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How Will Telecom ETFs Navigate Mixed Results in Q1 Earning?

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The outlook for the Telecommunications sector remains moderate, with the companies reporting mixed numbers for the first quarter of 2023. Witnessing increasing demand for wireless high-speed networks, the optimistic forecast of the sector is further fueled by growing trends of digitalization. However, the sector’s revenue growth potential still appears to be bleak at the current level.

Despite the challenges posed by the COVID-19 pandemic and other macroeconomic factors, the industry has grown over the past few years, driven by increasing demand for data and connectivity. However, the sector faces potential headwinds in the form of recessionary fears and evolving regulations, which may impact its growth trajectory in the future.

Companies in the telecommunications sector are working to redefine their business plans to improve operational efficiencies, reduce costs, and support their employees and customers through various financial packages.

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

AT&T Beats Q1 Earnings Estimates, Falters on Revenues

On Apr 20, AT&T (T - Free Report) reported first-quarter earnings for 2023, with adjusted earnings outperforming the Zacks Consensus Estimate by a couple of cents. Excluding non-recurring items, adjusted earnings were 60 cents per share compared with 63 cents in the year-earlier quarter.

AT&T's reported net income fell significantly year over year, despite top-line growth, due to lower other income. On a GAAP basis, net income was $4.18 billion or 57 cents per share compared with $4.76 billion or 65 cents per share in the same period last year.

The company's Q1 GAAP operating revenues increased 1.4% year on year to $30.1 billion, with strong performances in Mobility, Mexico, and Consumer Wireline, although this was partly offset by a decline in Business Wireline revenues. However, the top line missed the consensus estimate of $30.3 billion.

The solid Q1 results of the company were fueled by healthy wireless traction and customer additions. The company recorded solid subscriber growth backed by a resilient business model and robust cash flow position driven by diligent execution of operational plans. Focusing on 5G and fiber-based connectivity the telecom company aims to increase efficiency to lower operating costs.

Verizon Beats on Q1 Earnings Despite Lower Revenues

The bottom line beat the Zacks Consensus Estimate by a penny, but the top line of Verizon (VZ - Free Report) failed to meet the consensus estimate. Excluding non-recurring items, quarterly adjusted earnings per share were $1.20 compared with $1.35 in the prior-year quarter.

In the quarter, net income on a GAAP basis was $5.02 billion or $1.17 per share, up from $4.71 billion or $1.09 per share in the prior year. However, total operating revenues decreased to $32.91 billion from $33.55 billion due to lower wireless equipment revenues caused by a challenging macroeconomic environment and the shutdown of the company's 3G network. The top line missed the consensus estimate of $33.71 billion.

For 2023, Verizon has confirmed its guidance, anticipating wireless service revenue growth of 2.5-4.5%, adjusted EBITDA of $47-$48.5 billion, and adjusted earnings per share of $4.55 to $4.85. Capital expenditure is expected in the range of $18.25 billion to $19.25 billion.

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. Having gathered $294.01 million in its asset base, the fund has 14.72% exposure in Verizon and 4.48% exposure in AT&T. IYZ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. It charges an annual fee of 0.39%.

Fidelity MSCI Telecommunication Services ETF (FCOM - Free Report)

This ETF provides exposure to the communication services sector in the U.S. equity market at a low expense ratio of 0.08%. FCOM holds 113 securities in its basket, with Verizon and AT&T holding 4.21% and 4.02%, respectively, of the assets. It has amassed an asset base of $579.05 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Vanguard Telecommunication Services ETF (VOX - Free Report)

The fund follows a passive investment strategy and holds 117 securities in its basket. It has holdings in AT&T and Verizon with 4.27% and 4.24% share, respectively. VOX charges an annual fee of 0.10% and commands an asset base of $2.72 billion. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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