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How Will Telecom ETFs React to Decent Q1 Earnings?

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The telecom sector is steadily witnessing increasing demand for higher-speed networks in the wake of growing digitization trends and the virtual modes of communication. This requires the players to consistently progress in enhancing their network capacity with further fiber and wireless placements.

Amid the pandemic-induced rising remote/hybrid working trends, firms are working toward improving data traffic management. Companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. The introduction of 5G smartphones is likely to encourage telecom operators to make the 5G network more pervasive.

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

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

Earnings in Focus

On Apr 21, AT&T Inc. (T - Free Report) reported first-quarter 2022 results, with adjusted earnings and revenues beating the Zacks Consensus Estimate. Excluding non-recurring items, adjusted earnings in the quarter were 77 cents per share compared with 85 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate of 61 cents. Quarterly GAAP operating revenues dropped 13.3% year over year to $38.11 billion but surpassed the Zacks Consensus Estimate of $28.95 billion.

AT&T plans to invest $24 billion each in 2022 and 2023 to upgrade its existing infrastructure facilities for 5G and fiber deployment, and about $20 billion starting 2024. As a standalone company, T aims to pay more than $8 billion worth of dividends to its shareholders, representing a payout of about 40% against the expected free cash flow of $20 billion in 2023. Management further plans to decrease the net debt to adjusted EBITDA ratio to the 2.5 range by 2023 end.

On Apr 22, Verizon Communications Inc. (VZ - Free Report) reported first-quarter 2022 adjusted earnings of $1.35 per share, on par with the Zacks Consensus Estimate. Quarterly aggregate operating revenues increased 2.1% year over year to $33.55 billion. Also, the metric surpassed the Zacks Consensus Estimate of $33.38 billion.

Verizon has updated its earlier guidance for 2022 and currently expects organic service and other revenue growth to be flat year over year. Reported wireless service revenue growth is expected at the lower end of the previously guided range of 9-10%. Adjusted EBITDA is likely to be at the lower end of the earlier projected range of 2-3%. VZ expects adjusted earnings at the lower end of the previously guided range of $5.40-$5.55 per share. Capital expenditure, excluding C-Band, is estimated between $16.5 billion and $17.5 billion.

On May 4, Lumen Technologies (LUMN - Free Report) reported mixed first-quarter 2022 results, with the bottom line beating and the top line missing the Zacks Consensus Estimate. Quarterly adjusted net income came in at 63 cents per share compared with 44 cents in the prior-year quarter. The bottom line surpassed estimated by 37%. Quarterly total revenues dropped 7% year over year to $4.68 billion. The top line missed the consensus estimate by 0.1%.

For 2022, Lumen expects adjusted EBITDA in the range of $6.9-$7.1 billion compared with the earlier guidance of $6.5-$6.7 billion. Free cash flow is projected between $2 billion and $2.2 billion compared with the earlier guided range of $1.6-$1.8 billion. Capital expenditures are estimated between $3.2 billion and $3.4 billion. The effective income tax rate for the full year is estimated to be nearly 26%.

ETF Angle

In the current scenario, let’s discuss the ETFs with a 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. IYZ has an AUM of $382.5 million and charges 42 basis points (bps) as fees per year. IYZ holds about 21 securities in its basket and puts 23.9% weight in the in-focus companies. IYZ has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

Vanguard Communication Services ETF (VOX - Free Report)

This ETF is one of the most popular funds in the communication services space. VOX has an AUM of $2.95 billion and charges 10 bps as fees per year. VOX comprises 107 holdings, with the above-mentioned companies taking 8.9% of the fund. VOX has a Zacks ETF Rank #3, with a Medium-risk outlook (read: How Are Google ETFs Reacting to Dismal Q1 Earnings?).

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. FCOM has an AUM of $727.8 million and charges 8 bps as fees per year. FCOM holds about 114 securities in its basket, with the above-mentioned companies having 8.9% weight in the fund. FCOM has a Zacks ETF Rank #3 with a Medium-risk outlook.