Moschip Technologies Ltd Management Discussions.

Company Overview:

MosChip is a Hyderabad-based Semiconductor Product Design Services and Internet of Things (IoT) Solutions company with 20+ years of track record in the business. Its unique combination of product development expertise and deep knowledge of competencies ranging from Chip Design to Systems Development makes MosChip as a perfect ‘Chip to Cloud company. MosChip closely works with Indian defense labs in offering some of the high-end product solutions and also associated with globally acclaimed chip design companies like Qualcomm, AMD etc. In addition MosChip has been providing both semiconductor and system level solutions to various Indian government organizations.

MosChip acquisition of Maven Systems Pvt. Ltd., in 2016 is fully integrated into MosChip and has been making steady progress in the areas of Smart Cities, Asset Tracking and Telematics and providing soluitons for Street lighting, Smart metering and Industrial IoT.

MosChips acquisitions of Gigacom Semiconductor, First Pass Semiconductors and Institute of Silicon Systems have strengthened MosChips expertise in the Semiconductor segment, further all this Companys bring skill sets and wide variety customer base.

Performance Review:

1) On consolidated basis, the income from operations grew to Rs. 7,475.87 lakhs from Rs.6,017.24 lakhs registering a growth of 24.24 % year on year. The increased growth during the current year is primarily from Semiconductor business due to acquisitions. The loss before Interest, Depreciation and Tax stood at Rs. (1,443.00) lakhs while that of previous year stood at Rs. (507.18) lakhs. The Consolidated results however showed a Net Loss for the year at Rs.2,887.60 lakhs as against a Net loss of Rs.1,263.50lakhs in the previous year. The increase in loss is due to new hires done at the leadership level, which will get rationalized over coming periods.

The loss before Interest, Depreciation and Tax to income from operations ratio stood at (19.3%) for the current year as against (8.43%) in the previous year. The increase in loss before Interest, Depreciation and Tax is on account of following;

a) Lower amounts spent on R & D as against previous year, this has led to lower capitalization of manpower cost worked on IP and new product developments in the current year.

b) One time writeoff son account of receivables and others.

2) On a standalone basis, income from operations for the year stood at Rs. 5,869.07 lakhs as against Rs.4,555.86 lakhs for the preceding year. Standalone Net Loss for the FY 2018-19 was Rs.2,275.09 lakhs as against Net Loss of Rs.1,192.18lakhs for the FY 2017-18.

Semi-conductor Industry:

Semiconductors are extensively used in electronics devices, medical electronics and Military systems. Longer battery life, AI capabilities, biometrics, cloud computing, IoT will propel the future growth. Semiconductor industry will benefit from the ongoing innovation and development in connectivity, data centers, communications, automotive, safety & security, infotainment, navigation, home automation, wearable devices, etc. and will continue to see growth in the coming decade.

Semiconductor industry has been going thru rapid growth in 2019 with both the established companies and new start-ups making significant investments in the areas of Artificial Intelligence, 5G, IOT, Automobiles and data centers:

• AI Artificial Intelligence based applications demand is increasing rapidly across various industries. AI will also benefit semiconductor manufacturing by speeding up the process, increasing chip performance, reducing production costs and increasing output.

• Transition to 7nm node and beyond shift towards smaller nodes will bring competitive advantages of increased power and performance. This will ofcourse require significant cost and resource investments by the industry.

• Autonomous Vehicles increased connectivity, better battery performance in Electric vehicles, enhanced sensors required for the rapidly growing automotive technologies will spur the semiconductor industry.

• 5G deployment of 5G technology will increase demand for connectivity and connected devices and spur the semiconductor demand.

• AR/ VR augmented reality/ virtual reality in industrial, gaming, healthcare verticals augur new opportunities.

• Reduction in US Corporate Tax reduction from 35 to 21% has created a favorable business environment and increased spending in innovation and R&D.

Some additional highlights from the KPMG 2019 Global Semiconductor Industry Outlook:

• Semiconductor industry leaders expect that the U.S. and China will remain the top revenue-generating markets over the next three years.

• Smaller companies are becoming more and more important as the source of many ‘promising developments in the semiconductor industry with mainly IoT and AI as their focus.

• The top three ranked as top growth opportunity sector from the perspective of types of semiconductors is 1) sensors/MEMS, 2) analog/RF/mixed signals and 3) GPUs (think, for example VR and AR, both expected to drive revenue in 2019 according to 32% of respondents).

• The main issues facing the semiconductor industry are rising R&D costs (another reason, along with the above-mentioned innovation from small firms for more M&A activities)and cross-border regulation with both issues being connected.

IoT (Internet of Things) Industry

Mark Weiser, Chief Scientist at Xerox in 1991 gave the first definition of IoT, "world of ubiquitous computing in which all objects could sense, communicate, analyze and act with respect to other objects and people". Kevin Ashton then coined the word, IoT in 1999. IoT has now become mainstream across different segments and growing into newer applications.

