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How Will Telecom ETFs React to Mixed Q2 Earnings?

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The telecom sector continues to witness increasing digitization and virtual mode of communication amid the pandemic, resulting in rising demand for high-speed Internet connection and stable connectivity. Firms are working toward improvising management of the rise in data traffic. The companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. Going on, the introduction of 5G smartphones is likely to encourage telecom operators to make 5G network more pervasive.

Players in the sector are trying to redefine business plans to optimize efficiencies and operations, and to reduce costs while supporting employees and customers with several financial packages.

Let’s take a look at some big telecom earnings releases and see if these can impact ETFs exposed to the space.

Earnings in Focus

On Jul 22, AT&T Inc. (T - Free Report) reported relatively solid second-quarter 2021 results, with adjusted earnings and revenues beating the Zacks Consensus Estimate. Excluding non-recurring items, adjusted earnings in the quarter were 89 cents per share compared with 83 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate by 11 cents. Quarterly GAAP operating revenues rose 7.6% year over year to $44.05 billion and surpassed the Zacks Consensus Estimate of $42.65 billion.

For full-year 2021, management revised its guidance considering improving market conditions and strong quarterly performance. AT&T currently expects adjusted earnings to grow low- to mid-single digits, up from the earlier projections of flat to 1% year-over-year growth. Revenues are likely to grow 2-3%. The company expects free cash flow of around $27 billion, with a dividend payout in the high 50% bracket.

On Jul 21, Verizon Communications Inc. (VZ - Free Report) reported second-quarter 2021 adjusted earnings of $1.37 per share and beat the Zacks Consensus Estimate by 7 cents. Quarterly aggregate operating revenues rose 10.9% year over year to $33.76 billion. The metric also surpassed the Zacks Consensus Estimate of $32.69 billion.

Verizon revised its earlier guidance for 2021 to better reflect the improving business conditions. The company presently expects adjusted earnings in the range of $5.25 to $5.35 per share, up from earlier projection of $5.00 to $5.15. Total wireless service revenues are likely to grow in the range of 3.5-4%, up from 3% expected earlier.

On Aug 3, Lumen Technologies (LUMN - Free Report) reported mixed second-quarter 2021 results, with the bottom line surpassing the Zacks Consensus Estimate but the top line lagging the same. Quarterly adjusted net income came in at $521 million or 48 cents per share compared with $420 million or 39 cents per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 5 cents. Quarterly total revenues dropped 5.2% year over year to $4.92 billion. The top line lagged the consensus estimate of $5.00 billion.

For 2021, Lumen expects adjusted EBITDA in the range of $8.4-$8.6 billion. Adjusted free cash flow is projected between $3.1 billion and $3.3 billion, up from $2.8-$3 billion expected earlier. Capital expenditures are estimated between $3.2 billion and $3.5 billion compared with the  prior expectation of $3.5-$3.8 billion.

ETF Angle

In the current scenario, let’s discuss ETFs that have relatively high exposure to the companies discussed.

iShares U.S. Telecommunications ETF (IYZ - Free Report)

This ETF provides exposure to U.S. companies that provide telephone and Internet products, services, and technologies. It has AUM of $452.6 million and charges 42 basis points as fees per year. It holds about 44 securities in its basket and puts about 30.2% weight in the in-focus companies. IYZ has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: ETFs in Focus on AT&T-Discovery Mega Merger Deal).

Vanguard Communication Services ETF (VOX - Free Report)

This ETF is one of the most popular funds in the communication services space. It has AUM of $4.62 billion and charges 10 basis points as fees per year. It comprises 115 holdings, with the above-mentioned companies taking about 7.7% of the fund. VOX has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Stocks & ETFs Winners From Senate's Nod for Infrastructure Bill).

Fidelity MSCI Communication Services Index ETF (FCOM - Free Report)

This ETF provides exposure to the communication services sector in the U.S. equity market at a really low expense ratio. It has AUM of $934.3 million and charges 8 basis points as fees per year. It holds about 111 securities in its basket, with the above-mentioned companies taking about 7.7% weight in the fund. FCOM has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Can Google ETFs Keep Gaining on Q2 Earnings Optimism?).