“To put it simply: you rock,” was the concise and uplifting message from Ericsson CEO Börje Ekholm to his approximately 100,000 employees on the occasion of today’s announcement of the results for the first quarter.
Despite all the successes under Ekholm’s leadership, the financial markets do not seem to see the Swedish equipment manufacturer that way at the moment.
Shares fell about 6% this morning in Stockholm after the Ericsson boss warned investors could face a US fine over a scandal in Iraq, where Ekholm admits former employees may have accused the terrorist organization Islamic State of using it paid from streets.
“What I can say is that, in our view, monetary policy action is likely to occur, but the magnitude cannot be reliably estimated,” the early-rising chief told investors and reporters over an unreliable video link from the US. “We are limited in what we can say about historical events.”
A fine of the same magnitude as the last Department of Justice (DoJ) settlement in 2019 would equate to about $1 billion. Worse still is the possibility of “other measures”.
Carl Mellander, Ericsson’s chief financial officer, declined to speculate when asked what that might be. The main risk is that US authorities will try to block Ericsson’s $6 billion acquisition of Vonage, a move Ericsson has said is critical to its future growth strategy.
Prior to today’s announcement, Ericsson shares were down almost 24% since Feb. 15, when Ericsson first admitted wrongdoing in Iraq.
The company’s Mobile World Congress was overshadowed by the affair when US authorities said Ericsson had violated its deferred prosecution agreement – which was reached in December 2019 following disclosures of past wrongdoings in numerous countries – by failing to make subsequent disclosures .
That same week, the DoJ also told Ericsson that previous disclosures about conduct in Iraq — made before Ericsson paid the final $1 billion fine — were deemed “inadequate.”
At the time of writing, Ericsson’s stock price was down 28% from mid-February, and today’s price drop is concerning given Citibank’s recent warning that the stock could become “uninvestable.”
Other pain points included a 900 million Swedish krona ($95 million) cost of the decision to “indefinitely” cease operations in Russia, where Ericsson makes about 2% of its sales, and an unexplained SEK 300 million write-down ($32 million). at Ericsson Ventures, the company’s investment fund.
Net income consequently fell 8% to about SEK 2.9 billion ($310 million) in the first quarter compared to the same period last year.
Underlying strength
However, most of the underlying business remains strong. Ericsson still reported an 11% increase in sales to SEK 55.1 billion (US$5.8 billion) – although growth was just 3% on a constant currency basis – along with market share gains in Europe.
Huawei, its main Chinese rival, has fallen out of favor in several countries. Nokia, its main European competitor, has paid the price for previous 5G product issues.
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