Analyst investor earnings call for fiscal year 2022, and the fourth quarter of 2022. Today we will have our new CEO, Oliver Kaltner, and our CFO, Bernd Wagner presenting. As in previous sessions, all board members, including our COO, Dr. Udo Streller will be available for any questions you may have during the Q&A session following this presentation. Since time is always limited in these calls, we kindly ask you to limit the number of questions to three. We will be happy to answer any remaining questions in the near future, also at upcoming conferences and roadshows. Our annual general meeting is scheduled for May 17th, which will be held in a face-to-face format in Munich. The invitation and the agenda will be published within the next couple of days on our website.
Now, presentation supporting this call was also uploaded to the investor relations section of our website, as well as the audited consolidated financial statements which are included in our annual reports. However, if you are not online or 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, who will give you a strategy and business updates. Afterwards, our CFO, Bernd Wagner will give you some more details on the financials of fiscal year 2022 and the outlook for the current fiscal year. Oliver, please go ahead.
Thank you, guys. Thank you, Kai. Appreciate it. A warm welcome from my side to everybody's on today's earnings call, which is the first one actually in my role as CEO of Cherry SE. As you all know, I was appointed by the supervisory board with effect of January 1st, 2023. We are reporting about a fiscal year today which has had its challenges, and difficulties for Cherry and the industry broadly. In addition to that, we are providing you with an outlook for 2023. Allow me a few remarks about my personal background at this point. I was born in Wiesbaden, Germany in 1968 and graduated in 1993 in business administration at the University of Applied Sciences in Mainz. I've gained international management experience in companies of virtually all sizes, in IT, information technology, digital business, and consumer electronics.
It also includes startup companies with a focus on cloud-based, and IoT services with software as a service business models and several cross-border M&A transactions. Taking over the CEO mandate, real privilege for me, as the company has a very strong DNA and a really remarkable legacy. My personal association with Cherry dates back to 1999 when I was with Electronic Arts in the gaming industry. I would like to sincerely thank my predecessor, Rolf Unterberger, for the very professional and sincerely pleasant transition phase. At its core, I find a company that stands on a solid foundation, a company that in the next stage, will be looking at our international business with a strong focus in planning and execution excellence. In addition to the user process optimizations and the internal efficiency and cost measures, some of which have been already initiated as early as 2021.
Now, as I have also been an investor myself for many years, I would like to start with a general remark, to give you an impression of my personal management approach in my new role at Cherry. In my 30 years of professional life, I've experienced a lot of tailwinds and headwinds. Whether in corporate companies, SMBs, or startups, it is always about outperforming the market and striving for profitable sales growth. I'm very convinced that we have a substantial years of growth ahead of us with Cherry. To achieve this, we have to position ourselves better, organize ourselves better, and implement reliable plans professionally. As I always say, confidence in the investment is the sum of confidence in the management, the business plan, and its implementation.
Cherry is celebrating its 70th anniversary this year, and it must regain credibility as a stock-listed company, and it will. I see a lot of talent and a lot of expertise in the company, and I'm convinced that by working hard and with passion, we will take Cherry to the next levels. In this context, we do have to acknowledge that Cherry has undergone several changes in structure in recent years. This has been a period of significant organizational change, as Cherry has transitioned from a private PE-owned company to a publicly traded company with the IPO in the summer of 2021. Another observation, there is a need for optimization in the fundamental process of market analysis and assessment, sales planning and control, production planning and control, finance controlling and accounting. This all in order to achieve greater overall resilience, and precision in our business processes and the execution.
Let me address some market challenges. Ladies and gentlemen, the year 2022 was marked by special challenges for all of us. While the COVID-19 pandemic once again proved persistent and among other things, had a massive impact on global supply chains, the Russia-Ukraine war and the associated political and energy-related effects, the increase in the inflation rate and the associated consumer purchasing restraint, particularly on the European continent, as we know, had a significant impact on our business as well. In these highly volatile macroeconomic conditions, ranging from extraordinary global growth in the technology sector to massive rebalancing within only two years, companies are dependent on highly reliable planning and management excellence. General inventories in gaming and office peripherals grew in 2022 due to an ordering behavior, which was largely based on the positive COVID-19 effect of 2021.
At that time, the ability to supply was decisive criterion for market success with significantly increased prospects for even higher sales and rising profitability. However, global supply bottlenecks have in some cases turned into disproportionately high inventories at some manufacturers in the course of 2022 fiscal year, including our largest OEM customers. Consequently, over the last few quarters, we have seen some big players in the sector starting efforts to sell off their inventory into a soft end consumer market via discounts. While this is challenging in the short term, the medium and long-term fundamentals of the market continue to be strong. To address the near-term conditions, Cherry has already taken measures to mitigate these market challenges, and some further management actions will continue to radiate into 2023. In general, our sales and operations management processes need to be optimized.
The interaction with operations, with subsequent integration into finance accounting controlling, undoubtedly requires technical system optimization. These have already been initiated internally on a far-reaching and in-depth basis in order to make Cherry more reliable and far-sighted, again in the fields of internal forecasting and external reporting on the basis of a solid business plan. With beginning of February, we have started to migrate our international sales operations to Salesforce. The interaction between sales, operations, and finance is also based on a new system. Daily sales corresponds now with a monthly forecast process, which at the same time leads into operations planning and forms the basis for finance controlling accounting. We have continued to build a qualified team in all areas, which will ensure obvious and necessary optimizations here. In our industry, some manufacturers have very high inventories. Bernd Wagner will later share an analysis of our inventory with you.
I can say that we are basically in a reasonable position. Looking at 2023, this year is a transition year. In its 70th year of existence, Cherry is making very specific strategic investments in order to be successful in the market in an anti-cyclic manner. Yes, the macroeconomic environment will remain tough, but at the same time, it is a global market of chances and opportunities and Cherry will attack. We are investing in organic growth, for instance, with e-commerce, Gaming Goes Global, plus also M&A, such as Xtrfy, a deal that was announced and closed in January. In e-commerce, we are planning growth of more than 60% compared to the previous year. We are ramping up ULP, our new product lineup across all business units, and we have great confidence in the abilities of our teams in the field.
