Ericsson will probably be fined and perhaps face other actions from the U.S. Department of Justice (DOJ) over its handling of the bribery investigation in Iraq. During the company’s 1Q earnings call with investors today, Ericsson President and CEO Borje Ekholm said that the company is “engaging” with the DOJ on the matter and that the “resolution will likely result in monetary measures, but the magnitude cannot be reliably estimated.” He added that the company is limited in what it can say about the historical events.
Ericsson disclosed in February that an internal investigation found that the company may have made payments to the ISIS terror organization to gain access to certain transport routes in Iraq. The investigation looked into the conduct of Ericsson employees, vendors and suppliers in Iraq from 2011 to 2019.
The news of a potential fine caused shares of Ericsson stock to tumble 7%.
When pressed for more details about the monetary measures or other actions the DOJ might take, Ericsson CFO Carl Mellander declined to speculate. However, Ericsson is in the midst of acquiring Vonage for $6.2 billion and investors have expressed concern that it might be delayed due to the ISIS investigation.
The company reported an adjusted operating profit of 4.8 billion kronor or $507 million, and said that its business was hindered by the company’s exist from Russia. Ericsson stopped conducting business in Russia in February and announced earlier this week that it had suspended its business in Russia indefinitely due to that country’s ongoing conflict with Ukraine.
Nevertheless, Ericsson said that organic sales grew by 3% year-over-year primarily because of strength in network sales in North America, Europe and Latin America. Sales for the quarter were 55.1 billion kronor, which was higher than analyst estimates of 53.6 billion kronor and an increase of 11% year-over-year.
The company’s Networks Group reported sales of $40.7 billion kronor up from $36.3 billion kronor in the same quarter the previous year. Ericsson said that the increase was due to strong sales in North America, Europe and Latin America.
The Digital Services business, which includes back office support systems, cloud core and cloud-native infrastructure offerings, reported net sales of 7.2 billion kronor, a decrease of 2% year-over-year. Although the Ekholm said he was confident in Ericsson’s products, he said that there have been problems with sales execution in this area. Nevertheless, he noted that 16 of the 20 largest operators in the world are using Ericsson’s products. “We have a strong position but we need to execute better,” he said.
Ekholm also said that he expects strong growth in the U.S. market in 2022 because of the C-band spectrum buildouts. Elkholm said that he expects network densification in the U.S. to also be strong in 2023. “In North America as the networks become loaded they will expand capacity. 2023 will be a good year.”
Intellectual property (IPR) licensing revenue was up 1.4 billion kronor because of the renewal of patent license agreements that expired in 2021. Elkholm said that the company is making progress with existing renewals that are in the pipeline for 2022.
He also noted that the company will continue to see higher research and development costs as it continues to make investments in its cloud and core network portfolio. “We believe we’ll see long-term return on those investments,” he said.
Managed Services accounted for 4.9 billion kronor in net sales for the quarter, which was down 5% year over year and the company’s Emerging Business area reported net sales of 2.2 billion kronor, up 2% year-over-year. The Emerging Business unit is home to the company’s enterprise business and Cradlepoint, which drove most of the sales growth. Ericsson noted that its enterprise business is currently fairly small but growing rapidly.