Thank you, and welcome everybody to our analyst and investor earnings call for the third quarter and first nine months of 2023. As always, we have all members of the management board participating in this call today. Now, the presentation supporting this call was also uploaded to the investor relations section of our website, as well as the unaudited condensed consolidated financial statements, which are included in our interim statement as of September 13. However, if you are not online or do not have access to the files at this time, you should still be able to follow the call. Ladies and gentlemen, today's presentation contains forward-looking statements regarding future developments, which are based on the information currently available to the company.
As a result of risks and uncertainties, actual outcomes may differ from the forward-looking statements made in this presentation. Cherry does not intend to update these forward-looking statements. Also, financial figures in this presentation may not add up due to rounding. Finally, please take notice that this call will be recorded, and the replay will be made available in the investor relations section of our website shortly. Now I hand over to our CEO, Oliver Kaltner. Oliver, please go ahead.
Dear shareholders, dear analysts, and dear participants in this call, on behalf of Cherry SE, I also would like to welcome you to the Q3 2023 call on November 15th, 1:45 P.M. CET. Actually, it's 2:00 P.M. The executive board of Cherry SE is fully represented in this call. So also a warm welcome to my colleagues, Mathias Dähn, our CFO, and Udo Streller, our COO. We all will be available to answer questions in the later Q&A session, as we always do this. Coming to the business. In our third quarter this year, we have seen a mixed performance across our various business segments. We ended with a group revenue of EUR 27.3 million and an adjusted EBITDA margin of -4.6%. The results got significantly influenced by the following main factors.
Gaming and office peripherals still are on track and expectation, with a solid growth for office of around 8% and gaming of 14% in the first nine months, with further market share gains. Cherry Digital Health and Solutions business unit is behind expectation with -32.8%, which is impacted by reluctance of medical service providers to purchase eHealth terminals in the third quarter of this calendar year. We see significant misses, both in revenues and profit, in the component business. Let me provide you with some more detailed information, business segment by business segment. The business performance of the Cherry's Group various business units varied greatly over the course of the year.
In the office and gaming peripherals line, we were able to record up to double-digit growth and increase our market share over the course of the year on the back of a strong product portfolio, a richer strategy of going international, and optimized sales management, despite an overall decline in consumer demand in the key markets. The main season for gaming products is now with, A, the various Black Friday windows, B, Christmas selling, and C, after Christmas selling, which is going to take place the first week in January. Office sales shows constant growth potential to an established hybrid working culture across different industries, company sizes, and countries. Some numbers. With revenue of EUR 19.9 million, the gaming device business unit also performed better than in the same period of last year.
Growth was mainly due to the acquisition and integration of the Swedish esports specialist, XTRFY, which took place in January this year, and the products of which obviously are really complement the Cherry product portfolio and are now being offered and sold on the market under the new joint premium brand called CHERRY XTRFY. The professional business area generated revenue of around EUR 60.1 million in the first nine months of the current fiscal year. By contrast, business with eHealth terminals fell short of our expectations due to the current reluctance to buy on the part of medical service providers, which is being impacted by external influences. On the other hand, the market remains unchanged in terms of size and relevance for our solutions that have a technical and system advantage compared to competition.
We expect a ramp-up in sales from now on for the rest of this calendar year and ongoing for next calendar year. The main reason for the decline in revenue in the digital health and solutions business unit were delays in the telematics infrastructure that went on for longer than expected, caused by political and technical factors affecting the implementation of new specialist applications, such as the e-prescription and the electronic patient record. Due to the introduction of the e-prescription on July 1st this calendar year, which will become mandatory at the turn of the year, and the planned mandatory introduction of the electronic patient record by the end of 2024, demand for eHealth terminals was expected to increase in the third quarter. However, as stated, the ramp-up in demand has not yet begun.
The change in the system of funding pharmacies and doctor surgeries for the equipment and operating costs arising in connection with the required telematics infrastructure TI, which also has changed from reimbursement of the initial equipment cost for a monthly TA flat rate on July 1st, has contributed to the general reluctance to purchase. In contrast, business with hygienic and washable input devices benefited from a strong product portfolio and a growing international market environment. Here, we show a good year-on-year increase, especially based on deals that we have now landed over in the United States. The security device business also grew by around 4% year-on-year. In the final analysis, however, it was the components business unit that was the main cause of the overall decline in business performance in the third quarter. Losses that could not get compensated by the other business segments.
After strong growth in 2021, driven by the COVID-19 pandemic, the keyboard switch business slumped by 62.5% in the following fiscal year. In the first nine months of the current fiscal year, the revenue decreased by further 51.9%, and the upswing in demand originally expected for the second half of 2023 did not materialize. We also have to keep in mind that the patent on MX1 ended in year 2014. Since then, Chinese manufacturers built strong foundation of production facilities to cover the global market with quality, top price switches for the entry product range market. So the feedback we have received from OEM parties on our portfolio is straightforward. MX1 is technically outdated and overpriced. MX2 is underpinning Cherry's technology advance.
We are back into leading position from a technical perspective, but manufacturing and selling costs must match with the latest market expectation when it comes to pricing. ULP is top innovation made by Cherry, with a standalone position in the market worldwide. As part of the strategic realignment and restructuring of the business unit, inventories of discontinued Cherry MX switches amounting to around EUR 2.8 million were written down in full. To support the market launch of Generation 2 MX switches, the Cherry management board has decided to discontinue the previous technology. On Friday, November 3rd, 2023, the executive board made a strategic decision on the future setup for our component business that got full approval by the supervisory board of Cherry SE. The decision got published by an ad hoc news, followed by a corporate news the same day.