Let me provide you with a strategy update here. Our mission is clearly defined with the expansion of the company into a relevant hardware, software, and cloud service company in the international market. The main reason why I took on the CEO mandate is my deep conviction that Cherry has a strong substance, and promising potential in a software as a service world, leveraging our existing installed base consisting of hardware and software offers. On top of that, we see global market trends that underpin and strengthen Cherry's growth plan in the medium and long term. We are well-positioned, and ready to play a successful role in markets where market size is much bigger than pre-COVID-19. F or instance, the number of gamers has grown over COVID period. There are 3.2 billion active gamers with a high proportion of female talent.
Gamers and creators are creating more and more content, which requires top-glass IT equipment. Market for workspaces has been grown due to the workspace now being at home and in office. The hybrid working model is just as it's beginning to get rolled out further, and it's providing us replacement of some of the existing equipment plus an increase of penetration rate in Cherry segments of keyboard, mouse, and microphone. Healthcare and security are at the crucial stage of digitization. This digitization requires hardware, software, plus cloud solutions and services as well. Cherry will expand its portfolio of equipment, services, and solutions. What are the key levers in our individual business units? Let's talk about components first. Cherry's business model to date has been based on working with the so-called ODR.
ODRs are the manufacturing companies that serve major brands such as Hewlett-Packard, Dell, Acer, ASUS, Samsung, Microsoft, Midea, Lenovo, and others. Well, this model makes us primarily dependent on their sales cycles and project orders, which can lead to price pressure and volatility. When we look for Cherry's strength, we see them in our fundamental forward-looking brand, product, and price positioning in the medium to high-end segment. Our goal for the future is to position Cherry directly as a global OEM partner for innovative components and keyboards going forward. The innovation relevant products areas that we have is MX ULP and STD, RGB, MX. They build a strong basis for direct collaboration with OEM partners. In doing so, we aim to, A, also become a direct contract partner to global OEMs through a new engagement model and direct offerings, while obviously keeping our businesses with the ODR partners.
B, increase customer and partner value through innovation and customization. C, to sustainably increase Cherry sales of premium products, components, and overall profitability. The business model will be activated in 2023. Significant outputs with a lasting effect are expected in 2024. Gaming and devices and office peripherals. Gaming Goes Global is by far one of the largest packages measures in Cherry's history. The integration of the Swedish Esports specialist, Xtrfy Gaming, the entry into the very prosperous Esports market go hand in hand with a significant expansion and internationalization of our distribution footprint. Gaming Goes Global generates positive spillover effect on all other Cherry product areas. In terms of sales and country mapping, we have never been so broadly and deeply distributed in parallel.
We benefit from the fact that the Xtrfy product portfolio is complementary to that of Cherry, whereby we now occupy additional product and price categories in the upper third tier. The integration of Xtrfy is already well advanced in terms of organization, content, personnel, and culture. The positive collaboration effects will already be felt in 2023. Xtrfy has positive ripple effects on our office peripherals business as well as both product management, marketing, and sales team launch both businesses holistically in the market. It all gets together now. Digital healthcare and the services. The digitization of the healthcare and security industry is getting more and more concrete traction and shape. The high installed base in the Cherry eHealth Terminal market, is a very promising starting point for significant growth in a highly regulated and certified German healthcare market. This creates very high barriers to market entry for competitors.
Our short-term goal is to expand our strong market position, and further develop our product offering into a platform by further integrating software solutions. Cloud services such as e-prescription should be fully integrated into our future solution offerings. The digitalization chain extends from hospitals, and medical practices to pharmacies and related service providers such as physiotherapists and others. Also, the security sector presents opportunities for, A, organic growth and also inorganic growth through targeted M&A deals. We will definitely continue to explore both avenues for expansion. Cherry goes very international now. Cherry, founded in 1953 by Walter Lorain Cherry in Highland Park, Illinois, in the United States, has always had a very international focus. However, the business has focused primarily on the German-speaking market in recent years, in addition to the U.S. and China.
With this year, and especially Gaming Goes Global, we are deepening our sales lines in the major markets, while broadening them in the markets of Central Europe with extra push in France and the U.K., Benelux, the Nordic countries, Southern Europe, with focus on Italy and Spain, Eastern Europe, as well as an uplift strategy for China market, plus push in South Korea, Taiwan, and other Asian countries. With all these measures, we will be actively represented in 30 countries. Our product portfolio is fully tailored to the strategy to go more international, and to fulfill most of the country-specific localization needs. Our business units in China and the United States will also generate further growth. On the management side, we are providing additional support to the American management team, and in China, we have just promoted a strong local female manager to the management team.
My personal focus is also on the reset of the American organization, including the optimization of product and partner planning in order to activate recognizable market potential for Cherry, and to help the company achieve significant and profitable growth in the most important Western markets. Talking about M&A. The general core strategy of expanding our offering with agnostic software solution, to enable smart cloud-based services in the Cherry ecosystem has a direct impact on our M&A strategy. Acquisitions in the component business would only be opportunistic. In this context, the key criterion is profitable sales volume. The core objective for our M&A efforts will be to quickly identify attractive and relevant digital, and software assets in the market that will support us in further developing our installed base as a marketplace. Our good reputation in the market is a factor that should not be underestimated here.
The integration of Theobroma, Active Key, and most recently, also Xtrfy have cemented Cherry in the market as a professional, credible, and a reliable partner. With my recent personal involvement in the transaction of Kreisel Electric and John Deere Inc, ordeer AG and Nexi Group, as well as Lofelt and Meta, the M&A activities at Cherry are at the top of my personal agenda. We have approximately EUR 93 million cash on hand, plus Cherry treasury stocks, which underpins our ability to act in the asset market with enough volume and power.
