Welcome to our analyst and investor call for the second quarter and first half of 2022 fiscal year. As always, we will have our CEO, Rolf Unterberger, and our CFO, Bernd Wagner, lead you through the call today. As in previous sessions, all board members, including our COO, Udo Streller, will be available for any questions you may have in the Q&A session following this presentation. Now, the presentation supporting this call was also uploaded to the investor relations section of our website. However, if you're not online now, 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 a replay will be made available in the investor relations section of our website shortly. Now I hand over to our CEO, Rolf Unterberger, who will give you an update of the current business and market situation. Afterwards, our CFO, Bernd Wagner, will give you some more details on the financial results of the first half of 2022, before Rolf concludes the presentation part of this call with a wrap up. Rolf, please go ahead.
Yeah. Thank you, Kai, and welcome everyone to our half year earnings call. The second quarter of the current fiscal year continued to be significantly impacted by the adverse market conditions with regard to the overall macroeconomic environment as a result of the COVID-19 pandemic, an overall reduction in market demand and the war in Ukraine. Our business operations, in particular in the gaming business, were specifically held down by disruption in global supply chains, as well as the temporary closure of joint Chinese productions and logistics sites. As previously indicated in our last earnings call, we have responded to these underlying conditions with a variety of specific individual measures like operational improvements, automated production, as well as multi-machine handling of assembly machines, diversified shipping strategy, and dedicated inventory management.
Group revenue of EUR 32.9 million in Q2 2022 was at the same level as for the first quarter of this year, marking EUR 65.9 million in group revenues for the first half. While we had an exceptionally strong first half in 2021, with group revenues of around EUR 80 million, the results in the first half of 2021 still mean a double-digit growth compared to the first half of the year 2020. Adjusted EBITDA margin for the second quarter was at 15.3% after 13.4% in the first quarter, which shows incremental improvement due to the measures we have already initiated. Thus, we recorded an adjusted EBITDA of 14.3% for the first half of 2022.
The number of employees was reduced by approximately 5% to 528. Even so, we added additional resources to the organization in various areas. The operating cash flow of EUR 0.3 million increased by EUR 2.7 million year-over-year. With EUR 37.9 million in net cash, we are still in a very comfortable financial position to fuel our growth, both organically and via M&A. Finally, M&A. Our M&A activities are ongoing and we are evaluating potential targets on a continuous basis. As part of our share buyback program, we repurchased a total of 215,318 shares via the stock exchange by end of June, spending approximately EUR 2 million. Ladies and gentlemen, please let me now draw your attention to some of the highlights in the first half.
Business with our globally unique Cherry MX Ultra Low Profile mechanical switches, which can also be installed in laptops due to their particularly low overall design height, continued to perform very favorably. In addition to our existing partnership with Dell Alienware, we were excited to announce in the first half of 2022 further well-known manufacturers such as MSI, XMG, and Corsair. All announced to use Cherry MX Ultra Low Profile switches in their high-end gaming laptops and or desktop keyboards. I will come back to that a little bit later. In the medium and long term, we expect to see a continued brisk market uptake with these switches in the premium segment.
The expansion of our product portfolio in the peripherals business was highlighted by several new wireless keyboards and expanding our sales channels, especially via our e-commerce activities, provided for a solid development in the first half of 2022, even in this unfavorable market environment. We also surpassed the 100,000 units threshold in July with our superior ST-1506 eHealth standalone terminal for the digital German healthcare market. Moreover, we received several new awards and nominations. For example, the prestigious German Innovation Award for our CHERRY MX Ultra Low Profile switches. Furthermore, the panel of judges at the Plus X Awards named Cherry the best brand of 2022. In July, Cherry also received the award for best customer satisfaction 2022. The vast majority of the consumer surveys nationwide by Plus X Awards choose Cherry as their favorite company in terms of customer satisfaction.
Factors such as quality, customer service, innovation, user-friendliness, convenience, availability, and speed of product delivery. The expansion of our portfolio and sales channels enabled us to drive forward our business activities with peripherals as planned, whereby the expansion of the e-commerce business initially played a major role on the European market. One of our product launch highlights was the Cherry MX 8.2 TKL Wireless, for example. The elegant tenkeyless design in a solid aluminum housing with RGB lighting is an eye-catcher on any desk. In addition to the classic gaming features, dependable Cherry MX switches, abrasion-resistant keycaps, and a metal case for transport guarantee the users a lasting gaming experience.
By the way, the angled shape of our new MW 4500 ergonomic mouse may feel strange at first, but it's actually a more natural posture and thus reduces the risk of wrist problems for long working hours with less fatigue. Thanks to our latest advanced wireless technology, you don't have any annoying tangled cables. Ladies and gentlemen, all this was achieved by our dedicated Cherry team in an environment which is currently marked by global supply chain disruptions, Chinese lockdowns, higher customer inventory levels, and a temporary weakening of our consumer demand. While the economic prospects for the rest of this year remain rather soft, the long-term and secular growth trends around gaming, mobile working, and digitization of healthcare are still very promising for Cherry.