Let me give you some background on that key strategic change. Due to the lack of competitiveness in the market segment for MX Generation 1 keyboard switches, the switch business requires a substantial repositioning. To repeat, in fiscal year 2022 and from January to September 2023, the switch business declined by 62 and 51.9 percentage points, respectively. Despite targeted countermeasures as part of group-wide operational excellence, we expect a significant unplanned EBITDA charge in the 2023 fiscal year. The reasons for this development are too low sales volumes with too low unit margins in the switch business, and the fixed costs are too high as a result of significant capacity underutilization.
As mentioned before, the compensation of those losses by the other business segment is not possible, and it's not acceptable to the stakeholders of Cherry SE in the long term, and requires a strategic realignment of the components business unit. To this end, we have resolved a comprehensive package of measures along the entire value chain of the components business unit in order to permanently restore competitiveness and profitability in the switch business. In doing so, it is our goal to concentrate more and more on innovative strength again, and at the same time, to ensure more and lasting market relevance and acceptance of the current product range. With ULP MX2, we are meeting the expectations of our global OEM customers in terms of innovation, pricing, and volume.
After installation of the second automated assembly machine for Cherry MX ULP switches at the Auerbach site in June, we see the first fraction of this product line in sales. We also started to sell the first units of the MX2 switch in the third quarter. On October first, 2023, we announced that Cherry SE has signed an OEM general agreement with MEDION AG to expand partnership for further media product ranges with Cherry MX technology, the first direct contract in this area. We will also achieve additional sales potential via switch variants localized in China, while significantly reducing manufacturing costs. To secure the improvement potential, we are reducing fixed costs in the global Cherry organization. And yes, the components business remains being a relevant part of Cherry's overall portfolio of products and services.
So how does the future structure of the components business unit and catalog of measures look like? Based on the need to realign our switch business, we have made the following management decisions, whereby the sites in Auerbach, Germany, Zhuhai, China, and Vienna, Austria, are closely networked in the operational service areas of engineering, development, production, and logistics, and adapted to customer requirements. The Auerbach site in Germany. Number one, development and production MX2 switches for use in own products in the international market. Second, development and production of ULP switches in the international market. And third, innovation development for the MX and ULP product lines with regard to MX 3 and ULP generations. The Zhuhai site in China. Number one, production of office and gaming hardware for the international market.
Second, development and production of office and gaming hardware, especially for the Chinese and other Asian markets. Third, control and quality assurance of the production MX2 switches for use in Cherry partner products in the international market. This, in cooperation with a new external production partner. And fourth, focus on product innovation and building engineering competence for innovative gaming products in China, with local development teams and startups that are located in China. Talking about the Vienna facility. Number one, it's all about the development and production of eHealth terminals for the international market. Second, development and production of PIN pads for the international market. Third, development and production of IoT sensor technologies for the international market. And fourth, software development for the medical field and others, also for the international market.
The new collaboration partner in China is responsible for the production of MX2 switches for use in Cherry partners' products in the international market. The goal is also to build engineering expertise for innovative gaming products, such as switches, hardware, and software, with selected global development teams and startups in China. So we're going to ramp up China as a total, but as we are in that market, established with an own facility, obviously, we're already looking back on a very strong legacy. For the production of Cherry office hardware, including Active Key keyboards and mice for hygiene, medicine, and industry for the international market, we continue to work with production contract partners also located in China.
Through these measures, we are networking the three facilities more closely and efficiently with each other than has been the case to date, thus strengthening their future viability in the market. And again, we're talking about the three facilities that are fully owned by Cherry. As a result, Cherry SE is increasing its competitiveness in all business areas across the entire product portfolio, and tapping into the potential for significant cost savings and earnings improvement, while ensuring compliance with Cherry's typical quality characteristics and specifications. Since 2019, China has demonstrably developed into the core production country for qualitative switches in the entry level and volume market. We're taking that into consideration.
It is important to focus as Cherry, again, in our own innovative strength in the middle and upper segment, and at the same time, to take advantage of the advantages in the entry-level segment, if we see that case by case, deal by deal. Over the years, Cherry has built up a stable base with a high performance team in China, from engineering through production, marketing, and sales. It's one of our best in class teams that we have. Our new strategy will benefit from this, and our partners and customers will also benefit just as that. In this way, we underpin our claim to market being relevant, innovation leadership, product quality, volume solutions of all sizes, pricing expertise, and profitability.
As we go through a broad and wide resetting, these measures are part of a planned overarching reorganization of our group structure and organizational structure as part of ongoing operational excellence with the following characteristics. Number one, minimizing the number of legal entities in a first step by merging Active Key GmbH with Cherry Digital Health GmbH. Change of legal name from Theobroma Systems Design and Consulting GmbH to Cherry Embedded Solutions GmbH. Third, global structure for product development, product management, marketing, sales, finance, et cetera. And fourth, adjustment of the organizational size from currently 460 full-time equivalent employees, to an anticipated total of approximately 355, effective March 30, next calendar year. Now, Mathias, please provide us with some financial data on Q3, but also the rest of the year and with regard to the resetting measures. Please, take on.
Thanks, Oliver. Let's stay at the Cherry at a glance slide for a second. I'm not going to read to you all the figures. I think the most important item that I want to highlight is that even though Q3 was not as we intended it to be, the most important message is that the other two business units, in particular, the peripheral business units, was able to counteract and compensate partially the profitability burden that the components business has put upon us. Revenue after nine months, just under EUR 90 million, EBITDA 2.2%. Still, the 451 staff that Oliver has just referred to. Ongoing M&A net debt 0.8 , and operating cash flow, I will come to that in a minute.