People and culture is definitely one of the things that is always top of my mind. We are in the midst of fierce international competition for the best new talent. The recently announced redundancy at major tech companies, do not change the fact that we still have to make enormous efforts to meet our demand for talented and experienced employees.
Cherry is very aware of this challenge, and it's positioning itself to be organizationally, procedurally, and culturally relevant. Allow me to summarize. As stated before, 2023 is a transition year. In a volatile macro environment and still soft, but hopefully soon recovering market, we will optimize the management of our business. It's all about focus on the essential core task, continuous view of market conditions and changes, fast and linear decision-making process. It's continuous cost management, strengthening the top line, and securing and increasing the EBIT and EBITDA margins. We have defined a comprehensive package of measures for 2023, and we have promising growth avenues that will support our expansion in the medium term, including international implementation, which will begin this year and reach well into 2024. Midterm, we target to outperform market growth again, and are looking into revenue growth rate of more than 20% per year.
This midterm growth will be profitable as we also aim to improve the adjusted EBITDA margin to around 20%. We have strong conviction in our opportunities, and expect to emerge a stronger company both in growth and margin. Ladies and gentlemen, I would like to hand over to Bernd Wagner for a detailed view on the financials for the fiscal year 2022. Bernd, please go ahead.
Thank you, Oliver. Welcome to all participants of this call. Ladies and gentlemen, I'm pleased to be speaking to you today at this investor and analyst call, and to present our company's financial performance over the past year. As Oliver has already mentioned, the fiscal year 2022 was a very difficult one in both macroeconomic and geopolitical terms. The Ukraine war and supply chain constraints led to higher customer inventories, and impacted our sales and forecast visibility. As a result, we missed our financial expectations. Our company has experienced a decline in revenue and profitability in the past year, but in 2022, we have developed innovative products, invested in go-to-market activities, including e-commerce and prepared our Gaming Goes Global strategy, which will allow us to emerge stronger once we get beyond these market economic headwinds.
Our team has worked tirelessly to ensure that we remain at the forefront of our industry, and continue to deliver value to our customers. 2022 has been a challenging year, and our response to the softer demand was to implement measures to safeguard the long-term profitability of the components business, including short-term work at our production of classic MX switches at the Auerbach site. In the light of this, group revenue decreased by 21.4% to EUR 132.5 million, which is still slightly sales figures of 2020. Gross profit margin of 27.8% was down 13.1 points from last year. This was driven by product mix away from components, idle production costs, increased material and logistic costs, and impairment of Viola switches. Cherry continues to invest in R&D, and sales and marketing.
As a consequence, the adjusted EBITDA was EUR 15.2 million, with the adjusted EBITDA margin declining to 11.5%. The adjusted EBITDA figure included non-recurring adjustments of approximately EUR 3 million. In the fiscal year 2022, earnings before interest and taxes, EBIT, were impacted by two impairments resulting in a loss of EUR 36.5 million. The first impairment relates to the discontinuation of Viola switches, which was discontinued due to weak demand. The assets associated with Viola were fully written down, leading to a EUR 3.5 million impairment. Based on current market challenges, especially in our components business, we have incurred an impairment loss on goodwill of EUR 29.9 million. Next, please. Looking at our business in more detail.
The gaming business, which is 31% of our product mix, comprises the two business units, components and gaming devices that were most severely affected by macroeconomics. Revenue generated in the gaming business totaled EUR 41.2 million, down by 50.2% from the previous year. The professional business area, which is now around 69% of group revenue, generated sales of EUR 91.3 million, which corresponds to year-on-year growth of 6.5%. Revenue generated from office and industry, security, and POS peripherals rose by 10.7% to EUR 65.2 million. The expansion of e-commerce activities made it possible to exploit existing uncovered market potentials in the peripherals market. With the founding of E-Commerce GmbH and the accompanying recruitment of dedicated employees specialized in e-commerce, the groundwork has now been laid for growing our business with end customers.
The factors described above show a varying development in the two business areas, causing a shift in the product mix and a new weighting of revenue and earnings contributions. With the gaming business area, revenue from components business unit decreased by 62.5% to EUR 21.6 million. The keyboard switches business was most heavily impacted by the negative macroeconomic conditions due to high pressure on prices, significant excess inventories at customers, and the trend towards smaller gaming keyboards is 20%-30% reduction in the number of switches. On the positive side, the demand for Ultra Low Profile switches was very high and is expected to grow in 2023. Historically, we have sold our gaming devices primarily in China.
However, during 2022, we began preparations to take this business global and will commence new geographic sales in Q2 2023, which should result in higher sales for 2023 and beyond. Next, please. The group adjusted EBITDA margin declined to 11.5%, down 17.5 points from last year. The adjusted EBITDA margin in the professional business was 17%, down 5.9% to the year before. The main reason for this were our investments in sales and marketing for e-commerce and innovation. E-commerce sales are developing along our expectations. The adjusted EBITDA margin in the gaming business was -0.7% compared to 35.4% a year before. With focused cost-cutting measures initiated in 2022 to align the production costs to the lower demand for switches, we expect lower idle costs in 2023.
With the new gen four assembly machine, we expect much higher productivity once the demand for switches improves. Next, please. Now, a look at the OpEx. Despite the market headwinds, we see great opportunities for growth in e-commerce, Gaming Goes Global, and digital health, and we were investing in those areas for growth. We have challenges in components where we are working to realign our costs. A few on research and development. We have also made significant investments in research and development, which have enabled us to bring new products and services to market and expand our customer base. We believe that these investments will continue to pay off in the future as we expect to see even greater growth in the years to come. Research and development expenses amounted to EUR 9 million in 2022 compared to EUR 6.1 million one year earlier.
