Supply chain woes and inflation are to blame for lower gross margins, said Ekholm
Ericsson stocks tumbled as much as 10% on Thursday, following the company’s latest earnings report. The Swedish telecom equipment maker posted an increase in second-quarter earnings, but missed Wall Street analyst’s expectations. Ericsson reported sales of SEK62.5 billion (US$5.89 billion) and posted net income of SEK4.7 billion (US$443.51 million) for the quarter, which ended in June.
The company missed its second-quarter margin expectations, posted a 1.3% drop in second-quarter gross margin, to 42.1%. The company linked the lower margin to a decrease in licensing revenue, the rapid increase of inflation, and continued supply chain issues affecting semiconductor manufacturing.
Börje Ekholm, Ericsson President and CEO, said that the company saw a 5% increase in organic sales growth thanks to the rollout of 5G networks and gains the company made to market share during the quarter.
“We have adjusted our group structure to strengthen execution of our strategy to be a leading mobile infrastructure provider and to establish a focused enterprise business,” he said.
When it comes to mitigating supply chain issues, Ekholm said the company is adjusting prices as supplier contracts expire. The precarious geopolitical situation has pushed Ericsson into a proactive posture when it comes to managing supply chain risk, he said.
“However, we believe the best way to compensate for cost increases is the continued investment in technology to increase the cadence of bringing new innovative solutions to the market,” he added.
5G infrastructure buildouts are fueling the company’s growth, but Ekholm notes that global penetration of 5G is nascent.
“We foresee that the global 5G build-out will be larger and continue for longer than previous mobile generations. The build-out will include evolving consumer use cases, such as Fixed Wireless Access, mobile gaming and XR applications, in addition to new areas, such as enterprise and first responders,” he said.
Ericsson shares have been in free fall since the beginning of the year, shedding more than a third of their value. The company is currently under investigation by U.S. regulators over allegations it made payments to the terrorist group ISIS in Iraq.
Ericsson said in February that its own internal inquiry showed a pattern of payments to ISIS going back years. The company noted that the investigation found serious breaches of compliance rules and the Code of Business Ethics. It identified evidence of corruption-related misconduct, including: Making a monetary donation without a clear beneficiary; paying a supplier for work without a defined scope and documentation; using suppliers to make cash payments; funding inappropriate travel and expenses; and improper use of sales agents and consultants. In addition, it found violations of Ericsson’s internal financial controls; conflicts of interest; non-compliance with tax laws; and obstruction of the investigation.
“We continue to strengthen our governance, risk management, and compliance across the group and are fully committed to operating with integrity. We continue to engage with the Department of Justice and the Securities and Exchange Commission in relation to the 2019 Iraq investigation report and the DPA breach notices. The outcome of these matters cannot be assessed at this point in time. We are fully committed to cooperating with the US authorities,” said Ekholm.
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