In order to prepare for further implementation of our profitable growth strategy, we have continued our product development activities, concentrating on expanding and further optimizing our portfolio to meet the needs of increasingly hybrid workstation environments. The focus was on developing additional wireless products as well as a specific mechanical keyboard using Cherry MX Ultra Low Profile switches for the office market, thereby concentrating on ergonomic design, optimized typing feedback, the reduced form factor without a number pad, high quality materials, and specific radio frequency and Bluetooth standards to ensure sustainable product quality for mobile users. While our e-commerce business in Europe is further growing nicely, we also began to generate initial revenues via online sales channels in the U.S. in the first six months of this year.
Development in the digital health business unit focuses primarily on the ST-1506 eHealth standalone terminal and the PP-1516. The current variant of the eHealth terminal now includes a comprehensive remote management capability, which is very important for TI 2.0 going forward. The Cherry eHealth PP-1516 and the necessary extension of the eHealth 1506 terminal are still undergoing development as planned until end of this quarter and will be certified by Gematik by end of the year 2022. Ladies and gentlemen, as already mentioned, the tactile version of our awarded Cherry MX Ultra Low Profile switch was brought to market in the second quarter. In addition to the perceptual mechanical feedback, this version is especially characterized by the absence of the loud audible click, otherwise typically for Cherry switches.
This means the Cherry MX Ultra Low Profile technology is now available for the high-end office notebook market segment. Work also continued on the development of an innovative analog switch technology. The market launch is scheduled for the second half of the current year. This represents a systematic evolution of our successful MX switch in terms of material used, the overall quality, and the gaming experience. These switches will offer additional specific performance benefits for professional users in the areas of gaming and esports going forward. In the gaming devices business unit, development activities focused on expanding the product portfolio with Cherry advanced wireless technologies.
Competitive gamers can now benefit from this fast, especially designed Bluetooth low latency, not only with MX 3.0S, which we launched a couple of months ago, and the premium MX 8.2S keyboard just recently launched, but also with the MX 2.0S keyboard. Moreover, the MX 3.0S keyboard product line has been expanded to include a further model without the right-hand keypad. The two other developments, the MX LP 2.1 and the MX LP 6.1, to be launched end of Q3, beginning of Q4, also follow the current market trend. As so-called 60% keyboards, they are equipped with Cherry's flatter, low-profile MX switches and also with Cherry's innovative advanced wireless technology.
In the field of gaming mice, the newly developed MC 1.1 mouse is intended to occupy the big entry-level market segment in a range of versions going forward. By the way, the MX 2.0S keyboard, which won the German Design Award, also has been enhanced with a special edition to meet the standards required in cyber bars and internet cafes in China. We are very proud that in May this year, the Cherry MX Ultra Low Profile received the Gold Award of the German Innovation Award 2022. The jury based its choice on the first-class typing feel, Cherry's fantastic achievement in terms of development, and the new standards that the MX Ultra Low Profile sets in the keyboard market. It creates completely new technical and design possibilities in the development of keyboards. As previously indicated, more and more hardware manufacturers are opting for this standard.
Since its launch in March 2021, the MX Ultra Low Profile has successfully established itself on the market and is now used by several well-known manufacturers, including Alienware M and X series, the success of which made Dell also introduce a MX Ultra Low Profile for its G16 laptop. Furthermore, Ultra Low Profile switches can now be found in the latest version of the MSI Titan GT77, the Titan GT Series, XMG NEO 15 gaming laptops, and of course, in the Corsair Voyager a1600, as well as the KM devices desktop keyboards. We are convinced of the huge market potential for high-end gaming and also laptops in the future. With that overview, I'd like to hand over to Bernd to talk about the detailed financials. Bernd, please go ahead.
Thank you, Rolf. I would also like to welcome everyone on the call and to point out the main financial results of the second quarter and the first half year of 2022. Our gaming business was heavily impacted by the challenging market situation, especially the COVID pandemic and the corresponding lockdowns in China, but also by a general decrease in customer demand in a highly competitive market environment. The components revenue decreased in the first half year by 55.8% to EUR 13 million. The business with gaming devices was less affected and decreased only by 5.9%. Consequently, the gaming revenue share reduced to 37.7% from 52.3% the year before.
We also see some positive developments in our professional business, where revenue increased by EUR 2.7 million or 7% in the first half year 2022 compared to the same period last year. However, office peripherals revenue declined by 2.8% versus the same period last year. Especially the expansion of our e-commerce activities helped to nearly offset negative impacts from the overall market environment. The healthcare business has developed very positively in the first half year. With our new eHealth terminal and our strong competitive situation, we managed to grow by 33.9% to EUR 13.7 million. Due to the development of our business areas, the importance of our professional business has increased significantly. The share in revenues has improved by 14.6% to 62.3%.
The total revenue in Q2 2022 was EUR 32.9 million and therefore on the same level as the quarter before. Due to the macroeconomic headwinds and the short-term market softness in the gaming industry, revenue dropped by EUR 9.7 million compared to the same period last year. However, we need to keep in mind that Q2 2021 showed an outstanding business performance. Compared to Q2 2020, revenue in Q2 2022 increased by 2.8%. The gross margin in Q2 2022 is 33.4% and 8 percentage points lower than in Q2 2021. The decline is primarily driven by a change in the product mix resulting from the lower switch sales, higher material prices, and FX impacts. In addition, the market environment has turned more competitive.
