CFO Journal
Qualcomm CFO Trims Operating Expenses as Industry Faces Down High Inventories
Akash Palkhiwala expects the excess stock to be worked off over a couple of quarters, and talks about the benefits of higher interest rates on the company’s cash holdings
By Nina Trentmann
Dec. 29, 2022 9:00 am ET
Qualcomm Inc., the San Diego-based technology company that sells chips, software and other products, last month slashed its forecast for smartphone shipments again and offered a gloomy assessment of the quarters ahead.
The company cut its sales projections for handset chips to a low-double-digit percentage decline from a mid-single digit fall before, joining other consumer-facing businesses that confront a sharp turn in demand after a pandemic-fueled boom.
Qualcomm is working to reduce operating costs and double down on new areas, including its automotive business. WSJ’s CFO Journal spoke to Chief Financial Officer Akash Palkhiwala about the company’s spending plans, the impact of higher interest rates on its finances and the outlook for 2023. His answers have been edited for length and clarity.
WSJ: What’s your outlook for 2023?
Mr. Palkhiwala: There is a lot of uncertainty globally. There is the macroeconomic environment, the situation in the U.S., China and in Europe, there is the Covid situation in China—how long that takes to resolve. And generally in the semiconductor industry, there is significant inventory for some of our customers.
These factors combined introduce uncertainty in the short term. We are focused on controlling the things we can control.
WSJ: Have you made changes to your forecasting and planning process amid all that uncertainty?
Mr. Palkhiwala: As we plan our next year, we’re doing a lot more [macroeconomic scenario-planning] than we’ve done in the past—especially on the downside—and trying to quantify the implications for us. What that really means for us is we have more scenarios to navigate through.
WSJ: How long will it take to whittle down those inventories you mentioned?
Mr. Palkhiwala: A couple of quarters is what we think it takes for it to get to a better place. It’s very typical in our industry where you go through inventory build and bleed. Especially on the backs of supply constraints, it is no surprise that [original equipment manufacturers] ended up building a little more inventory and now the supply constraint has definitely gone away.
WSJ: How do you think about spending in 2023?
Mr. Palkhiwala: One of the first things we are doing is we are reducing spending in the more mature areas of the business and redirecting those resources and those dollars to [automotive and Internet of Things], because that’s where a lot of our growth is driven by. In addition to that, we are making select head count reductions in certain functions. The third thing is that we are preparing contingency plans. So if we need to take additional action, we’ll be ready to do that.
WSJ: So you are slowing hiring as well as making selective cuts?
Mr. Palkhiwala: It’s a combination of those two things. We obviously have targets across our businesses where we are increasing spend, but there are other areas where we’re reducing spend significantly.
WSJ: You issued about $3.4 billion in new debt in 2022. How concerned are you about rising interest rates?
Mr. Palkhiwala: The issues were really to replace many mature aging bonds. We had actually locked in rates a couple of years ago. And so that obviously helped us a lot because we could protect ourselves [against] the recent increase in rates. While the coupon on the document would show a higher rate, since we had locked in rates, we see the benefit of the rate locks coming through. The next maturities come in 2024 and then in 2025. We’ll see how the rate environment changes between now and then.
WSJ: Ahead of an upcoming maturity, when do you look to refinance?
Mr. Palkhiwala: We plan within months of a maturing bond. We look at the market environment and we try to optimize it when we issue it. But we also have a strong balance sheet. So if we can’t do it in time and have to do it a little later, that’s OK with us.
WSJ: Would you use term loans or commercial paper in that case?
Mr. Palkhiwala: Yes, it’s a combination of those instruments and also our cash balance on our balance sheet.
WSJ: Are there any positive effects from higher rates on your business?
Mr. Palkhiwala: When you have a significant cash balance, when the rate goes up, we also see the benefit on the cash balance side. On our debt, most of our debt is fixed-rate. So you don’t see the increase in the cost on the debt side as much. If we do end up doing new issuances at higher rates, it might still put us in a reasonable place with increased income on the cash balance.
WSJ: How do you think about working capital in the context of higher rates?
Mr. Palkhiwala: It’s an important lever to have in the business if you can maximize your cash balance and the income you get on it. With the increase in inventory across the industry and across our own inventory, it’s something that has captured some of our cash flow. As we go through 2023, it’s going to be an opportunity for us.
Write to Nina Trentmann at nina.trentmann@wsj.com
Appeared in the December 30, 2022, print edition as 'Qualcomm Confronts Decline in Demand.'
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