Thereof, EUR 3.9 million development costs in the gaming business area, and EUR 5.1 million was attributable to the professional business area. We also developed new product categories such as microphones. Marketing and selling expenses. We invested EUR 19.3 million in sales and marketing in 2022, which is up EUR 2.4 million from last year as we seek to capitalize on our opportunities in e-commerce and Gaming Goes Global. Administration expenses, c onversely, administration expenses decreased by around 15% to EUR 15.2 million at group level. The lower cost was mainly due to the non-recurrence of one-off expenses incurred during the IPO last year. Additional savings were also achieved by proactive cost management measures, and progressing digitalization of processes. Next, please. Our financial position remains strong, and will enable Cherry to further grow organically and inorganically within the long-term secular trends.
As of December 31st, 2022, group net assets amounted to EUR 379.1 million, which decreased by EUR 31.9 million or 7.8% compared to previous year. The intangible assets after impairment amounted to EUR 158.7 million compared to EUR 190.1 million last year, primarily as a result of the impairment on goodwill of EUR 29.9 million and capitalized R&D costs of EUR 0.8 million on Viola. As of December 31st, 2022, Cherry has had cash of EUR 92.8 million, which is 24.5% of the total assets. This amount includes EUR 45 million drawdown out of the total credit facility.
Furthermore, iIn 2022, Cherry had acquired 907,117 treasury shares with a transaction volume of approximately EUR 6.8 million, in conjunction with a share buyback program launched in June 2022. These shares can be used in future as a purchase price component in M&A transactions or for other purposes. Networking capital. The networking capital, meaning current assets less current liabilities went up by 7.6% to EUR 40.9 million year-on-year, driven primarily by an increase in inventories, which was greater than the increase in trade payables and therefore needed to be financed out of Cherry's own resources. Next, please. A short glance on the inventory. Inventory increased to EUR 65 million at year-end and allows for growth in the e-commerce business, enables Gaming Goes Global to sustain supply chain constraints during the lockdown periods.
As supply chain returns to normal, our target for 2023 is to reduce these levels, which will support our cash flow. From the chart, you can specifically see the increase of peripherals for e-commerce compared to last year. Next slide, b ack to the strong financial position. You see the equity compared to last year decreased by EUR 41.3 million to EUR 251.8 million, reflecting the combined effect of the share buyback program 2022, which are recognized as a reduction in equity and the group net loss for the year resulting primarily from the non-cash impairment losses. The equity ratio is still strong, with 66.4% at the end of the fiscal year 2022. Next, please.
The net cash flow from operating activities totaled EUR +5.8 million compared to last year of EUR 7.8 million, which shows a strong resilience in even very challenging markets. Net cash outflows for investing activities totaled to EUR 11.3 million. Fiscal year 2022, the bulk of investments were made in machinery and tools, as well as intangible assets in the form of own R&D work capitalized. Investments in property, plant, and equipment amounting to EUR 5.5 million were over 20% lower than last year, and the final purchase price payment of EUR 1.6 million relating to the acquisition of Active Key in 2021. Next, please. Now, the final outlook for fiscal year 2023, which we see as a transition year. Ladies and gentlemen, the macroeconomic environment is expected to remain challenging in 2023.
While we have taken important steps to set ourselves up for a return to adjusted EBITDA margins of 20% over the medium term, we remain prudent in our full- year forecast and view 2023 as a year of transition. Overall, we expect for fiscal year 2023 sales in the range of EUR 35 million-EUR 165 million, and an adjusted EBITDA margin in the range from 10%-14%. We forecast double-digit revenue growth, including Xtrfy, and a higher adjusted EBITDA margin for the gaming business in 2023 fiscal year. We forecast single-digit revenue growth, and a slightly lower adjusted EBITDA margin for the professional business area. The decrease in margin is due to product mix and further ramp- up for e-commerce. In Q1, sales is expected to be low due to ongoing high inventory levels at customers.
In Q2, we will launch Gaming Goes Global. In the second half of the year, we expect improved sales of eHealth terminals and PIN-Pad as regulation constraints end, and higher Ultra Low Profile switch sales as we ramp up Ultra Low Profile production. As we look ahead, we remain focused on our core business, and we will continue to invest in our people, products, and software technology to drive long-term growth and profitability. We are confident that our company is well-positioned to thrive in the years to come, and we look forward to delivering even greater value to our customers' investors. Ladies and gentlemen, many thanks for your attention. Now I hand back to the operator to start the Q&A session.
The first question comes from Thomas [audio distortion].
Yes. Hi, can you hear me?
Yes.
Yes, we can.
Perfect, g reat. Thanks for taking my question. Three questions from my side. I would take them one by one, if that's okay. First on your gaming segment, you're now guiding for double-digit growth on the gaming segment, which sounds a little bit more confident given the recent sales decline. What is your basis for your confidence? Has anything already changed? Maybe already better discussions with distributors and customers, so a ny insights on that and the general market environment would be very helpful.
Yeah, good question. There are kind of two parameters that we look at. Number one, we have a very strong product portfolio, including now the Xtrfy products. The second thing is that we're going really very international now with the product segment, and this is going to help us to grow in that segment.
Okay, perfect. Thank you. My second question. I know you're only guiding on sales and EBITDA, but a rough estimate on your cash generation in 2023 would be helpful. Also, what we can expect in terms of working capital movements, as well as CapEx.
Yeah. The cash flow from inventory is fully dependent from top line, of course. Therefore, we have a prudent forecast on the top line, which means we are ordering less and try to sell off also our inventories, bring that level down, not endangering e-commerce first. T he CapEx was the second part. CapEx in 2023, we in total have in the range of EUR 20 million. EUR 10 million of that one is roughly for gen four and assembly machine, Ultra Low Profile. Roughly EUR 4 million-EUR 5 million is capitalized R&D costs.