However, from Q1 to Q2 2022, we are seeing a first improvement in the gross margins of 3.5 basis points, resulting from cost reduction measures we have initiated. Our business in the first half of the year has suffered from the macroeconomic headwinds. We further invest in our growth strategy. This is also one reason for the drop in the adjusted EBITDA and EBIT, which is caused by higher research and development costs for the future products, as well as higher sales and marketing expenses for expanding the sales and marketing team globally and the e-commerce rollout. Given the overall situation, we achieved an adjusted EBITDA of EUR 9.4 million in the first half of the year, and we initiated measures to improve our results.
A full reconciliation of our alternative performance measures is included in the interim report, which is also available on our website. In the first half of 2022, revenue of EUR 65.9 million is EUR 14.5 million below last year, but 10.1% higher than the same period 2020. With EUR 41.1 million revenue in the first half of the year 2020, the professional business increased solidly by 7% compared to the same period of last year. The pace of growth in this business area was mainly driven by the steadily improving level of digital health business. Furthermore, the e-commerce business, which was first initiated over the course of last year, contributed to this growth. Opposed to that, gaming revenue decreased by 40.9% to EUR 24.8 million comparing the same periods.
The lower figure was primarily attributable to lower demand for switches in Asia as well as changing demand for smaller keyboards with a reduced number of keys and various lockdowns in China and Hong Kong. Nevertheless, we work intensely on bringing the gaming business back to its former strengths by strong investments in the extension of our production capacities for the new ultra-low profile switch, combined with a bunch of cost and efficiency measures, especially within operations. The group EBITDA adjusted has decreased by 61.1%, as explained already mainly by lower gross margins due to product mix effects and increasing material costs as well as higher R&D spending and increased personnel costs following our growth strategy in e-commerce business. The adjusted EBITDA margin for the professional business area was 17.8% compared to 23.5% in 2021.
The decline is based on the increased material costs and higher personnel costs required to implement organic growth in e-commerce strategy. The adjusted EBITDA margin in the gaming business area came in at 8.5% compared to 36.3% in the same period last year. Main drivers are also increased material costs, but also reduced fixed cost absorption in view of lower revenue. To mitigate these cost increases, we did not extend time-limited workers and introduced short-term work at our Auerbach production site in Q2 2022, which has already been approved until end of August 2022. The total net impact of the measures in the first half year was about EUR 0.5 million. We have also been able to negotiate first savings on material pricing and logistics costs, which contributed to a slight margin increase in Q2 compared to Q1 2022.
We have strong conviction in the long-term growth of our market area, and are investing to capture this opportunity. In the first half of the year, our expenses declined by 8.2% from last year, mainly because last year had IPO costs and share-based payment costs. Despite our revenue reductions, we are investing in our growth strategy by increasing R&D spending, but also in terms of the expansion of our global sales staff and e-commerce strategy. Total assets decreased slightly by 0.7% to EUR 407.7 million. Cherry has, at the end of June 2022, a very strong cash position of EUR 99.7 million, which allows to grow organically and inorganically. Net cash is EUR 37.9 million.
Our inventories have increased by EUR 8.1 million or 18.4% to a total of EUR 52.3 million, which will generate cash in future in the e-commerce business. Once the macroeconomic headwinds disappear, the inventory level will be reduced to a normal level. The equity ratio is 72% and amounts to EUR 293.5 million, and has only slightly increased by EUR 0.3 million to year-end. According to our share buyback program that has started in June, our equity has been decreased by EUR 0.9 million by end of June. We have already purchased about 215,000 shares. Given the described circumstances, the operational cash flow in the first half was only EUR 0.3 million +.
We see a positive development from Q1, which was EUR -2.6 million to Q2. The cash flow from investments which, with EUR 6.3 million reflects our focus on Cherry's future and thus also includes the last payment in accordance with the acquisition of Active Key in 2021. The cash flow from financing activities was EUR -4.4 million, which includes amortization of IFRS 16 and lease liabilities and EUR 1.9 million cash out in the context of share buyback. Ladies and gentlemen, despite the challenging environment, Cherry achieved a double-digit adjusted EBITDA margin of 14.3% in the first half of the year.
As we have announced in our revised guidance on July eighteenth, we expect the revenue to be in a range of EUR 150 million-EUR 170 million, which is a decrease by EUR 20 million. The adjusted EBITDA margin is now expected in a range of 14%-19%. Further information can be found on our interim report that can be downloaded from our website. For the professional business area, we expect revenue growth in a low double-digit percentage range for the current fiscal year. The adjusted EBITDA margin in this business area is likely to be lower than last year. We expect the gaming division's revenue for the full year to be lower than previously anticipated, with a lower EBITDA margin. Despite the current market situation, we still believe in our mid and long-term growth paths and work continuously on measures to achieve them.
Now, with that said, I hand back over to Rolf. Rolf, please go ahead.
Yeah. Thanks, Bernd. Ladies and gentlemen, during the first half of 2022, we implemented a broad set of measures to expand our strategic course of growth in the medium and long term. These include, in particular, the further strengthening of our management resources, investment into the IT infrastructure, additional build-up of inventories with a few ensuring supply chain capability for the planned expansion of our e-commerce business, and the stepping up sales activities in defined new markets. However, we remain focused in expanding our presence in our markets, and we are well-positioned to continue gaining market shares in different areas. Based on the long-term secular growth trends I was talking about already, gaming, mobile working, and digitalization of the healthcare. Thank you very much for your time and continued support. I will now turn over to the operator, who will moderate the questions. Please go ahead.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad now. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, that is star one to ask a question. We will take our first question from Marie-Thérèse Grübner with Hauck Aufhäuser Investment Banking. Please go ahead.
