Ericsson Warns Likely To Be Fined Over Iraq Scandal, Reports Profit Slump

Swedish telecom provider Ericsson said on Thursday it would likely be fined by U.S. regulators for its handling of a bribery investigation in Iraq and reported a slide in quarterly earnings due to its suspension of business in Russia.

The company disclosed in February that an internal investigation had found it may have made payments to the Islamic State militant group in Iraq - misconduct it said "started at least back in 2011".

Shares in Ericsson tumbled 7% in early Thursday trade, bringing the stock's losses since news of the scandal broke to around 30%.

The U.S. Department of Justice could take a range of actions, it said. These "may likely include additional monetary payments," Chief Executive Borje Ekholm said in a statement, adding that the company could not reliably estimate the size of the fine.

Ericsson reported an 11% drop in adjusted operating earnings for the first quarter to 4.7 billion Swedish crowns ($500 million). It was hurt by a $95 million provision for its indefinite suspension of business in Russia over the invasion of Ukraine.

Ongoing patent litigation with Apple Inc and a delay in the renewal of a 1 billion crown annual software contract to the current quarter also weighed on the results.

But revenue rose 11% to 55.1 billion crowns on higher demand for 5G telecom equipment, beating estimates of 53.36 billion crowns.

A fine would come on top of a $1 billion fine paid to the DOJ in 2019 to settle bribery cases in several countries. At the time, Ericsson also agreed to supervision by the regulators for three years.

"A fine is, in our view, the best Ericsson can hope for, as much worse scenarios have been discussed in the market recently," said Mads Rosendal, analyst at Danske Bank Credit Research.

Market speculation about possible penalties has ranged from sanctions on the company to a ban on selling in the United States to legal action being taken against top Ericsson executives.

In a public rebuke for the scandal, last week shareholders representing more than 10% of Ericsson shares voted against discharging board members of liability for the previous year. That means Ekholm and other board members could be held personally liable for their actions.

Ericsson has also been spending heavily to boost inventory for critical parts in the face of a global chip shortage.

"We do see that certain vital components need extra attention... we have decided to invest in buffer inventory for some of those vital components," Chief Financial Officer Carl Mellander said.

($1=9.4483 Swedish crowns)