But I'm not going to read all the data to you. You could retrieve that already, I trust. Again, key financial indicators, group revenue in sort of a mixed bag. Solid growth, solid growth in office and gaming. Increases in market share, however, not absolutely unsatisfactory development in components with over 50% year-on-year decline. Oliver has elaborated on the MX switches, and we come to what we have done and what we have anticipated in a minute. Digital health already characterized by Oliver, customers' reluctance to purchase eHealth servers in Q3 continued with revenue down just over 30%.
I think the most important message here on the right side, gross profit margin negatively impacted by the inventory write-down for the MX1 switches. And as well, the EBIT margin, mainly driven by reduced gross profit, but the-- and I will come to that in a minute, the unplanned operating loss from components business unit. Inventory structure, finally, we are moving in the right direction. We stopped, or let's say, cut, inventory inflow at the beginning of the second quarter at, let's say, in the first half year. So, as these goods are shipped, you know, from China, it's natural that, you know, stopping on day one does not mean that the inventory build-up stops on day two.
But so we are here, let's say, witnessing the effects that we have initiated in H1. Clearly, we are not happy with what we have achieved so far, but the main and chief important message here that I have on that slide for you is that, with the strong business that we anticipate in Q4, in particular in peripherals and gaming, we will bring the inventory, the end inventory down by roughly EUR 30 million, in the vicinity of EUR 30 million. Might be a little bit more, might be a little less, but I think EUR 30 million is the right figure to run with right now. Obviously, Q4 has three months, and even those months have weeks and days.
We can't really tell, you know, in which exact time the cash will be collected. So, some of that will drop into Q4, some of that will drop into Q1 of next year. But I think the most important thing is that this EUR 30 million will be realized following a strong pickup in demand or pickup in revenue in the fourth quarter, in particular in peripherals and gaming. On the cash flow side, you see that the picture has not changed much. We are still, you know, suffering from high inventory build-up. We are still seeing, let's say, net working capital increases year-over-year.
Definitely for me, however, important to focus on the second big bullet on the right side, we see a sequential improvement in quarterly cash flow development after - 17.8 in the first quarter. Still disappointing, - 8.7 in the second quarter, but now we are at - 5.2. So you see that the, the trend is definitely moving the right direction. And again, with the strong reduction in inventory that we foresee, that will be reversed in the upcoming quarters. Outlook for 2023 specified. So we we specified our revenue and EBITDA guidance to around EUR 140 million in revenue and around 10% in EBITDA margin. The midterm key targets are unchanged.
So, they, I think, have been up just after the second quarter. But now, for me, the most important issues are on the right side here. The 10 million losses in components was never budgeted and never anticipated. We realized those, we realized that the components business was having those issues, and our answer is pretty swift. Having realized the 10, we counteracted, we came up with a plan which we announced beginning of November, if I'm not mistaken, and we will be super swift in execution. So that, as Oliver has pointed out before, the components business will no longer be able to make these losses. So basically, in our midterm outlook, you can find it down there in the top, sorry, in the bottom right corner.
We will unlock EUR 10 million of annual savings. Let's say around about EUR 10 million annual savings. And those will, you know, after we provide EUR 11 million for provisions and job cuts and other external costs, they will be effective from day one in Q1 2024. So, we looked at the components business. We realized that we have an issue there. We counteracted super, super fast, and the components business, after restructuring, will no longer be able to come up with losses of that magnitude. In the middle, we just gave you a little bit of a precise view on how the restructuring charges are going to look like.
We booked them in Q4, EUR 11 million for provisions for the job cuts and other external costs, and EUR 9 million for non-cash impairments of property, plant, and equipment, as well as for the EUR 2.8 million of MX1 switches that we have written down in Q3. All in all, that will allow us to come back to a very profitable business in the midterm. Again, I think for me, the important message here is that even with, 2023, not as delightful as we had hoped for. The two business units that are not components are showing with great, let's say, strength that the underlying business performance of those two of the remaining business units of the Cherry Group are very strong.
They underpin our earnings potential, and also in order to rectify, let's say, the issue that we have in the third segment, we came up with a restructuring plan that we are executing as we speak. If we're not talking to you, we are just in the middle of execution of that restructuring. So that, thanks to all of the, and the outlook for Q4.
My comment to start with on that slide is that we became better now in terms of tracking our sales flow from our warehouse to distribution, to the retailers, to the e-tailers, up to end consumers and end users. That means, like in both lines, B2B and B2C. What we see right now, with regard to Q4, is that obviously there was a negative impact in Q4 last calendar year, by the fact of the change of the Chinese distributor. Something that obviously has been managed, and we're now looking forward to the Chinese season, obviously gearing up compared to last year's quarter. Second, obviously, we see an ongoing development of our international strategy, especially for gaming devices and office peripherals business, with a better penetration in the key European markets and also the U.S. market.
The second element that is not reflected here on that slide is that we see the hygiene medical products from Active Key. We are really gaining some more traction also here in the United States. And the security business also doing on track, obviously also very much driven by businesses we see in the United States. It's very clear that when we're talking about B2C products, this is now the major season. You see a kind of Black Friday activities on Amazon, but you see that across all the different type of e-commerce platforms. The Cyber Monday and the holiday season around Christmas, not to forget again, the first three weeks in January are pretty solid kind of revenue contributor for all our businesses that we're in when it comes to gaming and office peripherals.