Yes, good afternoon. Thanks a lot for taking my questions. My first question has to do with the ULP potential that has helped cushion some of the shortfall in the gaming components business in the first half. Just to have a better sense, you're saying that the current capacities are pretty much used up. What can we expect? First of all, current capacities cover how many million switches, roughly? And by the end of next year, let's say, how can we expect this capacity to develop?
Mm-hmm. Yeah. Marie-Thérèse, hello. Rolf speaking.
Hello.
Thanks for your question. Yeah. As you know, we have one assembly machine, which is basically fully occupied now with the ramp-up of those new customers we just mentioned before. Capacity is around 25 million. The second machine will arrive in Q1 2023, which will then a little bit more than double the capacity we have. It's around 45 million switches, which we can produce then next year. This will accommodate all the customers we have, even a couple of customers we still can onboard. Depending on the onboarding of new customers, we need to decide maybe Q4 to order the third machine.
The third machine. Okay. All right. My second question has to do with the eHealth business. I was concerned that it would be down a bit in the second quarter because of the connector issues Rolf was mentioning.
Mm-hmm.
Now we have this business growing. I think you mentioned 33.9% in H1. Maybe give us some color on, you know, what has driven this growth, and more importantly, what can we expect in the second half in terms of, you know, sequential development. I know that the two new products that you mentioned are going to be certified toward the end only because of some delays. If you give us some colors on the eHealth, that would be great.
Yeah. I mean, it's the discussion unfortunately still going on with the connectors, yeah. But nevertheless, in order to add new stakeholders, they have to order certain number of terminals, yeah. I think we have technology-wise, also from security perspective, a strong competitive advantage against our only competitor. Therefore, we could further grow that business, yeah. We would expect also to grow that business until end of the year, at least at the same level we have been last year or even a little bit above. Yeah. This depends really on how fast they really can connect the connectors and how fast they can solve the discussion around financing, et cetera. What's going on at the moment in the market. The PIN pad will be certified.
With the PIN pad, of course, we also have always to certify the new software versions of the eHealth because certain features go together. It will only be done by end of the year, but this is no problem because e-prescription and also to PIN in the PIN everybody gets on the smart card, the insurance smart card, will only come beginning of next year. There's a delay from the ministry. Therefore, there's no issue. What we do is now to really use the window of opportunity and expanding our embedded base. As I mentioned before, it's around 100,000. In July, we reached 100,000 terminals, or we crossed that number, let's say. Last year we delivered 63,000.
We expect to be somewhere between 60,000 and 70,000 terminals this year.
Great. Thank you very much. My last question has to do with the cash flow, and you know, what we can expect. I mean, the second quarter was already much better on operating cash flow levels, roughly EUR 3 million. Can we expect the second half to be significantly better than the first half in light of you know, inventories presumably starting to be released or should we expect a more muted development than that in the second half?
Hi, Marie-Thérèse. Yes, Bernd speaking. The first half year was mainly influenced by the inventory buildup and the share buyback, which only started in June. For the second half year, the operating cash flow was more or less slightly positive only. What we expect in the second half is much better positive cash flow from operations. But as you know, we will most likely not further increase the inventory level. We have very high inventory level that gives us enough buffer to build up, to start now and expand the e-commerce business and reduce the switch level which we have. But the share buyback is ongoing.
Mm-hmm.
You know how much we are willing to buy back on shares for future M&A transactions, and that will probably eat up certain cash portions. Operating cash flow will be better. Investing cash flow will most likely be much lower because we see only the fourth generation starting with IFRS 16 lease. The machine will arrive somewhere at the end of the year.
Yeah.
Yeah, only share buyback will eat up some cash.
Okay. All right. Thank you very much.
Thank you. We take the next question from Julian Dobrovolschi with ABN AMRO. Please go ahead.
Hi. Good afternoon, gentlemen. Thanks for taking my questions. Thanks for the presentation. I have three questions as well. For the first one, I just wanted to kind of ask you if you could give a bit more comment on the statement that is said in the press release. I think in the press release, you said something like that you expect very good mid-term growth prospects. This is literally in quotes. I was just wondering, you know, does it mean that, for example, you should probably see various headwinds fading away at this point in time, such as probably supply chain improvement, demand curve for gaming switches going up slightly and many other more.
How can we actually interpret the statement of yours that, you know, do you kind of see good, let's say, growth prospects in the second half?
Hi, Julian. Thanks for the question. In general, we can say the plan was anyway done that we have a stronger half year, yeah, as we always had. This year, it's a little bit more, or it's a little bit stronger than the years before. This was calculated based on the new products we bring into the market in Q2, Q3, Q4. Of course, since we started an e-commerce business only in the first half and see a very significant uptake there, we also expect, especially on the professional side, a stronger growth there, towards second half of the year. On the gaming side, we see maybe slight improvements, but we don't see a relief at this moment.