IoT can be defined as technologies or/ and applications that equip sensors, devices to generate information; to connect to internet; to communicate to computing source for data analysis in real-time and enable smart action to be initiated. The number of IoT-connected devices in 2016 were estimated at 18 billion units and is expected at a CAGR of 15% to reach 31 billion units by 2020. IoT market value of US$ 0.4 trillion in 2015 is expected to grow at a CAGR of 20% to reach US$ 1.1 trillion by 2020.

IoT market can be generally divided into three broad categories: enterprise/industrial, consumer, and services/public sector. Each has its own distinct characteristics and market opportunities (table 1).

Table 1. IoT market structure

Enterprise/industrial Consumer Services/public sector
• Planning and inventory • Customer experience • Health care delivery
• Factory and operations • Channel connectivity • Commercial building Energy management
• Supply network and logistics • Aftermarket support
Representative value opportunities • New business models • New products and extensions • Public sector safety
• New products and product development • Lifestyle enhancement • Public sector traffic management
• Asset management • Crop yield management
• Demand and supply synchronization • Smart homes • Smart buildings
• Remote appliances • Smart cities
• Quality sensing and Prediction • Connected cars • Smart irrigation
Representative use cases • Condition-based monitoring • Personal lifestyle monitoring • Patient surveillance
• Dynamic routing and scheduling • Personal asset tracking • Smart law enforcement
• Manufacturing operations and • Customer and product driven • Public sector, services driven
product driven • Public cloud primarily • Public / private cloud mix
• Private cloud primarily • Millions of devices • Variable data set complexity
Additional features • Hybrid architecture • Simpler data sets • Medium number of devices
• Fewer devices • B2C channels • B2B2B, B2B, B2C channels
• Relatively complex data sets
• B2B channels
Projected global IoT spending share by 2020 50-60% 20-25% 20-25%

Source: Deloitte analysis. Deloitte Insights : deloitte.com/insights

The enterprise/industrial segment involves complex data sets and fewer devices in manufacturing operations within a private cloud environment. The consumer segment involves many devices in a public cloud environment and is more focused on consumer experience. The services/public sector segment is a hybrid of the two.

Source: Jenny Lai, Anderson Chow, Carrie Liu, and Chi Tsang, The industrial internet of Things, HSBC Global Reasearch, November 2016, p. 14.

Deloitte Insights I deloitte.com/insights

Major growth is expected to come from:

• Monitoring/ predictive maintenance monitoring key capital assets and leveraging advanced analytics to predict failures and administer preventive maintenance activities

• Asset tracking tracking movement and location of assets through sensors, real-time reporting and optimizing performance

• Dynamic routing and scheduling optimizing schedules and enhancing productivity in real-time

Industry 4.0 revolution and the digital transformation will drive significant increase in IoT capabilities and implementation across various industry verticals like oil & gas; power & utilities; life sciences/ health care; transportation & logistics; manufacturing; etc. Moschip intends to ride this growth wave.

Company centric Highlights and Key developments in Semiconductor Segment

MosChip acquired four Semiconductor companies in 2018-19 with a view to expand its capabilities, increase the customer base and expand the global presense. The acquisitions added additional skillsets / expertise in the areas of Analog/ Mixed signal design, Physical design (RTL to GDS2) and VLSI training, Serdes, IP products. These new skillsets may leads to increased business & opportunities in the coming periods / years

These acquisitions benefitting MosChip with an IP focus and USA centric business relationships with top-tier companies; even while making it one of the few companies engaged in Semiconductor Design & Deliver with full-canvass capabilities including Fab relationships apart from adding 530 talented & experienced engineering resources to the talent pool.

MosChip also acquired Institute of Silicon Systems Pvt. Ltd. (ISS) a highly recognized player in the training space which trained more than 1250 engineering students in the area of semiconductor design and development over the past eight years. This acquisition, will enhance the talent pool of MosChip in training its manpower in the latest technological advancements in the field of semiconductors and also a continuous source of talent supply to meet the growing needs of the business.

Company centric Highlights and Key developments in IoT Segment

MosChip, with its objective to be a preferred product development partner and single point solution provider, continues its focus on the fastest growing IoT segment.

MosChip has undertaken concrete efforts to strengthen its technology expertise and broaden its solutions and product engineering services offerings.

With persistent efforts for technology upgradation, solution ruggedness, customer centric approach. MosChip has launched next generation of CCMS solution to deliver higher business value at affordable prices. It has ensured that we have a better field implementation and operation. This has helped to increase the shipment of CCMS devices by 3 times (20K devices). On account of government driven orders, there is un-predictability in the segment. It is being overcome with realignment with lighting OEM, system integrators and ESCO partners for direct ULB and enterprise customer requirements in Indian and overseas markets.