All right, perfect. Thanks a lot. Then maybe the last question, you already mentioned that the Xtrfy integration is working really well. I think there are no challenges also in the current months to come. Are you seeing the first effects also from synergies? What kind of synergies are they? Can you give a rough estimate of the amount Xtrfy will contribute in the current year in terms of sales? I think you mentioned in the press release that you expect sales in 2022 of EUR 7 million. C orrect me if I'm wrong, insights on how much Xtrfy is going to contribute in the gaming segment in 2023 would be also very helpful.
Okay. First of all, obviously, we ran through a lot of details in that type of integration, which was number one, obviously, we looked at the product assortment, and we laid that out, and we identified that lots of the Xtrfy product is in the higher range, so that we're not in a kind of competitive situation. We also kind of slimline the pricing model here, given the fact that we're also looking into, let's say, kind of price list activities whenever it's required. Also, this is completely merged in. Then obviously, also sales got fully integrated here. From a marketing side, obviously, we are going to have a very, very good kind of branding solution in which we're not being in a competitive situation there.
What you need to understand is that with the acquisition of Xtrfy, that means for Cherry an entry into the entire Esports segment, which Cherry wasn't been there before. This is so very helpful for us because this is the kind of gaming market that is going almost through the roof, as you can imagine. What we see also here is that the diversity factor in Esports is very high, not only from a gender diversity perspective, but also from an age perspective.
The level of investment being made in that segment is higher than in all the others. In this way, obviously, we looked at that. Thirdly, which is also very important, is cultural integration. That means like the teams are really completely integrated already. Obviously also, the integration in terms of our financial and accounting system also is done. We can really say like it's an all ready to be activated part. This is going to pay off already when we're starting with our Gaming Goes Global campaign.
Perfect. Any insights on the sales contribution of Xtrfy in this year or is it still early to comment on?
It's a bit too early quite frankly, because we are going to see that we're going to expand even the sales distribution with that product. What is more important is that it's allowing us to really go even more international, because Xtrfy has some kind of really hot spots also in markets where Cherry was okay. I would rather go and say, let's look into that specific question in the next three to six months, so that we can really see where we are. Rather than giving you a gut feel, it's better to really build it up on numbers.
Okay, p erfect. Thanks a lot. Thanks for the presentation.
Pleasure. Thank you.
The next question comes from Julian Dobrovolschi from ABN AMRO-ODDO BHF .
Hello. Good afternoon, gentlemen. I hope you can hear me and welcome, Oliver. I have a couple of questions from my end as well. Maybe the first one on growth. You expect gaming revenue to grow with a double-digit rate in 2023. That's nice to see. Can you please provide a bit of more color around this in terms of how much growth should come from switches business, and how much it come from peripherals? Also, just looking at the switches growth, it will be nice to understand how much of growth do you expect to come from the classical MX switches and how much should come from the ULP, as we also know at this point in time, ULP seems to be a better product on the switches side than the classical MX. That'll be great. Then I have a couple of questions after this as well. Thank you.
I can give you some kind of indications where we're trying to head to in terms of direction. Number one, as I just stated, gaming is a very strong kind of measure packet that we put together with the Gaming Goes Global campaign. This is really kind of fully founded on a very strong plan. That also means like the integration of all the teams in the fields obviously has been done. We are up and running here. The peripherals business, obviously as I just stated in my speech, is really based on the new work of the new working culture that we're all going to see. The question that we always get is, does that mean that people are going to have more desk and more equipment?
The answer is simply yes, because that's what we learned from COVID. Obviously, this is the kind of positive effect post-modern COVID that we see, that the working culture is now going into this massive change mode, which can be very beneficial for us. The component business is, it will be a soft market this year. As we can see from all our OEM partners, they had some fantastic years over the last two years, and obviously, the type of forecast security level has decreased in the meantime, so they need to really get that sorted out. We have to be very keen on the fact that we might see some kind of flush out activities, by some of the competitors since they're kind of carrying a lot of inventory.
We have a good inventory situation, and we have a good kind of direct contact now with our partners all in the component space, so that we're getting crisper and better in terms of giving you a projection where we are with the business in the next month. This is definitely on my personal list of attentions, key attentions. It's the component business. With the new generations, obviously we are back into innovation field. If you're looking into the MX generations that we launched, obviously they have been relevant in the market for more than 40 years, and that really underpins the strength of this company. Now with the ultra light profile and obviously also with the new MX generation, we're going back into innovation mode.
This needs to be addressed differently, that's why I'm going to really put myself into the chair really going into OEM talks, because I would like to see the big brands talking to us with us directly to really lay out the business for the company for the upcoming years. As you may know, obviously I had OEM responsibility at my time at Microsoft, so I'm very familiar with that type of business. Again, I'm very positive, and have kind of a really good kind of view into the future with regard to the component business. Obviously, [audio distortion] ?
Yeah.
Yep.
Yeah. Sorry.
No, please go ahead.
No, I was just saying that indeed, I kind of love to sympathize with what you just said. I think indeed, let's say if you just look across the board, across the whole industry and also, you know, what Logitech and Corsair were speaking about, the switches business, all of them, they had a terrible 2022 and now they've been rushing a bit, maybe with some aggressive discounts just to be able to burn through inventory and kind of let's say, start from a clean sheet, if you will, in next year in 2023. They'll be probably curious to, in terms of development, how that would kind of, let's say roll out the Cherry side as well. Personally, I'm also a bit worried.
Also, you kind of mentioned that you seem to be happy finally to [audio distortion] with the inventory levels of the switches, MX switches. I think if you just compare the figure , I think it's on the slide on page 10, I think in my view that's still rather high compared to the levels of 2020. You know, that kind of brings a bit of concern on my side. Also, boards, you can understand that this could be a bit of a pressure in the midterm as well with no turning back in a way.
Also, besides that, you know, just kind of looking on the internet, I see a lot of copycats a, let's say a lot of other substitutes, if you will, on the switches side, which in the end could also contribute to a bit of a softer market on the switches for Cherry. I'm just curious, how do you basically look at the global picture, and what kind of risks that could actually basically roll out into the Cherry business? More than that, if you just look at the inventory, do you kind of believe there is a risk of writing this down a portion? If so, if you could kind of also, you know, mention a bit about, you know, what's the kind of oldest batch of switches laying out in the warehouse at this point in time. That'll be helpful.