It will be quite stable, maybe a little bit stronger than half one.
Okay. Got it. I think that also more or less answers my second question, but you can please add if my understanding is not fine. Because my second question was pretty much basically on the growth that, based on basically your guidance with professional business, I would kind of, you know, get to something like 12% growth that you have to get in the second half of the year just to be able to kind of eke out the low double digit growth in the professional business. I was just wondering, you know, like, what kind of drivers should we expect? You just mentioned, of course, the e-commerce. But besides
Mm-hmm.
The e-commerce business, which eventually will probably drive up more volumes, should we expect some other catalysts from the professional business?
What was the last sentence? What do you expect from the professional business?
No. Should we expect other catalysts to kind of propel the growth in the professional business in the second half of the year besides the e-commerce pipeline that?
Mm-hmm.
As we know, it looks good and healthy.
Yeah. In general, we have to say, there's, you know, I always mention that there are three secular growth trends of Cherry, and one of them is of course the hybrid working, yeah. You see that everywhere. Nobody's really returning to the, let's say pure office work. It's really a hybrid. Sometimes people have a third workstation in the holiday location. This means this embedded base is further growing, and of course the replacement cycle is therefore of course increased on a much higher volume. Combined, let's say, of the e-commerce trend and of course the hybrid working, we expect even a stronger growth in half two.
Okay. Let's say kind of still sitting on the cyclical growth trends and hoping that, you know, eventually we're gonna see some kickback from that point. Maybe a final question on the inventory switches. I think in previous calls you mentioned that at least in the past, I think end of Q4, end of Q1, you had something like 120 million in switches components in the warehouse at your side. You mentioned that you would like to bring this one down to normal levels towards 60 million-70 million units. I was just wondering if you could give us an update, you know, how much you're able to sell through the inventory, but also how much actually produced.
If you look at the total volumes sold in Q2, if you kinda can give us an understanding how much of volumes were actually sold from the production line and how much was already sold from the inventory level. Do you wanna go on this question?
I can answer that question. In fact, we have all the switches which we have produced, we are nearly at the same level, so around 160 million by end of June, and that was a similar level at year-end. That means all the produced switches we have been able for the moment to sell in the market. We have started the short-time work, as you know, in April. We will probably see in the next few months a lower production to really reduce the level of switches now. Actually, we see a higher demand internally for our own switches for the gaming peripherals which is growing this business.
Therefore we are producing Ultra Low Profile 27 for 27 days, 24 hours, and we are producing quite a lot ML and our own switches which we are only using for our own keyboards in China. Hopefully, we can reduce the next few months in the range of EUR 5 million-EUR 10 million each month on the stock level. That is very specific depending on the top line demand, yeah.
For example, considering that, you know, kind of planning to reduce it, the stock at this point in time by EUR 5 million-EUR 4 million per month, does it mean that for every single, let's say, demand from the customer, you'll sell it from the inventory only? Or it is gonna be a mix of produced, literally, let's say, in the factory and, a part of it, and a part of it would come from the inventory. What's your thinking?
Yeah.
Around, you know, how
I think the challenge will be that if demand is not going up, then we will reduce the production even further and then try to sell off the switches as they are sitting on the inventory level. But if demand goes up, then we stay at that level what we are producing today, and reduce with the excess demand the inventory level.
Yeah. Okay, got it.
Maybe just to add on that, Julian. It's right what you said, yeah. It's always a mix out of inventory and new product switches, depending always what kind of switch combination the consumer or the end-user our customers wants to have. I think a major portion what Bernd explained is really for our own keyboards that we use their different type of switches which are not in the warehouse in Hong Kong. And for that, of course, we need to produce further on.
Okay, got it. Maybe a final one, and then hopefully, Bernd, you can try to clarify this for me. So on the financial side, I was just wondering how do these things stack up in the case when you're actually selling switches from the inventory and then selling switches from, you know, let's say, monthly produced volumes. My expectation is that if you sell from the inventory, I would expect that most of the cost of the goods sold that basically goes into production of those inventories is already expensed. Is my understanding correct? Or you basically put this on the P&L at the point in time when you actually sell the goods from the inventory? How does that work?
No. Typically, we are selling all the switches, besides one customer. We sell all the switches to our own subsidiary in Hong Kong and to the full costs which we have, plus a profit margin according to transfer pricing. If the stock has increased, we eliminate any interim profit at the time of reporting, because if the switches goes with full costs on the stock plus the profit which we have sold for transfer pricing purposes, then we eliminate the profit on that one, yeah. In Hong Kong, all the switches are sitting at full costs. If that answers your question. Without any profit-
I was just wondering, let's say. If you sell it from the inventory, it's not like we should kind of eliminate, you know, the cost of goods sold for that particular inventory part, just because you didn't really kind of account for the COGS element. Then, I guess you actually account for the COGS element when you actually sell the goods from the warehouse from Hong Kong all the way to the final customer, be it, for example, Corsair.
Yeah. When we sell, I'm not sure if I understand the question correctly, because Corsair is exactly a different customer. We are selling Corsair directly out of Germany, and all the other customers out of Hong Kong, yeah. I'm not sure whether I get your question correctly. Your question is-
Maybe the question, just to try to formulate it a bit differently, let's say, do you achieve higher margins when you sell from the inventory?
