Ericsson's Woes Continue With Russia Hit, Looming U.S. Fine

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Ericsson's Woes Continue With Russia Hit, Looming U.S. Fine
Credit: © Reuters.

By Geoffrey Smith -- Swedish telecoms gear maker Ericsson (ST: ERICb ) said its earnings fell in the first quarter and warned of further hits due to its withdrawal from Russia and a fresh U.S. fine for sanctions-busting. 

Börje Ekholm, who was censured along with the rest of the company's management last week for his handling of an investigation into possible payments made to Islamic State affiliates in Iraq, said in a statement that it may be fined by the U.S. Department of Justice for breaking the terms of a deferred prosecution agreement.  

"The resolution of these matters could result in a range of actions by DOJ, and may likely include additional monetary payments, the magnitude of which cannot at this time be reliably estimated." Ekholm said. 

Ekholm's admission accompanied news of an 8% drop in net profit in the first quarter to 2.9 billion Swedish kronor ($308 million), well below expectations for 4.8 billion kronor. That was despite an 11% rise in sales to 55.1 billion kronor. The results included a 900 million kronor charge that the company announced earlier this week as it suspended its business in response to the invasion of Ukraine. Around one-third of that charge will hit cash flow, with the rest coming as non-cash impacts.

Before the invasion, Russia had been a key growth market for the Swedish company, but it already faced substantial costs in relocating manufacturing production to the country under the requirements of a law that was scheduled to come into force next year.

The company's quarterly update wasn't without its positive elements. Gross margin was roughly stable at 42.3%, while it also reported strong demand for its Cradlepoint wireless product for enterprises, thanks to the rollout of 5G services in the U.S. However, its margin before interest, taxes and amortization (EBITA) remained stuck at 11%, well short of its medium-term target of 15%-18%. Ekholm said the company expects to need "2-3 years" to reach that target.

Ericsson stock had lost some 34% of its value in response to the disclosure of the Iraq issue in February, but has since retraced one-third of those losses. 


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