Yeah.
To understand in which state in the switches business.
Good question. The good news is that we don't have old product in the inventory. All the product that we still have there is relevant for the market. Again, what I've stated before is that even if the market is soft, obviously we still can sell that product in the upcoming months and years, which is fantastic. It needs to have that kind of uplift given by the new type of new generations, which is kind of also repositioning Cherry as a really kind of a market leader based on innovation. You see, the most important thing that is now necessary, given the fact that we have that type of inventory situations with other companies, is manage your clients and manage your kind of channels that you have.
That means like, don't go the same path if you don't have to. We don't have to. That means like anything of extra discount doesn't make any type of sense. Even if we see that there will be kind of an extra volume going throughout the different type of channels in the different markets based on, again, high inventories by competitors, don't even go there because it's hurting your partnership. What I have learned now in the last 30 years that I'm in the business obviously, is that a partnership needs to be reliable, specifically in those challenging times.
Even if they're going to help you a little bit with kind of cleaning your inventory, what is the most important also for retailers and e-tailers in all the different segments, both B2B and B2C, doesn't matter, is that they would like to have that type of balanced reliability at the same time. They might help you on the short term, but they look at the midterm, and therefore I really believe that we have a kind of a strong position at Cherry. What is also very important, and this is where I really take something over that is strong, is the decision to really go multi-channel. That means like pushing more the e-commerce side of the business. We're doing some kind of good, we have some good traction here in that segment as well.
I look at the numbers and I see the kind of traction that we have, and I really believe that, it was not too late to get into that one here, but it's exactly the right time to go into there. Obviously this will also be very helpful specifically for our gaming and peripherals business. Overall obviously, it's about, stay strong with your clients, stay close to them obviously, look into your inventory throughout the channels, not only the inventory that you carry on your own warehouse. Take care of the one that is also in the different type of sales channels, and obviously manage that through. What I can see from the current business obviously, that our sales through numbers are really, really good. That means like as always in that business, sales through is qualifying you for further sell-in.
Yeah, makes sense. Well, thanks a lot for all this cover. Really helpful. Maybe final one on the outlook figures. I was just wondering why such a wide bandwidth on the revenue side? Basically assuming no growth all the way to 25% growth and, if you basically also take out the Xtrfy contribution, I think on the lower end you also assume a bit of the negative growth. That's A. B, can you also please talk a bit about the thinking behind the adjusted EBITDA margin guided range of 10%-14%?
Obviously, again, looking at the low end, so that's 10%, which is 1.5% below sorry, the value that you guys ended up in 2022, which was already a bit of a shock for the market. I was just wondering what are you basically taking in terms of assumptions if you also look at the low end of the adjusted EBITDA guidance range that you have for 2023. Thanks.
Let me address on the top line, on the top line range, and I'm going to hand over for the EBITDA margin topic to Darren. Basically, quite frankly, for us it's now really important to get this credibility back in terms of our, the way we are managing the business, the way we're reporting business, and having numbers in place that we can achieve. That's one thing. That's really something that is obviously also top of my mind given the fact that I have looked at the recent month of the company, debt support. We need to have that stability and we need to have continuity. That means also for 2023, as I said, like that's a transition year. It's not only a transition year because of Cherry, it's a transition year because of the macroeconomic situations that we're in.
If we face all of this, obviously it's kind of a challenge for all the type of industries. It's kind of a challenge for all the kind of industries that are both in B2B and in B2C. Having said that, going into more conservative approach also means like, we have a clear understanding how we need to manage our costs. We have a clear understanding how we are going to expect return on investment on our strategic investments already made. Some of the investments, the major ones obviously have been made in the past, so we expect to really see the outcome this year.
Obviously, this speaks across all the different product lines that we have to really sit down on a permanent basis, on a weekly basis, with all the kind of business decision makers in the company, to really look at where are we with the business on a daily basis. It is that type of operational excellence that is now required. It's not about fantasy, it's not about going big in wording. It's really about delivering in operational excellence. This is what I'm very committed obviously, and this is where really going to help the company to get on a better level in terms of excellence when it comes to the operational level. Going back to the EBITDA margin question. On the EBITDA margin, the main impact is that the...
On the EBITDA margin, w e have a low visibility on sales going forward, because of the explained actual macroeconomic situation. We expect a bigger increase in the second half, as you remember from my presentation. We expect gaming rollout in Q2, the constraints, regulatory constraints to end in the first half so that we have uplift in sales in the eHealth business, therefore we have a broader range on the EBITDA. If there's a delay one month, two months, then that is an impact on the EBITDA of course, yeah.
Okay, I understand. Thank you so much. Oliver, best of luck in the new position. Thank you. I appreciate that.
Thank you. Have a good one.
We have a further question coming from Marie-Therese Gruebner from Hauck & Aufhäuser.
Yes, g ood afternoon. Can you hear me?
Yeah, we can hear you.
Wonderful.
Badly. A bit badly, yeah.
A bit badly. Now is it better?
No, not really.
Okay , that's not good. All right, f irst question I have is, you mentioned that you want to internationalize the peripherals business starting Q2 2023 with a push. My question is, how do you expect your major customers to react to that, and how should we think about the positioning vis-a-vis those as you roll out the peripherals outside Asia? That's my first question.
Okay. Basically, obviously I have strong belief in multi-channel and collaboration models. What does that mean? Multi-channel means like go as broad and as deep as it's possible, because at the end of the day, we have to take care of users and consumers. Second thing is, it's all about having a deep collaboration model with our partners. They need to understand that if you're in a growing market, it's not about grabbing market share from others, it's about becoming part of growing the market. That is something that we are absolutely dedicated to do so, and so far we didn't have faced anything that is negative around that one here. We go after more, and we clearly stated that.