No. That is, we are selling at standard cost to Hong Kong, and as I said, if it's going from the production, we are selling it anyway to Cherry Hong Kong, and it is at the standard price in Hong Kong. The only thing is if you have an increase or decrease on inventory at a reporting deadline, then you eliminate in the company profit. It is always the standard price or the actual standard price, and there's no higher profit whether you sell it directly from the production or whether you sell it from inventory.
Yeah, I think that answered my question.
This is not impacting.
Thank you so much.
Yeah, this is not impacting your profitability. If you would, for example, the only difference what is the case is, if you have, let's say, if you reduce your inventory only and have the fixed cost with no operation and no production, then of course you would have double cost because you're selling off the cost of goods sold, and at the same time you have your full cost, OpEx cost, but not producing anything. Yeah. Therefore, we have introduced short-term work and getting subsidies from the state on that one.
Yeah, got it. Yeah, thank you so much, Rolf, for all the color. Good luck and enjoy the summer.
Yeah. Thank you. Thank you.
Thank you. We take our next question from Tim Wunderlich with Hauck Aufhäuser Investment Banking.
Please go ahead.
Yeah, thank you so much. I would like to know if you could give me an indication about the ASP trend, so the pricing trend, year- over -year and also quarter -on- quarter in the gaming segment.
In, um, in, uh-
For gaming switches, because in the call you're talking about the intensified competition. I would like to know how this affects your market share for traditional gaming switches, but also the ASP.
Yeah. In the switches, so in general, we're looking at price increases everywhere in all the segments, yeah. In gaming, we increased prices beginning of the year on gaming devices, so the devices itself beginning of the year and thinking about increasing prices towards Q4. This means mid of Q4, most probably, in November. In the switch business, we did not increase prices this year since all our competitors are selling on around 50% level compared to last year. As you know, the Chinese are very aggressive, so we cannot increase prices because this would even increase the gap towards the prices towards the clients.
Therefore, here we work pretty much on the cost saving measures where Udo and the team is working on heavily to reduce cost of goods, material prices, et cetera, et cetera. We don't increase the prices this year.
Okay, understood. On the inventory, sorry if you talked about this, I couldn't listen to the entire call, but what is the risk of inventory write-downs? How do you see this? I mean, your revenue is down, inventories have gone up. Is there any risk that, you know, by the end of the year, there's some inventory that you simply cannot or won't be able to sell? Is that a concern?
Clear message. No, there is actually no risk on that one. We have it primarily, as you might have heard, the inventory level on switch, on the switch side is more or less the same like year-end. We are trying to sell off now, or reduce the inventory level in the second half. We expect, for the rest of the year, no further increase, but also not a significant decrease in inventory. Why? Because, there is the main reason is that we have built up inventory for our new e-commerce business. It's one of the reason. The second one is, that we have built up a raw material basis to sustain any shortage on supply chain issues. Yeah.
All of the products which we have on board are sellable. They are turning, but we have a higher stock volume. Yeah. What we are trying to do in the second half is definitely to not increase very strongly any further the inventory. We have taken action also on that one because we think that is sufficient for the rest of the year. There will be a shift in the inventory level. We will perhaps decrease further the switch level, but use perhaps that cash to strengthen the e-commerce. Because on e-commerce, either you have it on stock and can sell it, or you don't have it on stock. If you go to Amazon and say, "We come back in four weeks time," you don't make the deal. Yeah.
That is the main reason that we have increased the e-commerce business. That is really one of our strategic pillars in the future, and that is driving the inventory. Of course, the inventory is also increased because standard prices has increased because of material price increases. That is where we are working on now, that there will be no further increase, but a intelligent shift. From the risk perspective, and that is your main content of your question is, actually, we see no risk on inventory level.
Okay. Understood. Yeah. Thank you. Last question. In the gaming segment, what is the normalized EBITDA margin that you guys are now targeting, let's say for 2023 and 2024? Because you come from really strong levels of 30% +. You're now at single digits at clearly subdued revenue levels. You know, if we assume that next year we're not seeing a massive rebound in demand, right? If we assume that maybe gaming segment revenues grow by something like 10%-15% in 2023, then what kind of margins would you think you would be able to achieve? What kind of EBITDA margins? Are we talking about 15%, 20%, or just a ballpark figure would be extremely helpful. Yeah. Thank you.
Rolf, do you want to answer that one?
No, just go ahead.
Very difficult to say. We see with the increasing share of the ultra-low profile switch a stronger shift towards the ultra-low profile, which has a quite attractive margin. On the other products for the moment, we have absorbed, as Rolf said, we have absorbed cost and material price increases here. So that is the reason why we are working on initiatives. And you know, the biggest one you know already, that's the implementation of the fourth generation machine, which arrives end of the year, which gives us a high much better production efficiency on the production side.
We're working on certain other measures on the production side and to be more efficient here so that this cost absorption will turn around and say we are reducing our costs, our OpEx cost. That is one of the bases or one of the topics. What we pretty clearly see is an improvement on the gaming peripheral side. This, with the new products which we are bringing on board, we see a very attractive improvement of the margin on the peripheral side. Actually, our main concern is the cost coverage on the fixed cost coverage on the switch side, yeah. It's quite difficult to predict now, actually, to predict for 2023 what is happening.
