Ericsson's Core Profit Misses As Rising Costs Hit Margins

Ericsson, the Swedish telecoms equipment firm facing bribery investigations, reported a rise in second-quarter core earnings on Thursday that missed expectations as margins were hit by higher component and logistics costs.

Shares of the company dropped 11% in morning trading to their lowest since March 2020. The stock has lost about a third of its value since February, when Ericsson disclosed improper payments in Iraq stretching back to at least 2011.

Rising inflation, a chip shortage and Russia's invasion of Ukraine drove up costs and pushed down the firm's gross margin to 42.1% from 43.4% a year earlier.

It was also hit by patent disputes, including with Apple, that cut its high-margin royalty revenue by 900 million Swedish crowns ($85 million).

"The global supply chain situation remains challenging ... this results in cost increases which we work hard to mitigate as far as possible," Chief Executive Borje Ekholm said in a statement. "As contracts expire, we aim to adjust pricing."

Analysts expect the trend of higher costs to continue in the second half of the year.

Apart from increasing prices, Ericsson is investing in research to lower the cost of products to fight of inflation, Ekholm said in a conference call.

The company is being investigated by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) over its past conduct in Iraq. It said it was engaging with both agencies and the outcome could not be assessed yet.

Another investigation by a U.S. security panel has delayed its $6.2 billion acquisition of cloud communications firm Vonage. Ericsson now expects the deal to close in July.

Despite those distractions, Ericsson's sales in North America and Europe rose as telecom operators raced to upgrade their networks, helping Ericsson and its rival Nokia.

"We have a 39% market share, excluding China, of the global market, and that is several percentage points up during the last period," Chief Financial Officer Carl Mellander told Reuters.

Ericsson's quarterly revenue rose to 62.5 billion crowns from 54.9 billion a year earlier, beating analysts' average estimate of 61.45 billion. The Russia-Ukraine war hit sales by 1.2 billion crowns in the quarter, the company said.

Quarterly adjusted operating earnings rose to 7.3 billion crowns from 5.8 billion a year earlier, missing analysts' mean forecast of 8.01 billion, according to Refinitiv data.

($1 = 10.5908 Swedish crowns)