By the way, the company stated it in 2021 when the company got listed, and for good reason. In a certain way, quite frankly, if we see growth in the market of peripherals, if we see growth in the market of gaming, if we see growth in the market of digital healthcare, if we see growth in the market of security, there is no reason not to go after it, okay? For sure this is something where we can definitely see that a collaboration level needs to be on a higher level as well. Again, I'm very optimistic because I'm coming from worlds where you have collaboration, and some competitive situation with the same client. I mean, that's a very natural thing. We should not be assistant to really go what the market is requiring and demanding for.
Okay, i t gives me better visibility as to how you're thinking about this. My second question is more quantitative. I mean, you've had an abnormally low level of gross margin in 2022. Can you maybe quantify the share of adverse forex and abnormal logistics costs in that figure? Also, tell us a bit more where, you know, assuming a normalization on both fronts, where the new normal would be for, you know, 2023 and beyond.
It was logistics costs and FX, yeah?
Yes, please. Both.
Okay, l ogistics cost is still on a high level. We assume that this was in the range of roughly 1-1.5 percentage points. FX is, as you know, the U.S. dollar was very strong. We purchased a lot in U.S. dollar. Meanwhile, U.S. dollar is compared to euro, weaker again. We estimate that roughly we use we have a shortage per year of round about EUR 20 million. Each euro cent is roughly EUR 100,000, worse or better. We have a budget rate of roughly one or two for the moment.
Okay. I think I could do the math, but you know, basically coming from the very high level of gross margins you had in the past, I mean, what is the new normal now into 2023 and 2024?
Very much depending from the product mix. We have been prudent on the component side. I think the actual level which we have seen in Q4 was impacted by special events like write-off of Yola.
They have roughly EUR 2 million special effects in Q4 on that one, spare parts materials from Viola, which was through cross-margin. We will see that normalizing Q1 again. Hopefully, the U.S. dollar, because we started hedging this year, U.S. dollar is also supporting, is supported from the hedge going forward.
Okay, a ll right. Thanks a lot, Bernd for this. My last question, which will be the third one, is why such a modest increase in the adjusted EBITDA margin in gaming, you know, coming from a slightly loss-making position? Maybe specifically within that, you know, where do you see the capacity utilization in Auerbach in 2023? Jamie speaking, you know, can you tell us about where the money will be spent , you know, in 2023 in the gaming vertical? How do we need to understand, you know, a modest increase in the EBITDA margin? I mean, are you going back to, you know, you used to have margins north of 30%. If you can give us some more color there.
I will answer the margin side and Udo will go to the utilization of the capacity. From the margin side, we expect, of course last year we have, as you have heard, we have released people, so we have had restructuring costs. We have had short-term work, this will pay out this year. Secondly, we will be more effective and more productive with the new 410 machine when volumes go up again. Udo is working, he will explain on that one on cost initiatives to bring the material costs down. The gross margin will also be going up. That's the expectation or EBITDA from the Ultra Low Profile, because the second machine will start in the second half. Yeah, that is the expectation from the margin increase slightly on the components. We are prudent on the volume, very prudent on the volume. Udo?
Also Bernd, welcome from my side. Allow me to give a little bit more insight, even on the capacity. For the capacity, as already mentioned by Bernd, it's adjusted. In Auerbach, if your question was specifically on the capacity for the switch manufacturing in Auerbach, it's adjusted. We focus on the MX level. We focus on the new products, on the Ultra Low Profile. The second machine already arrived. In the moment we set it up, and we will have it on plan and then we can grow there as already explained. In short, in summary, the capacity is adjusted now.
Okay. I mean, the kind of midpoint of the revenue guidance you give corresponds to what capacity utilization? I mean, you know, you tell us that you're cutting the capacity in Auerbach, but what is the overall new capacity? How much can you generate in sales with the new capacity?
The capacity at the moment we're adjusting to, it's around 250 million switches in total for the year, on yearly basis.
Okay. That's a big decline, right? Before that it was more in the range of EUR 800.
EUR 800 we had never.
600. This is a major cut in capacity. Okay, a ll right. Okay, thank you very much.
Thank you, Sophie. Take good care.
We have more question coming in from Jörg Frey, Warburg Research.
Hello, gentlemen. would also like to go one by one if it's okay for you.
Absolutely.
I will start a bit with the gaming devices. I think you had now a decent decline in the fourth quarter. You mentioned the switches, the switch to the new distributor. Just to make it a bit clear, is the old distributor, Beijing Joyway, are they now completely out or is there going to be a parallel structure? How do you assess actually the potential of your new distributor? Is there a change in the go-to-market? I think Joyway used to sponsor substantial Esport teams. A bit more color on that one, please.
Yeah, I will answer that one. Joyway gave us signals that they do not want to grow any longer. He has his own different plans. We decided to change over to a new, much larger distributor in China with having very strong expertise on JD.com and Tmall, but also shops business. At the end of Q4, we transferred the inventory from Joyway back to Cherry first and then to the new distributor. Yes, the question or the answer is yes, Joyway is more or less completely out now by end of Q1. We are only just discussing some quality issues on products which they have returned, which have been not in the right or in the right shape. O therwise, Joyway is out and the new distributor is much larger, and is also very competent, especially specialized in e-sports and gaming.
Okay. Fundamentally, basically, no change in the go-to-market, but different, bigger, gorilla, basically.
Yeah. Exactly, a bigger gorilla, and we have now absolute control on JD.com and Tmall.
Great. Then a bit related to that, with Xtrfy and Going Global, first of all, is it right to assume that this is basically a developed market brand? Or are you also introducing that in parallel in China? Then, how big is the idea actually? Is this going to be your way of challenging the Corsairs of this world, or is this forever seen as a kind of niche product in a very premium market segment? Just some general flavor there. Probably the profitability of Xtrfy, when at a starting point probably would also be helpful.