We also have some product launches and updates of products here in the Q4. That means, like, we have enough kind of footage that we can really share on the influencers, esports organizations, but also obviously on social media, which is going to really create a certain kind of an extra, an extra push. The latest on eHealth terminals and PIN pad is that, obviously started in October. We see that there is a swing going north with regard to increasing kind of sales there. We're also tracking the kind of inventory that we have with our partners.
We are mainly using distribution and system house partners, and given the fact that we have that kind of legal construction there, starting 1st of January, obviously, we now also go back to our partners and say, "Look, guys, you really need to fill the market with the appropriate amount of volume that is required," given the fact that obviously everybody is asked to really go eHealth terminal and using digital PIN pad solutions for the upcoming solutions, again, required by the political parties. These are the kind of major impact assets that we see for Q4. This is it, obviously. We would now kindly ask you to start the Q&A session again. It's Udo Streller, also in the room, Matthias and I.
So please, going back to the operator to really collect the questions and, yeah, very, very happy to really take your questions from now.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to withdraw your question, please press nine and the star key again. Please press nine and star now to register for your question. First up is Oliver Frey from Bankhaus Metzler. Over to you.
Hello, I hope you can hear me?
Yes, we can hear you.
We can hear you, yes.
Perfect. Thank you for taking my questions. I would start off with two. Regarding Q4 maybe, and the pickup you expect coming up. Can you give us some insight on how Q4 started? And if you can already see an acceleration on top line, knowing well that the major events like Black Friday and Christmas are still ahead. And maybe on adjustments for the full year. As of Q-- as of nine months, we can see around EUR 5 million of adjustments. You talked about the EUR 20 million expected for the restructuring. Can we look at EUR 25 million for the full year? Maybe some insights on this part. Thank you very much.
I take the first question. I would then obviously give Mathias the opportunity to give you an answer on the second one. From a pure operational perspective, obviously, what we're doing is currently, and that started obviously in October, we're simply laying out kind of deal term sheets out to our partners. And what we usually also do is, we kind of oversell what we have as inventory. And currently, obviously, it's very much our focus to really sell what we have on inventory on finished goods. And we have seen some nice traction already in October, but again, to be quite frank, given the fact that obviously this is a very kind of backloaded business in the fourth quarter, we now have to really look into the next six weeks.
These are the kind of weeks that really make it, make the difference there. Specifically, the next four weeks, obviously, for Christmas, and obviously, it's the last two weeks in December where we really need to reload the channels for the first three weeks in January. So it's really now the time to really get all the deal term sheets back and to really start the logistics in terms of putting the products from our warehouse to our partners. So it's now the time.
So as to your question regards the, the adjustments, we said that we would have around EUR 11 million of a provision that we built. These obviously do not touch EBITDA because we had adjusted for them. We have already written down the EUR 2.8 million in MX switches in Q3. Those will be adjusted or have been adjusted, and the rest obviously is not touching EBITDA because these are a non-cash, non-EBITDA items. So if that is a proper answer to your question.
Thank you very much,
Welcome.
The next questioner is Marie-Thérèse Grübner from Hauck Aufhäuser Investment Banking. Over to you.
Hi, Marie.
Yes, good. Hi. Sorry if there's a bit of background noise. I'm traveling, unfortunately, today. A couple of questions from my side. In the EUR 140 million of sales you're planning now, for the full year, how much is budgeted for eHealth alone? Not eHealth and security, but eHealth in Q4. We have, like, a EUR 3.3 million run rate, roughly, for the first nine months. So that's my first question.
So, Marie- Thérèse , we gave you a guidance for the full year for the full group, and that's it.
Okay. Okay.
Right.
All right.
Sorry for that.
That's fine. [crosstalk] No, no worries.
You tried.
Okay, no worries. Yeah, I did try. Now, next question is, the R&D spend. You know, there was a bit of an acceleration in Q3 at 5.1% of sales. What kind of ratio is targeted for the full year?
Marie-Therese, I think here it's, it's wise to look at the outlook for, for the years to come. We have said what we wanted to say about the R&D expense ratio. It will be between 3% and 4.5%, in the midterm, and I think for this year, believe me, we do our utmost to reach the adjusted EBITDA margin, but, you know, breaking down the figures line by line, I would say-
Okay.
- is not making too much sense to me right now.
All right. Okay, so I skip the next one. Maybe the CapEx question. We had EUR 6.6 million of, of pure CapEx as of nine months. What is- what are you budgeting now in light of the latest, you know, change in strategy for MX, for switches?
So we are not, we are not, I think I've said this before, we want to go from an asset-intensive to an asset-light business model. Please keep in mind that in terms of accounting, some of the IFRS 16 items are considered investments for, if you ask me, no good reason. But we don't plan to have any, let's say, investments that I would also call an investment, like in machine equipment, new facilities, no, nothing. We don't have any plans to do any of that.
We should stick with the roughly EUR 6 million of CapEx full year, so there's nothing coming in Q4?
No, no big things coming in, you know, if it's not related to IFRS 16, no.
Okay. And then, the cancellation of the MX Gen4 machine order, is this resulting in any penalties?
From who? If I may ask. No, the penalty-
I don't know.
The thing is, you know, no- [crosstalk]
Because you ordered the machine- [crosstalk]
Now you got me. [crosstalk]
and you're not taking it, you know? So.
Don't get me, you know, excited on this. The thing is here, we are absolutely let down by the supplier. We intended to have significant cost savings with the MX Gen4 machine. They are not coming, and the supplier simply let us down. So if you ask me, is there a penalty upcoming? Well, my question would be to who? Because basically, my question is to the supplier: How could you let us down, and what are you doing to compensate? I'm not saying that we are suing. I'm not saying that we're gonna get any compensation, but the thing is, we are not at fault here. We are not a bit at fault here. Let me put it that way.
