Qualcomm CFO cuts operating costs as industry faces high inventories

        <a href="https://www.wsj.com/market-data/quotes/QCOM">Qualcomm</a><span class="company-name-type">    Inc.,</span>

  a San Diego-based technology company that sells chips, software and other products, last month <a href="https://www.wsj.com/articles/qualcomm-qcom-q4-earnings-report-2022-11667419622?mod=article_inline" target="_blank" class="icon none" rel="follow noopener">lowered his forecast</a> again for smartphone shipments and provided a gloomy estimate for the upcoming quarters.

The company cut sales forecasts for phone chips to a lower double-digit percentage from a previous mid-single-digit decline, joining other consumer businesses facing a sharp turnaround in demand after a pandemic-fueled boom.

Qualcomm is working on cutting operating costs and doubling down on new areas, including the automotive business. WSJ’s CFO Journal spoke with Chief Financial Officer Akash Palkhiwala about the company’s spending plans, the impact of high interest rates on its finances and the outlook for 2023. His answers have been edited for length and clarity.

WSJ: What is your prediction for 2023?

Akash Palkhiwala, Chief Financial Officer, Qualcomm.


Qualcomm Inc.

Mr. Palkhiwala: There is a lot of uncertainty on a global scale. There is the macroeconomic environment, the situation in the US, China and Europe, there is the Covid situation in China – how long does it take to resolve it. And we have significant inventory for some of our customers in the semiconductor industry in general.

The combination of these factors creates uncertainty in the short term. We focus on controlling the things we can control.

WSJ: In all this uncertainty, have you made changes to your forecasting and planning process?

Mr. Palkhiwala: As we plan for next year, we will be doing more [macroeconomic scenario-planning] more than we’ve done in the past — especially on the downside — and we’re trying to measure the impact for us. What this really means for us is that we have more scenarios to go through.

WSJ: How long will it take to reduce those stocks you mentioned?

Mr. Palkhiwala: We think it needs a few quarters to get to a better place. It is very typical in our industry to build up and bleed inventory. Not surprising, especially in light of supply constraints [original equipment manufacturers] created a bit more inventory and now the supply constraint is definitely gone.

WSJ: How do you plan to spend in 2023?

Mr. Palkhiwala: One of the first things we do is we cut costs in the more mature areas of the business and redirect those resources and those dollars into that area. [automotive and Internet of Things], because that’s where most of our growth comes from. In addition, we are reducing the number of selected heads in certain functions. The third is that we make contingency plans. So, if we need to take additional measures, we will be ready to do so.

WSJ: So you’re slowing hiring as well as making selective layoffs?

Mr. Palkhiwala: It is a combination of two things. Obviously, we have targets across our business where we have increased costs, but there are other areas where we have significantly reduced costs.

WSJ: In 2022, you issued about $3.4 billion in new debt. How worried are you about rising interest rates?

Mr. Palkhiwala: The issues were really to replace many mature aging bonds. We actually closed rates a few years ago. And that obviously helped us a lot because we were able to protect ourselves [against] recent rate hike. Even though the coupon on the document shows a higher rate, since we lock in the rates, we get the benefit of rate locks. The next maturity dates are in 2024 and then in 2025. We will see how the exchange rate environment changes between now and then.

WSJ: When are you looking at refinancing before the upcoming due date?

Mr. Palkhiwala: We plan within months of a bond maturing. We look at the market environment and try to optimize it when it releases. But we also have a strong balance sheet. So if we can’t do it on time and have to do it a little later, that’s fine with us.

WSJ: In this case, would you use term loans or commercial paper?

Mr. Palkhiwala: Yes, it is a combination of those instruments and also our cash balance on our balance sheet.

WSJ: Are higher rates having a positive impact on your business?

Mr. Palkhiwala: When you have a significant cash balance, we also see benefits on the cash balance side when interest rates rise. Due to our debt, most of our debt is fixed interest. So you don’t see as much cost growth on the debt side. If we do new issues at higher rates, that could put us in a reasonable position with increased income on the cash balance.

WSJ: How do you think about working capital in the context of higher rates?

Mr. Palkhiwala: This is an important lever to have in business if you can maximize your cash balance and the income you get from it. With the increase in inventory in the industry and in our own inventory, it’s something that takes away some of our cash. As we move into 2023, this will be an opportunity for us.

Write to Nina Trentmann nina.trentmann@wsj.com

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