customers with an array of communications products and services.

We are an integrated facilities-based communications company focused on providing our business and mass markets customers with a broad array of communications products and services.

Our specific products and services are detailed below under the heading "Operations - Products and Services."

Our ultimate parent company, Lumen Technologies, Inc., has cash management arrangements or loan arrangements with a majority of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends.

Under these arrangements, the majority of our cash balance is advanced on a daily basis for centralized management by an affiliate of Lumen, and most affiliate transactions are deemed to be settled at the time the transactions are recorded.

The resulting net balance at the end of each period is reported as advances to affiliates or advances from affiliates in our consolidated balance sheets.

From time to time we may declare and pay dividends to our parent, QSC.

The dividends are settled in accordance with the cash management process described above, which has the net effect of reducing our advances to affiliates or increasing our advances from affiliates.

As part of these cash management or loan arrangements, affiliates provide lines of credit to certain other affiliates.

Amounts outstanding under these lines of credit and intercompany obligations vary from time to time.

Under these arrangements, the majority of our cash balance is advanced on a daily basis for centralized management by Lumen's service company affiliate.

From time to time we may declare and pay dividends to QSC, our direct parent, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances.

We report the balance of these transfers on our consolidated balance sheet as advances to affiliates.

We were incorporated under the laws of the State of Colorado in 1911.

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Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions;

• Connect America Fund ("CAF").

Between 2015 and December 31, 2021, we received federal support payments from CAF II of the FCC's CAF program;

• Regulatory.

Between 2015 and December 31, 2021, we received significant federal support payments from the FCC's Connect America Fund ("CAF") Phase II program, and beginning in the second quarter of 2022 we began receiving much smaller support payments from the FCC's Rural Digital Opportunity Fund;

We continue to provide certain services based on older platforms to support our customers as they transition to newer technology, such as conferencing services.

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

Our and Lumen's network, through which we provide most of our products and services consists of fiber-optic and copper cables, high-speed transport equipment, electronics, voice switches, data switches and routers, and various other equipment.

Our and Lumen's network, through which we provide most of our products and services, consists of fiber-optic and copper cables, high-speed transport equipment, electronics, voice switches, data switches, routers, and various other equipment.

We operate part of our network with leased assets, and a substantial portion of our equipment with licensed software.

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We and Lumen have devoted, and plan to continue to devote, substantial resources to (i) simplify and modernize our network and legacy systems and (ii) expand our and Lumen’s network to address demand for enhanced or new products.

A key element of our network expansion plan is our Quantum Fiber buildout project.

Under this project, we propose over the next several years to construct additional fiber optic infrastructure to enable us to provide Quantum Fiber broadband services to several million additional urban and suburban locations in our ILEC markets.

Although either we or Lumen own most of our network, we lease a substantial portion of our core fiber network from several other communication companies under arrangements that will periodically need to be renewed or replaced to support our current network operations.

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We expect continued intense competition from a wide variety of sources under these evolving market conditions.

In addition to competition from large communications providers, we are facing competition from a growing number of sources, including, systems integrators, cloud service providers, software networking companies, infrastructure companies, cable companies, device providers, resellers, and smaller niche providers, among others.

In addition to competition from large communications providers, we are facing competition from a growing number of sources, including, systems integrators, hyperscalers, cloud service providers, software networking companies, infrastructure companies, cable companies, wireless services providers, device providers, resellers and smaller niche providers.

Our ability to compete hinges upon effectively enhancing and better integrating our existing products, introducing new products on a timely and cost-effective basis, meeting changing customer needs, providing high-quality information security to build customer confidence and combat cyber-attacks, extending our core technology into new applications and anticipating emerging standards, business models, software delivery methods and other technological changes.

Depending on the applicable market and requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs, are offering faster transmission speeds or lower prices, or in certain markets, are incumbent communications providers that have a longer history of providing service in the market.