Okay allow me to enter. We terminated the contract by the fact that the performance was not met according to the contract signed.
No, no-
After strong-
That's perfectly understood. Okay, thank you very much for the clarification, and these were all my questions. Thanks for taking them.
Thank you. Safe travel. Take good care.
Yeah. Thanks a lot.
Next up is Julian Dobrovolschi from ABN AMRO - ODDO BHF. Over to you.
Hello, good afternoon, gentlemen, and thanks for taking my questions. I have two with small follow-ups, if I may. The first one is on the switch, kind of the expectations for Q3 with the-
... You're barely audible. Can I interrupt? I need to interrupt you. You're barely audible.
Can you hear me now?
A little bit better.
I'll try to speak louder. It's probably because of the- [crosstalk]
No, it's less about the volume there. I may say it's more about we have a lot of interruptions there. Most probably your line is not solid.
Oh, hang on. I'm gonna switch to the phone.
Oh, yeah, maybe, yeah, because honestly, your line is not solid. Yeah.
It's getting worse.
I'll break in the line, call it on the phone.
We take the next questioner, and it is-
Yeah, that would be great. Just loop him in later.
Yes. Yes, exactly. So next is, Miguel Lago Mascato from Montega. Your line is open now.
Okay, thank you very much. Hope you gentlemen can hear me well.
Excellent, yeah.
Great. All right. So first off, you mentioned components is still a core part of your, yeah, let's say, company and strategy. But now you have a sort of a external provider for the MX2 switch business, which is like, yeah, the sales driver for the next year, I guess, apart from ULP, now that you have MX1 discontinued. Do you see any major risks from this outsourcing? And how is negotiation going with, yeah, with the sales partners for the MX2?
Mm-hmm. Let me just sort it out to be very precise. We still keep MX2 production in Auerbach for our own products, our own keyboards. So we still remain MX2 production also in Germany. Obviously, we had the chance to really look into the requirements given by OEM partners, and they're all fine with having MX2 production out of China again, which is already the core market when it comes to switches anyhow. That means like, we need to ensure, and it's one of the requirements, obviously, need to be managed by our COO and our Chinese team, that all the quality requirements from engineering throughout production, throughout logistics, are going to get met. But that's a very normal procedure, quite frankly.
There's one thing that we also have to bear in mind, is with the new kind of cost structure that we have in terms of production costs on MX2, our competitiveness in the market is going to increase significantly. And this is something that specifically OEM partners are also looking into. So quality, number one, price relevance, number two, and then obviously, it's all about innovation. And personally, I can say, like, I, I need to look at all of us as becoming again, more an innovation center rather than a volume production facility. And with that swing, obviously, we are now kind of taking the best out of the countries, which is top-class production in China and top-class innovation that I'm expecting in all those lines from Germany.
Yeah, and to add, I mean, some really operational side, the subcon model, the subcon contract we will have with our partner, it basically will ensure that it's a Cherry switch. It is very switch manufacture with a partner, but with all aspects to being a Cherry switch.
Sorry, but I didn't catch the last part on the operational side.
Sorry, again, so means I only summarize that I say, we'll be manufacturing there with a partner. It will be a Cherry switch in all aspects, quality, performance, all kind of aspects.
All right. Yeah. No, no, no, that's, that's, that's for sure. So you don't have—you don't expect, or do you have sort of extra quality management measures you are taking there in order to ensure this, what you just mentioned?
Yeah, for sure. There's one element that we, as already mentioned by Oliver, we have our strong team ensure already, and we will strengthen it further, taking care so we really are at the site. I mean, we know the sites and also we know the places, we know also the partners for years already. And the second point is, of course, for the qualification for the REM, this will be ensured by structured and extra measures for the, for to ensuring the quality, with fixed procedures, KPIs and frequency of control and all these elements. For sure, yes. The answer is simply yes.
Okay. And you have worked with this supplier before? You know how the quality is supposed to be over there or anything you can-
Let me say like this, as we have not finally decided which partner is it, but we know them. Also, we have visited them before already, even kind of pre-ordered them before, and even we also had indirectly, we are XTRFY to some, business relationship already with some of them.
Let me add two things here, because I think, like, it's something that might be relevant for the broader community. We should not look at China as being a kind of a cheap production country in that segment, because they already have kind of proved what they can do. And by the way, they have proved it in our own Cherry facility. And the second thing is, if we look at the component business overall, we should not look at the business having switch generations for longer than five to six years, quite frankly. That means, like, we ask our teams to already start developing of MX3 and ULP 2, because this is going to really give us the advantage always to be the innovation leader, taking the four to five years and maximizing volume and sales.
At the same time, we're going to again restart looking into engineering the next generation. That is exactly what we need to do. What is definitely a correction of error, to look into the German facility side being a volume production side, and that's exactly the thing that we have now changed, and we're very much looking forward to the next setup. And again, since we are now discussing also straight to the OEM partners, that's the model that will be very kind of beneficial to all the parties being involved.
Okay, quick, quick, quick, and maybe last question from my side for the time being. Can you just elaborate on the last part discussing with OEMs contracts apart from MEDION? Do you have anything to share with us in a more abstract way?
If we, if we would have something to share, then it would be based on two signatures that we would see on the last page on a, on a contract. As this is not the case, we did not started to communicate that, but I can tell you that I'm looking into a pipeline that is, promising. MEDION AG is a, is an important start, as MEDION AG is the, the German partner of a big Chinese company called Lenovo, and they made a very successful business happen, obviously, not only in Germany, but based on how do we combine German engineering with international production to fulfill all the requirements on international market. So I'm kind of looking into that with a, with a solid level of, conviction that we're getting to the next and to the third.