Inline with the global market trends and new requirements in the Indian market on connected lighting, MosChip has designed an advance lighting automation solution (Greenlight). It supports individual lighting control with ON / OFF / Dimming, fault detection and edge analytics. It ensures higher visibility, flexibility and better energy savings for high wattage lights. The solution is being deployed on pilot levels as one of the first indigenous successful platform in India. MosChip is engaging with the stake holders and the platform is expected to be implemented on larger scale in coming months.

MosChips indigenous asset monitoring platform GeoHEMS for real time monitoring and control of moving and non-moving assets is being adopted by multiple global OEMs. It is a solution for performance, condition, anomaly detection, preventive / predictive maintenance and analysis. With larger adoptions in IoT segment security vulnerabilities are expected to grow and the solution is future proof with highest level of security of TLS 1.2 implementations. MosChip has won contracts from overseas Global OEMs and system integrators for design, production and supply of the solution and its variants.

With its expertise on leading edge IoT technologies, MosChip has undertaken product engineering services and successfully delivered solutions for safety wearables, connected safety sensors, automotive - telematics, Smart metering and Cloud based technologies.

Risks and concerns

The following important factors could affect our future results of operations.

Semiconductor segment

• Cyclical nature of Semiconductor Industry

After strong growth thru 2016-18 the industry has taken a dip in 2019. However, the semiconductor market is expected to recover in 2020 and continue to prosper. Semiconductor sales totaled US$481bn in 2018. Demand for chips related to the rapidly growing use of AI will contribute significantly to the industrys overall growth.

• Semiconductor Services under pressure from Pricing and retention

There is pricing pressure in the value added services space within the Semiconductor Industry as many MNCs are looking at lowering their R&D budgets and have expanded their operations within India and other countries with cheaper manpower costs. With companies like Qualcomm, Intel and Micron setting up their own design centers and expanding rapidly, its putting pressure on both billing rates and retaining key talent.

• Future success depends upon the continued services of key personnel, many of whom would be difficult to replace

The Companys future success depends upon the continued services of its executive officers, key hardware and software engineers, and sales, marketing and support personnel, many of whom would be difficult to replace. Because of the highly technical nature of its business, the loss of key engineering personnel could delay product introductions and significantly impair the Companys ability to successfully create future products.

• Others may bring infringement actions against MosChip Group that could be time-consuming and expensive to defend.

The Group may become subject to claims involving patents and other property rights. Intellectual property claims would subject the Group to significant liability claims for damages and invalidate its proprietary rights. In addition, intellectual property claims may be brought against customers that incorporate its products in the design of their own products. These claims, regardless of their success or merit and regardless of whether the Group is named as a defendant in a lawsuit, would likely be time consuming and expensive to resolve and would divert the time and attention of the Management and technical personnel.

• The Companys operating and consolidated results may be adversely affected by variations of the Indian rupee against foreign currencies and the US dollar

The Company has international exposure and is subject to currency fluctuations. The Company also consolidates its results with wholly owned subsidiaries in USA. Any adverse fluctuations in the currencies in which the Companys exports/imports or any adverse fluctuations against the US dollar would affect the Companys results of operations and the consolidated financial position.

IoT Business segment

• Working capital requirement

Supply of CCMS (Centrally Controlled Monitoring Systems) to the government directly by participating in the open bids or indirectly supplies through contracts awarded by EESL to others Long gestation in installation of the projects and require long outlays towards working capital given the process of awarding of contract, site preparation, inspections and follow-up for payments. The ability of the Company to raise the funds at optimum rates, would impact the profitability.

• Delay in deployment

Even though MosChips GeoHems products have made significant progress during 2019, the deployment and scaling of the business may put pressure on working capital and further R&D.

• Government policies

The priorities of the elected State and Central government(s) will decide the policy framework in relation to taking up of these projects which will directly impact your companys fortunes by way of lower demand for the products. Any change in the duty structure for import of electronic components, subsequent to finalization of price bids, would impact the profitability.

• Supply Chain dependencies

Your company depends on assured & quality supplies of various electronic components forming part of its products. Any disturbance in the supply chain process could impact the operations of the company.

Internal control systems and its adequacy

The Company has adequate internal control system consistent with the nature of business and size of its operations, to effectively provide safety of its assets, reliability of financial transactions with adequate checks and balances, adherence to applicable statues, accounting policies, approval procedures and to ensure optimum use of available resources. These systems are reviewed and improved on a regular basis. The Company has a comprehensive budgetary control system to monitor revenue and expenditure against approved budget on an ongoing basis.

The Company has an external audit firm to perform internal audit function to monitor and assess the adequacy and effectiveness of the Internal Controls and System across all key processes. Deviations, if any, are reviewed quarterly and due compliance is ensured. Summary of Significant Audit Observations along with recommendations and its implementation is reviewed by the Audit Committee and reported to the Board.

For and on behalf of the Board of Directors
Place: Hyderabad K. Pradeep Chandra
Date: 5th December, 2019 Chairman