For our traditional voice services, providers of wireless voice, social networking and electronic messaging services are significant competitors as many customers are increasingly relying on these providers to communicate, resulting in the long-term systemic decline we have seen in our legacy, traditional voice services.

Depending on the applicable market and services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs, are offering faster transmission speeds or lower prices, or in certain markets, are incumbent communications providers that have a longer history of providing service in the market.

We compete to provide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available network services, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service.

Competition from large communications providers, systems integrators, hyperscalers and others have increased pricing pressures with respect to several key products and services that we offer to our enterprise and wholesale business customers.

In particular, several hyperscalers have recently built their own data transmission facilities, which has reduced demand for our network services.

Competition to provide broadband and other data services to our mass markets customers remains high.

Market demand for our broadband services could be adversely affected by (i) advanced wireless data transmission technologies, including fixed wireless and low-earth-orbit satellite services, and (ii) continued enhancements to cable-based services, each of which generally provides faster average broadband transmission speeds than our legacy copper-based infrastructure.

In addition, several established or new communications companies, infrastructure companies or municipalities have built or are building new fiber-based networks to provide high-speed broadband services in existing or unserved markets, frequently with the support of governmental subsidies.

Our network expansion and innovation strategy is focused largely on addressing these competitive pressures.

To meet these demands and remain competitive, we are continuing to invest in network capacity, security, reliability, flexibility and design innovations, including through our Quantum Fiber buildout initiative.

For our traditional voice services, providers of wireless voice, social networking, videoconferencing, and electronic messaging services are significant competitors as many customers are increasingly relying on these providers to communicate, resulting in the long-term systemic decline we have seen in our traditional voice services.

Other potential sources of competition include non-carrier systems that are capable of bypassing our local networks, either partially or completely, through various means.

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CLECs provide competing services through (i) reselling an ILEC's local services, (ii) using an ILEC's unbundled network elements (iii) operating their own facilities or (iv) a combination thereof.

Competition to provide broadband and other data services remains high.

Market demand for our broadband services could be adversely affected by advanced wireless data transmission technologies and other systems delivering generally faster average broadband transmission speeds than our legacy copper-based infrastructure.

Our network expansion and innovation strategy is focused largely on addressing these competitive pressures.

As both residential and business customers increasingly demand high-speed connections for entertainment, communications and productivity, we expect the demands on our network will continue to increase over the next several years.

To meet these demands and remain competitive, we are continuing to invest in network capacity, security, reliability, flexibility and design innovations to deliver competitive high-speed services.

Additional information about competitive pressures is located under the heading "Risk Factors—Business Risks" in Item 1A of Part I of this report.

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To meet the needs of different customers, our offerings include both stand-alone services and bundled services designed to provide a complete offering of integrated services.

Our sales and marketing approach to our business customers includes a commitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to select enterprise customers.

Our business customers range from small business offices to select enterprise customers.

Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms.

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These offices provide sales and customer support services to the communities in our local markets.

Similarly, our sales and marketing approach to our mass market customers emphasizes customer-oriented sales, marketing and service with a local presence.

Our approach includes marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including retailers, satellite television providers, door to door sales agents and digital marketing firms.

We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience.

These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.

Similarly, our sales and marketing approach to our mass markets customers emphasizes customer-oriented sales, marketing and service with a local presence.

Research, Development & Intellectual Property

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The FCC regulates the interstate services we provide, including the business data service charges we bill for wholesale network transmission and intercarrier compensation, including the interstate access charges that we bill other communications companies in connection with the origination and termination of interstate phone calls.

Additionally, the FCC regulates several aspects of our business related to international communications services, privacy, public safety and network infrastructure, including (i) our access to and use of local telephone numbers, (ii) our provision of emergency 911 services and (iii) our use or removal (potentially on a reimbursable basis) of equipment produced by certain vendors deemed to cause national security risks.

We could incur substantial penalties if we fail to comply with the FCC's applicable regulations.