All right. That's it. Thank you very much, everyone, and best of luck with you.
Thank you for the good questions. Appreciate.
Thank you. And now we have Julian Dobrovolschi from ABN AMRO - ODDO BHF on the line again.
Yes. Can you hear me a bit better now?
Now it's 10 times better.
Yeah. Great.
Yeah, the green song. Good.
I changed the peripheral, probably, to a switch one, to a Cherry one.
Awesome.
Just a couple of questions to follow up on the switch business. So I think in the press release, you said something that the you expected a bit of an upswing in demand originally from Q2 to Q3. So basically, actually, to generalize from H1 to H2, and you hadn't really seen that one happening in Q3. And therefore, the restructuring measures that you drew down to execute on. I was just wondering if you can explain a bit to us, you know, based on what kind of assumptions you're expecting this upswing to happen, and actually what exactly happened there? And maybe if you can also speak a bit about the underlying market of the switch component business.
Oliver will talk about the underlying market, and let me just give you a clue on the budgeting question. We don't know. We weren't there. It was the assumption that, you know, post-COVID, the market had a downward trend in 2022, and that a natural rebound, sort of a, in inverted commas, a natural rebound would set in, which is a meaningful assumption, which just didn't materialize.
With regard to the overall market, obviously, number one, all the OEMs looking into 2024 as a starting year of a next level of generation of notebooks and also keyboards. Second, we're going to see already different types of switch developments in the market, where it's not only kind of a piece of hardware, but a piece that is also kind of getting connected with software solutions, which I think like it's probably one of the most promising and exciting things that we see in that segment. And at the end of the day, we have seen so many touch devices in the market, while at the same time, the switch keyboards have seen a fantastic growth path also over the next years, and that's exactly what we see for the upcoming years.
So it's still a market segment that is promising, and that was one of the things that we have looked into specifically when I said, like, we're not giving up the component business, then because of this. Then because of the fact that switch will remain an important business line of Cherry. But as I also stated, from January onwards this year, it's not the core line, but it's an important line, and we're going to incorporate that business line into our own and our partners' finished good product, in the way that users also will see that Cherry is still committed to provide them with the best in class and highly innovation, top-level products that we can offer them. So we're absolutely committed to really keep going.
Understood. Maybe also kind of a follow-up, in a way on this, but also relating to the write-down of inventory of the MX1 class switch. Can you please bring it back to basics to us and explain what is the fundamental difference between MX 1 and MX 2? I remember at IPO, it was the discussion only about the MX RGB product, so what it wasn't really, let's say, difference between one, two, three class, whatever.
But now we'll, we're speaking about basically forgetting about MX 1 class and switching to MX 2. And frankly, I wasn't able to find any kind of, let's say, proper technical characteristics between, you know, what's one and what's the other one. Can you please explain a bit to us and basically why MX2 is such a more future-proof product than MX1?
From the technical side, first of all, the MX 1 is the design, so it stays with many, many years without any upgrade. The MX 2 had several elements, of course, as also published on our webpage, and we did technical improvements to make it basically up to date and as a leading product. So it means to have the lubrication, to have also a difference in the spring geometry. We have better stabilization, more precision, and basically, the touch feeling variance is improved, and also out of this, we have quite positive feedback.
From the user side, also, as Oliver already mentioned, from the OEM side, in the end, MX Version 2 is a different version. So I mean, it's a new product, definitely. MX1, as said already before, only to underline, it's outdated by technology and also by price, and therefore it's basically not sellable anymore, at least from the price that we have.
I guess among the different types of, let me say, uplifts on that product, there's one thing that you can experience immediately yourself, which is the precision in every press. Because what clients, that means like, end users, always come back with in times when they're going to use even more kind of keyboard experiences based on homework and home office, they clearly say, like, "I don't have a very precise type of keyboard." And quite frankly, it's not because of the tap, it's always because of the switch. And that means like, since we're going to see more writing on keyboards, it's really exactly what is explained here.
The second thing that is so important is, and I think, like, it's a fundamental strength of Cherry, quite frankly, is a lot of the performance requirements have been developed on the gaming side, which are now going to get converted into the office products. That means like, we see even more kind of upside on the performance curve of the switches and all the finished good products, based on requirements that have started in gaming and now getting handed over in office.
That's a kind of a constant look and listening to what end users are sharing with us. That's what I also said, like, we should get rid of the thinking that we're going to keep next generations out there for five to more than 10 years. It's really about like, we have to go back into an innovation engine that is providing next generation within five to seven years, to really fulfill all the future kind of user needs that we see across the lines.
And this, let's say, four or five years ahead R&D development that you do, are they on the standalone, you know, just basically Cherry doing their own thing and try to kind of, let's say, push the R&D envelope even further, or it's also in the partnership with, let's say, OEMs. Because I believe, for example, in terms of the ULP switch, I guess that was designed in partnership with the laptop manufacturers, right?
Because otherwise, how can you design a product that you'd think would be, let's say, the best one on the market in terms of also integration aspect, when probably, you know, if you look at, you know, Lenovo even, or, or let's take the other one, Corsair-
Yeah.
-which is a big, you know, customer of yours, are they also designing, let's say, their product five years down the line, thinking that, you know, eventually there will be a place for the Cherry switch in that?