We are working on that one, but for the moment, we are taking care about 2022, second half, and with all the measures having an impact, of course, for 2023. If you ask me now, it's very difficult, but it will be somewhere in between, yeah. That is my view today, somewhere in between the margin you mentioned, which we have had last year and somewhere where we are today, yeah. Because on certain raw materials, we see also price declines because we're coming from a peak, especially gold, copper, and so on. We still see increases on granules, on the switch side. We are trying to be more efficient on the labor work side. It's quite difficult.
As you see in Q2, we have the first improvement on the margin by 3.5 basis points already. We are working, and Udo is very strongly working with his team to have even further improvement here on that page, yeah.
Maybe just to add on that. I think we have now a volume level. Bernd said we have a fixed cost level, which we can definitely go down further. There's a level how far you can go down. Therefore, we implemented or started a lot of measures and improvement programs in order to make the business more attractive so that the EBITDA goes up again based on today's volume. If the volume would go up, yeah, if nobody knows about that, then, of course, this will be significantly impact also the bottom line because we're working on the cost measures, and if volume goes up, of course, the fixed costs are low, much lower than to the volume.
As Bernd said, it's very difficult to predict, but with the volume, it could go up immediately, yeah.
Okay, sounds good. Thank you.
Thank you. As a reminder, please press star one to ask a question. We take our next question from Jörg Philipp Frey with Warburg Research. Please go ahead.
Hello, Rolf. Hello, guys. A couple of questions from my side as well. Well, you mentioned the success of the eHealth terminal, and well, if my calculations are correct, this basically means that by the end of this year, you will have probably sold around one eHealth terminal per doctor's office in Germany. Can you give us a feel about the additional penetration potential? Meaning, how is the business per or the penetration per doctor's offices? How's your idea of the maximum number of terminals you might be able to sell per doctor's office, per hospital, and how it is shaping up with alternative users? Is there any demand visible from daycare providers or other alternative use cases?
Just that would be my first question.
Mm-hmm. Yeah, I mean, it's very difficult to say, of course. Yeah, because the project itself basically says that they want to bring additional applications. This is one thing, and secondly, additional stakeholders to the platform. This is mandatory, and they always decide, now it's time for that group, for another group, for the next group. Therefore it's really difficult. We once made a calculation, saying looked at all hospitals, pharmacies, doctor's office, et cetera, et cetera, and said depending on the size and of course the content of that specific doctor's office or the hospital, there's an average number of terminals. But it is really a guess.
Right. Right.
Here we came to a number from today's perspective, not knowing which additional stakeholders will come on board or have to onboard this platform. We came to a potential of 800,000 terminals in the next years. So that's a rough number. We definitely target for ourselves, and this happened already in the first half of this year, that we in this year's rollout achieved more than 50% on market share. We definitely wanna further grow this business in order to go to, I don't know, 60%-65% market share the next couple of years.
You know, there is always ongoing discussion now. Let's say the mobile care people, the elderly care people, other user groups will be onboarded, and therefore, there's always a certain uncertainty seeing how many people will be onboarded. One thing is very clear, we have a future-proof platform. As I said already before, we have implemented now the remote capability. You know, when you now go for the next TI 2.0 software rollout, then you will see that this capability is very important. Yeah? That's only us who can do that. This is a future-proof platform. Another data point what we got from Gematik is that our terminal, as it is today, of course, with certain enhancement, will be rolled out in Germany up to 2028, 2029.
If now the software rollouts will be delayed, yeah, originally was at 2025, it might go to 2027. It's even longer. Therefore, there's a good perspective for us to really grow with additional stakeholders. What we say for us, we definitely want to have market share above 50%.
Sounds good. Particularly as you want to introduce new products by 2025, 2026 anyway or.
Yeah, of course. That's the basis. The software basically can run already today on the existing platform, right? It's highly secure and highly capable. Of course, this remote capability means to really upload new software, new applications remotely, is absolutely a must and is absolutely an advantage of our platform.
Great. Next question would be on office peripherals and basically your e-commerce business. Just to make it clear, do I get it correctly that basically all of your business currently is Amazon and marketplace stores? Because I didn't see any launch of your own Cherry branded store.
Mm-hmm.
Um-
Mm-hmm.
I noticed a bit in some products in office peripherals extended delivery times. Do you have an idea, or can you confirm that this has impacted your business somewhat, or is it just a question of when I look, basically?
Starting maybe with the first question. The e-commerce business is consisting out of Amazon and so-called omnichannels. Different places where we basically deliver to, different places like MediaMarkt, computeruniverse, XYZ. There are different marketplaces where we deliver online or basically where the vendors buy online from our. Or let's say, order via our customers, the B2B customers online, and the B2B customers make the fulfillment for us. That's the omnichannel business. The bigger one, of course, is the Amazon business. The Amazon, there are two ways to do Amazon business. It's the seller accounts, where you sell directly to the end user via Amazon or the vendor account. We have the vendor account in Germany.
This means we sell to Amazon, and Amazon is selling that further to any client. Yeah? This is very important to differentiate. In the U.S., we start with the seller account, or we started with the seller account. This means all the shipments have to be done via logistics support. End of the day, we sell to the end user in the U.S. Our own webshop.
