Ericsson AB faces new fines on corruption scandal in Iraq

Ericsson AB indicated it faces new fines related to its corruption scandal in Iraq and associated breach notices of its deferred prosecution agreement by the U.S. Department of Justice as the telecommunications networks maker presented its first-quarter earnings report.

The magnitude of any additional payments “cannot at this time be reliably estimated,” it said, avoiding adding clarity on the misconduct and failure to properly inform the U.S. authorities.

“We are engaging with the DOJ” and “we are committed to being super transparent, to follow the DPA completely,” Chief Financial Officer Carl Mellander said in an interview. “There is no provision in the books or anything. We are really in that position where we cannot estimate reliably any monetary impact.”

Shares fells as much as 9% in trading on Thursday.

Earnings

• The Stockholm-based network equipment manufacturer reported adjusted operating profit of 4.8 billion kronor ($507 million), missing average analyst estimates of 6.44 billion kronor. Profit was hurt by its provision on exiting Russia, Ericsson said.
• The company said Thursday its adjusted operating margin was 8.7%, compared to an 11.85% average estimate. Sales grew to 55.1 billion kronor in the quarter, above the 53.64 billion kronor expected by analysts.

Key Insights

• The start to the year has been turbulent with shares plunging by as much as a third after the media revelation, before paring some losses. As shareholders voted against discharging Chief Executive Officer Bjorn Ekholm from legal liability at the company’s annual general meeting in March, the CEO acknowledged that the repercussions of the Iraq episode had “continued under his watch” and that the company still has “a lot more work to do” when it comes to changing culture. He also wowed to step up an overhaul of the company’s compliance function.
• In March, Ericsson and some managers were named as defendants in a class action suit filed in the U.S. alleging violations of securities laws, in connection with allegedly false and misleading statements on its Iraq business.
• Ericsson said it continues to work toward closing the acquisition of cloud-based services company Vonage Holdings Corp. during the first half of the year. The Iraq scandal has led to raised questions on whether U.S. authorities might disqualify Ericsson’s bid. Given the “hefty price tag,” analysts have said a walk-away from the acquisition might be a key positive trigger for the share.
• Earlier in the week, the company said it had decided to halt its Russian operations “indefinitely,” while making a $95 million provision in its network business for the quarter.
• The global radio access networks market is set to grow 5% this year with faster growth in all areas, up from a prior forecast of 3%, Ericsson said, citing estimates by Dell’Oro. The company sees “really good momentum for 5G,” CFO Mellander said, adding that the company has been even more optimistic as “every time Dell’oro comes with new predictions, they raise those predictions.”
• Ericsson has also created “a buffer of vital components” to secure customer deliveries amid global supply chain challenges, it said.

Market Context

• Ericsson shares have lost about 25% in the 12 months to Wednesday’s close.
• 19 analysts tracked by Bloomberg recommend buying the stock, 10 had a “hold” recommendation and 1 recommended selling.

Bloomberg