Yeah, that's a very good question. Let me try to answer that very, in a very linear way. Number one, obviously, there's a clear level of expectation when the OEM partners look at Cherry, and that's all about you guys need to drive innovation, full stop. If you guys are not going to really become more innovative, then obviously we're simply going to look into the market and grabbing some kind of standard model. So that's one thing. But now with MX2 and specifically ULP, we have it back in the market that we are innovative company. Second thing is, now working closer with all the OEM partners, it's very clear that they're now going to share their requirements on the future product roadmap with us.
That means like, we are now in the moment, really also processing some kind of customization developments, which is amazing, because we didn't have that type of direct feedback from the OEM partners in the years before. We were always kind of just delivering what was the OEM partner sharing with us, and it was very much the standard. We've had a nice wave in that standard business market, but quite frankly, as again, we need to go back into innovation mode. Now, having said that, we are very open to any of these type of technologies, but fundamentally, we must be the innovation engine. That's the part. Again, we are also looking into now starting already internally, what should be the MX 3 generation look like? ULP, standalone innovation, standalone product.
There is almost nothing that I can look at as being competitive in the next years. Having said that, I'm asking our people to start already with ULP 2. That's the moment of truth. This is where we can really have something that is very extra to everybody, and everybody's getting back to us, ideally saying like, "Okay, we would like to start any kind of co-development with you guys." We're open to that, because we believe in the engineering power.
Understood. All right. That is everything from my side. Thanks for taking my questions and, yeah, good luck with the Q4.
Many thanks.
Thank you so much. Bye-bye. Take care. Thank you.
At the moment, there are no further questions. So if you have any additional questions, please press nine and star now. Nine and star for any additional questions. And now we have Jean-Marc Mueller from JMS Invest in the line. Over to you.
Yes, thank you for taking my question. Oliver, I have a question for you. I mean, you are-- you have a lot of experience with listed companies, unlisted companies, private equity. You're basically telling us that you will produce EUR 14 million of EBITDA this year, and then the cost savings come on top, so you will do some EUR 24 million next year. I mean, that's very simplified math, but that's roughly what you're telling us. I wonder, why don't you pair with a private equity and take this whole thing private?
It's an interesting question. I don't think that's an appropriate question in the Q3 earnings call, quite frankly.
Okay, yeah, it's, you know-
So Marc, let's put it well. I took over a mandate January of a listed company. Udo is with the company, which was a listed company before, since April last year, and obviously, Mathias gladly joined us as well. We are doing the best for the company, and based on this, we're doing the best for our shareholders. I took a mission on a listed company, and I do my best every single day to do the best for the listed company. All the rest is out of my hands, quite frankly.
Yeah, I mean, you could actively work towards such a solution. If the company is that earnings powerful, I mean, that would obviously be a solution which should have crossed your mind. I mean, not just yours, but the whole management team. I mean, you could obviously stay on, and in a private sector-
Look again.
Make something really great out of it.
Look again, so much. Again, I don't think that this is the audience.
Okay.
But what I'd also like to say, like, I'm committed to take the company through this calendar year, which was kind of clearly laid out as a year of transformation. What we have identified is that we need to change a business that used to be seen as the core business. But even more, we have not kind of starting to complain about what we have taken over, and we did not stop with the analysis. What we have done is even further going into into kind of a business model that is enriching our overall product portfolio by taking component back to life. And I'm thrilled by that. And I'm thrilled by the fact that I know that based on 2024, we personally all can focus even more in driving towards a hardware, software, and a cloud-based company.
Quite frankly, I would personally be very delighted to spend more time on the cloud side and the software side of the business. Again, I'm going to do this in January, because this is my mission.
I have no doubt.
But basically, but basically, quite frankly, what we have identified on top Jean-Marc , and on a very serious note, I have a strong conviction of the substance of that company, and we sorted out things that sometimes you have to sort out. But looking ahead of time, obviously, this will become a hardware, software, cloud company.
Okay, thank you.
Thank you for asking.
Now we have Jörg Frey, Warburg Research, in the line.
Hi, guys. Just quickly from my side, can you talk a bit, as we've probably seen very clearly this year, had a project nature of the digital health business, what is-- what sales level in digital health do you consider recurring without any specific mandatory changes regarding the infrastructure or whatsoever? So what's your kind of underlying sales base that in the first one?
Yeah. Keep going.
Yeah, probably if you can just do it one by one, that's probably easier for all.
Yeah, that would be helpful. So the way we look at the eHealth business is quite, quite clear. There is a remaining market potential for hardware solutions. The good news about the hardware solutions is there's already incorporated software. That means, like, the company was kind of very thrilled selling hardware for many, many years. I am thrilled by the fact that since we have already incorporated software, I can really, let's say, uplift and upgrade our installed base over a period of time. In order to do so, we need to have more services. Now, there are kind of services like the e-prescription and other services that are floating around the market anyhow. They need to go through a certification process, as you all know. But this is clearly underpinning the fact that we're talking about the beginning of the digitization in medical sector.
Now, having said that, based on the very nice installed base that we have there, we still can sell hardware for some years, but even more important, I would like to enrich the overall services that's coming with the installed bases over a period of time. That means, like, we're going to keep selling hardware, we're going to see for especially that PIN pad is going north, which is fantastic. But again, my focus with the team is very much in terms of how can we enrich the software by adding new services and by enabling services to really get connected to our solutions there. And we have-
Probably on that note, if I quickly might jump in. Do you think you need to acquire some more software on that part, or do you think you have the in-house-
Mm.
Power to enlarge that?