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Universal Service

In 2015, Lumen Technologies accepted Connect America Fund or "CAF" funding from the FCC of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 of the 37 states in which we or Lumen are an ILEC under the CAF Phase II high-cost support program.

As a result of accepting CAF Phase II support payments for 33 states, we were obligated to make substantial capital expenditures to build infrastructure by certain specified milestone deadlines.

In accordance with the FCC's January 2020 order, Lumen Technologies elected to receive an additional year of CAF Phase II funding through 2021.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”) which is a new federal support program designed to replace the CAF Phase II program.

Between 2015 and 2021, Lumen received approximately $500 million annually through CAF II, a program that ended on December 31, 2021.

Our share of this CAF II funding was approximately $145 million annually.

In connection with the CAF II funding, we were required to meet certain specified infrastructure buildout requirements in 13 states by the end of 2021, which required substantial capital expenditures.

In the first quarter of 2022, we recognized $13 million of previously deferred revenue related to the conclusion of the CAF II program based upon our final buildout and filing submissions.

The government has the right to audit our compliance with the CAF II program.

The ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the "RDOF"), which is a new federal support program designed to replace the CAF II program.

On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations.

Lumen Technologies won bids for RDOF Phase I support payments of $26 million annually.

Lumen Technologies expects support payments under the RDOF Phase I program will begin soon after its anticipated receipt of the FCC's approval of its pending application.

Assuming Lumen Technologies timely completes their pending divestiture of the ILEC business assets on the terms described in Note 2—Planned Divestiture of the Latin American and ILEC Businesses in Item 8 of Part II of Lumen's Annual Report on Form 10-K for the period ended December 31, 2021, a portion of these payments would accrue to the purchaser.

For additional information about the potential financial impact of the CAF Phase II program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

Lumen Technologies started receiving support payments under this program in the second quarter of 2022, but our share of these payments is not material.

In November 2021, the U.S.

Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants.

As of the date of this report, various state and federal agencies are continuing to take steps to make this funding available to eligible applicants, including us.

It remains premature to speculate on the potential impact of this legislation on us.

For additional information about these programs, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

Broadband Regulation

In February 2015, the FCC adopted an order classifying broadband internet access services ("BIAS") under Title II of the Communications Act of 1934 and applying new regulations.

In December 2017, the FCC voted to repeal the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband.

In December 2017, the FCC voted to repeal the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband services.

Opponents of this change appealed this action in federal court.

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In most states, switched and business data services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region.

In addition, our Voice-Over-Internet Protocol services are regulated more lightly than legacy telephone services.

In addition, Voice-Over-Internet Protocol services are regulated by state regulators, but more lightly than ILEC services.

State agencies also regulate certain aspects of non-ILEC communications businesses, including administering the payment of federal subsidies to support broadband infrastructure construction.

Data Privacy Regulations

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The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction.

These regulations require careful handling of personal and customer data and could have a significant impact on our business.

We have adopted data handling policies and practices to comply with data privacy requirements, and have resources dedicated to complying with changing data privacy regulations.

These regulations require careful handling of personal and customer data and could have a significant impact on our business especially if we violate any of those regulations.

Other Regulations

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The information contained on, or that may be accessed through, our website is not part of this quarterly report.

Any references to our website in this report or any other periodic reports that we file with the SEC are provided for convenience only, and are not intended to make any of our website information a part of this or such other reports.

You may obtain free electronic copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed by us or our ultimate controlling stockholder Lumen Technologies, Inc., and all amendments to those reports, in the "Investor Relations" section of our website ( ir.lumen.com ) under the heading "FINANCIALS" and subheading "SEC Filings." These reports are also available on the SEC's website at www.sec.gov.

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Nonetheless, from time to time we have used, and intend to continue to use, our website and social media accounts to augment our disclosures.

You should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Accordingly, you should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

Investors should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Investors should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business