Got you.
It will be ready by the end of November. We're working on that. For us, it's not that we will generate a lot of volume in our own webshop. It's most probably 2%-5% end of the day. Important for us is that is the customer journey. The customer goes on our home page, sees the product, and then can buy it directly with the buy button. This is important, yeah. That he doesn't have to move away to Amazon somewhere else to buy the product. This is the intention of our own webshop, which will be ready November. It's not to really increase business significantly. The significant increase comes definitely from Amazon, eBay, and then, of course, other marketplaces we're going to add on to our business.
It's clear that the presentation, the product presentation at Amazon is always pretty.
Of course. Of course.
You could get-
Of course.
You should get an uplift by your own look and feel.
Absolutely.
Lastly, touching a bit on the switches again. If I would calculate it, basically, your ULP business volume probably in first half is something sales wise between EUR 3 million and EUR 4 million. Would that be a roughly correct ballpark?
It's a little bit higher.
Little bit higher. Okay, great.
Yeah.
In terms of, well, it's now a bit more than nine months of the switches in the market. Have you experienced any changes in the percentage of customers opting for the ULP option at Alienware or at your other customers? Any color that you can provide there?
Yeah. We basically know that, of course, from Alienware, because those two platforms, the X and M platform, is in the market now a couple of months, let's say 12 months. Here we see still roughly 40%, adoption rate.
Yeah.
What?
Wait, go ahead. Sorry.
Yeah. It's around the 40% still, and the others we're ramping up at the moment. It's difficult to judge, but it shows that now Dell, not Alienware, where we have the X and the M platform, but also Dell with the G-series, adding the Ultra Low Profile now on the, let's say not that high. It's still a high-end gaming keyboard, gaming laptop, but it's around EUR 1,800 market price. This means, since they got good traction on the Alienware side, they're also adding now the Ultra Low Profile on the Dell portfolio directly. This shows us that it's very well received by the end user end of the day, which is important, but also with our customers.
Similar numbers we will see most probably with Corsair or MSI and others, but we don't have the market feedback yet because they just launched it in this quarter or let's say in the second quarter. We will need to see some numbers in order to really evaluate the adoption rate.
Great. In terms of, you mentioned it in your prepared remarks or I think, or probably, regarding another question, the lead times for your additional ULP assembly machines, how much in advance do you need to order?
Yeah. Unfortunately, it's 10-12 months, yeah.
All right. Okay.
Therefore, we have to be very clear with our forecasts and the availability of capacity, of course. This is something we look basically every week at in order to see when is the next big customer or an existing customer adding additional platforms. This is, I would say, something we need to decide in Q4 whether we go for next machine so that we have next year really done in Q4 the third machine, which brings additional EUR 35 million capacity.
Yeah. Great. Regarding the general switches business, if I'm following Corsair's comment correctly, it basically indicates a flattish Q3, and well, some hope for a nice rebound in Q4, which then should obviously also translate into your business, with probably a couple of weeks delay. Would it be a fair description for your gaming outlook or?
I think Andy Paul was talking about the PC parts like graphic cards and others, yeah? Not really about the keyboards. We don't see at the moment a strong pickup in Q4 or Q3. We plan a little bit higher, so we expect a little bit higher than Q1, Q2, but a real pickup I would not see before 2023.
Okay. Fair enough. Let's hope for the best for next year and, well, all the best for the future. Thank you.
Thank you.
Thank you. We have a question from Tom Diedrich with Metzler. Please go ahead.
Yes. Thanks. Yes. Thanks for taking my questions. Only two very short questions left. The first one is on your CapEx figure for the full year. Can you give us a reminder what we can expect in terms of investment or CapEx for the remainder of the year?
We will have in principle only from the asset side. I would say it is some toolings and the fourth-gen machine on IFRS. There's no cash out, but there is the IFRS accounting for it. We have a capitalized R&D spend.
In what amount is that?
The capitalized R&D spends are typically in the range of EUR 2 million-EUR 3 million.
All right. Perfect. Perfect. Thank you. The final question, at least from my side, if you can give some color on current trading or also how the last weeks they're up and running. Some comment on July would be helpful. If anything has changed the market, especially in China, or are you actually still seeing the same, let's say, yeah, weakening and challenging environment as you thought in the first quarter and in the second quarter? That'd be my second question.
Maybe in general, it hasn't changed too much, unfortunately. We just had another lockdown in the Zhuhai region in July, where our warehouse was closed again for five days. There's not too much change in that respect. Therefore, we still see absolutely unpredictable and mixed numbers when we look at the different weeks of July, but also August. It's very difficult to predict. What we can say is we will do everything in order to stay in the guidance and basically do everything what we have in our hands. Other things we cannot influence anyway.
Perfect. Thank you very much. Good luck.
Thank you.
Thank you. That will conclude today's Q&A session. I would now like to turn the call back over to the speakers for any additional or closing remarks.
Yeah. First of all, thank you very much for your active participation. It's always good to receive those questions in order to really think through our strategy we have, but I guess this is really pretty much in line. I'd like to thank you for for your support, for the investor support, and, yeah, looking forward to talk to you in person again, at the next one of the next conferences. Thank you much so far. Otherwise, we see you at, or we meet us again after Q3. Thank you very much.