So we have a very strong in-house team, which is located there in Vienna. We're going to see them refocusing on digital health, and medical sector-related software development, but it's a really strong team. I mean, strong in terms of high performance level. They're really keeping the metrics and the timelines and the milestones, which is fine. But quite frankly, this won't be sufficient. That means, like, our M&A strategy is clearly focusing on searching for companies and service partners that are going to enrich our kind of ecosystem that we're going after. Then, when it comes to cloud services, let's be very clear, this is something where we don't have the capacity. That means, like, we're going to look into companies that we're going to add to our portfolio.
Okay, understood. Then going a bit to the switches part. Well, in the past, you've positioned yourself also in the old MX line with a substantial price premium relative to the, say, copycats or the guys like Kailh or so. So how are you approaching that now with your realignment? What kind of price premium should we assume relative to Kailh? or if you could give us an absolute number that per - switch would also be helpful.
Mm-hmm.
Very good question there. Still the market looks at Cherry as a brand and a provider of innovative switch units. They will accept a certain kind of a price premium. But having said that, as we're going through a massive times of financial and kind of operational rebuilding the business here, we need to look into the manufacturing costs, and from there, obviously, we do the math in the future. But again, there is a certain extra that the market will allow us to get out there. Is that something that we have, let's say, exec- Let me say, that we have kind of put into the market in the past, like a price premium of 4x, 5x? No, forget that. That's not-
Yeah.
That's not the way, that's not the market that we're in anymore. And again, we have to also be very clear, we see Chinese production facilities, they have started to run the business in 2019, and since then, obviously, they really ramped up some top-class quality production, but they're very much in the mass volume side, right? And again, they're, we're not going to compete with them anymore because they're looking after, I don't know, 800 million-1 billion units per year. This is exactly the area where we should need to step out and where we should not be even connected with. We are the ones, we can deliver top-class innovation on a very reasonable pricing that is really kind of matching all the market needs. But again, we need to drive by innovation, and that's a different price model.
ULP, for instance, is a good example. There is no kind of competition out there, and we're not expecting any kind of competition in the next years. That means, like, we're going to ask for the price that is relevant for that top-class innovation. But again, we also would like to see that we're coming up with more deals in that segment, and that means, like, we're going back into collaboration and negotiation model. That's a very normal way to approach, but it's a different model compared to the last years, because the last years we were more in a kind of position, "Okay, we wait for your purchase order." I'm more into, "Let's sit down together and negotiate a good deal.
Right. Well, then the best of luck for future deals. Thank you very much.
Thank you for the good question. Appreciate.
Thank you. We have one follow-up question, which comes from Julian Dobrovolschi. Over to you again.
Julian, great to have you back in the line.
Yeah, indeed. Now that it's working, I want to put a lot of questions.
Yeah.
No, just to follow up on the healthcare business. You seem to be making a big bet purely on the telematics infrastructure over the midterm. So basically, let's say, the digitalization of the healthcare infrastructure from Germany, and with that, hoping to transform the company somewhat into a mix of cloud, software, and hardware business. Just wondering how large is the opportunity there, and if you could size up for us the total addressable market purely from Germany.
That is definitely something that is too early to talk about, quite frankly. What I can say is that so far the focus of the company was very much based on the German-speaking market. The more we get into the digital play, obviously, the more international we can get. And also one kind of news I can share with you, we're quite pleased to see how we have succeeded with our hygiene medical sector product based on the Active Key brand over the United States by simply changing the outreach and the sales model, because the product is so relevant. But now it's even more important to say, like, is that now a single product solution sale, or is it about like, "Hey, look, this is what Cherry stands for.
This is our overall portfolio that we have in the market." As you can see from that statement or as you can take away from that message, it's very clear that we have so much more potential in that segment, also by reorganization, reorganization of our way that we're approaching the different type of market. I look into the Americas, I look into key European countries, but I also have to say, like, we can still learn a lot from the northern countries, at the Benelux, as we even can learn in the digital medical sector from Spain, but none of these market is now completely saturated, so there is so much we can go after.
Understood. Thank you.
It's not going to help you with any of your models there, because I didn't share any number, but apologies.
No, that's fine. We're just, you know, having a bit of a high-level understanding of, you know,
Yeah
How this, how big, how big this could get.
Okay.
Thank you. We do not have any further questions.
Okay. First of all, thank you for obviously being on that call, and thank you obviously for being on that journey with us. As stated before, it's been a wild ride over the last 10 months, but it's been a wild ride for the good of the company. Again, the most important key takeaway is that, number one, we have a team of 20 top-class leaders in that organization worldwide, including three board members. We are completely dedicated, and we are completely committed to that mission. Second, we have a strong conviction that we're going to fulfill that mission to turn that company to hardware, software, and cloud. We already have a lot of software in our hardware, but we never talked about that one, and that's so much, but we can still do it.
The third element is, quite frankly, we have now kind of sorted out things that needed to get sorted out. Looking ahead, it's very much about leading the company more from an EBITDA perspective rather than from a top-line perspective. Games are over in terms of everything is fine, the cost structure is as good as long as you're generating more top line. No, our approach is exactly the opposite. We would definitely not go after a top-line business in the future that is not providing us enough EBITDA, and that's a major kind of 180-degree swap in the company, but it's for the good, and it's for the sake of the company, and therefore, also for you as shareholders. Thank you again for being on that mission.
Thank you again for obviously accepting that this was a kind of a wild ride. The year of transformation is going to hopefully end by the end of December. We're going to see some kind of adjustments, changes, and necessary things that we need to really get done in order to really reshape that organization, reshape that business. But it's promising, it's hard work, and we have to really take the next step, obviously, with the upcoming fiscal year. Looking very much forward to that one here. So thank you very much, obviously, for being on that call. Thanks to my team, and we're going to really keep working hard and dedicated to our mission. Thank you.