First of all, they already had a profitable business in the past. What is absolutely important about the product portfolio, that it's really strong on the innovation side and customization side. That means what they have in terms of a kind of a rhythm of the business, they are really able to react very, very fast and quickly on demand on the market that might. They also have some kind of customizable type of offers in their product portfolio, that is really kind of something very special here.
Second, what is absolutely important is that, as always, these type of companies with regard to their size, they can benefit from companies such as Cherry from a pure size perspective in terms of the way we are distributing and the way we are selling products to the different type of markets. That means, like, we're empowering obviously the product portfolio of Xtrfy, going even more international, going deeper and broader across all the different sales channels by using our sales forces. That's a very natural thing. By the way, one of the things that I felt like it's kind of the backbone of this type of acquisition, quite frankly.
With regard to innovation, we are now talking about having an R&D in that segment that is taking care of the entire segment in which obviously Xtrfy plays a part. It's not that we're going to see that both teams are separate from each other when it comes to R&D sales and marketing. It's exactly the opposite. We're going to really have this all-in-one, and having our sales forces obviously selling all the products in the same channel then obviously. A lot of kind of extra benefits for both parties. Again, we're going to see that extra benefit already with the upcoming Gaming Goes Global campaign.
Yeah. I guess, it's a very obvious advantage to not openly compete with your customer with this brand.
There is no competition. Again, as I said before, if you simply lay out the product assortment, you will see. Honestly, it's fully complementary. There is no competition nor on the product feature side, nor on the pricing side, not on the kind of brand side. It's an excellent type of getting that assorted in one range right now.
Sounds good. Going a bit on the components business, can you provide us some data on what percentage of your Q4 sales have now been ULP switches as opposed to your legacy products? A bit also in that regard, on the OEM transition, can you remind us how much of your switches businesses is currently sold via distributors? Or is, I presume that some parts like the ULPs are directly sold to OEMs or?
The switches are exclusively sold or predominantly more than 95% via contract manufacturers, not distributors.
Okay.
Because we have the negotiations with the brands. We're selling it to the brands, and so in recent times, there is coming up that also Xtrfy is selling Cherry switches, because you have this hot swappable technology. Y ou can take off the switches and exchange them. You're getting more and more even distributors, but with smaller volumes. The big ones are contract manufacturers, yeah.
There's one thing that I would like to add here. It's nothing wrong to have that basic business principle, but it has one disadvantage. You don't know what's going on on the side of Hewlett-Packard, and the Samsungs and all the others. You simply don't know that. Given the fact that we have now the new innovation product up and running, this is exactly the product that you need to address directly to the OEM partners. Again, I was in charge of OEM business at Microsoft, and Cherry should always talk to me directly. Obviously, if it's getting into execution mode, the ODR is back on track. It's not about replacing ODR by OEM, it's about just enriching the collaboration model by direct contacts to the OEMs.
Okay. If the ULP, they are also sold to the contract manufacturers? Did I get that right? In principle, yes. Yeah, b ecause they the brands like Dell, they have their contract manufacturers in China. They send their product their drawings of the new keyboards to the contract manufacturer, and they are producing them. They are all produced and built in China.
Okay. What's your Q4 share now, roughly about of ULPs in total, in percent of total components business?
In Q4 we have roughly sold, roughly, 5 million. We are producing in the range of 4 million-5 million per month for the moment. The second Ultra Low Profile machine has already arrived at the facility in Auerbach, and will go live somewhere in June.
Okay.
To add, we will more than double the capacity for you.
Yeah.
Yeah.
Higher, yeah.
Your Q4 component phase has been predominantly ULP phase, if my calculate. No, well, EUR 3.9 million. Yeah. Well, but approaching 40%, not bad. One final one on how we should think about operating leverage in the current year, particularly in the sales and marketing business. Well, should you planning to over invest or basically to increase your sales, and marketing budget also in the face of stable organic sales or what's your plan actually there? Well, is this going to only breadth with increasing volumes?
Well, we are not a pure market share-driven company, quite frankly. We're looking for profitable growth in all the different business segments there. As I stated before, a lot of strategic investments already have been made the last year that should now pay off in terms of having now the kind of payoff across the different business segments. The way I look at this one here is that we're going to see kind of a peak season for both gaming and peripherals this year. We're going to see that we are absolutely up and running for the digital healthcare business.
Whenever see any kind of political requirements and political frameworks given, we are absolutely ready to really go after the business because we have a high installed basis, and we know how we can obviously also increase volume in terms of production. We have a very kind of solid and strong positioning in the market. Where we definitely look at, and this is again, what I said before, this is on my personal attention list, is the component business. Here we're depending also on the kind of OEMs and the ODRs and their planning, and we need to get a better grip on what they are planning, how they plan it. Could be a soft year, but obviously we need to get a better grip. What does it mean having that soft year?
Obviously, what does it also mean is like to really go into complete product planning for second half of 2023 and obviously 2024. This is where we are. The segments are pretty balanced, obviously. The sales and marketing investments are balanced in a certain way. Again, this is the time when cost management is an important part of the game. That means like, we're looking into that constantly to simply overlook where we are, where do we achieve, where do we overachieve. Just the recent numbers from China, I'm really happy with the numbers in China. Saw the numbers from the America, happy with the numbers in America. When I'm happy with the numbers, I always see more. That's the type of mentality that we should really get fully loaded into Cherry.
Sounds good. I wish you the best of luck and more occasions to be happy with the numbers.
Thank you so much. Appreciate that. Thank you.
There are no further questions.
Okay. We would like to thank everybody that has been on this call. Thank you for sharing. Thank you for sharing the commitment to Cherry and also the orientation that we provided should also give you, hopefully, the right type of confidence. Again, we have the plan, we are in executional mode, and we know that we have to gain back credibility and we are up and running to really get there. Thank you very much in the name of my team. Thank you very much in the name of Cherry, and wish you good luck and have a lovely day. Take care. Bye-bye.