Good morning, ladies and gentlemen, and welcome to the Cherry SE Investor and Analyst 2024 Half-Yearly Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Nicole Schillinger.
Good morning, ladies and gentlemen, dear analysts and investors. Welcome to Cherry SE Q2 2024 Capital Markets Call. Thank you for being with us today. In the room with me today are Oliver Kaltner, CEO, Dr. Udo Streller, COO, and Volker Christ, who will be our Executive Vice President, Global Finance and IT, from the first of August. I am Nicole Schillinger, Senior Vice President, Investor Relations.
Before I hand over, let me briefly run you through today's agenda. Oliver will start with an overview of H1 highlights, and then hand over to Volker, who's going to run you through our major H1 and Q2 KPI. Then Udo takes over and shares with you the current status of our restructuring, as well as an update on our three segments. Oliver will conclude with a detailed outlook before we come to the Q&A session.
Thank you, Nicole, and good morning, everyone. Thank you for participating in this conference call. You might have noticed that this is a very special day for all of us, as we have the Q2 capital market call, followed by the annual general meeting, both on one day. Special thanks to my team for making this happen and for keeping the promise to deliver the quarterly results to our audience around three weeks after quarter end.
I would like to begin the presentation of Cherry's quarterly report for the second quarter of 2024 by outlining the most important events of the past few months and the associated implications for Cherry for the remainder of the 2024 financial year. Let's start with the most important decisions. In discussions with our long-standing banking partner, UniCredit, we have revised our liquidity planning and agreed to secure our room for maneuver.
Accordingly, the known problems of the past financial year have been taken into account. The basis for this was an independent business review, prepared with an independent partner, which assessed the plausibility and resilience of our five-year plan with an in-depth analysis.
Cherry and UniCredit are thus jointly entering the next phase of our corporate development. I want to underpin the good relationship we have with our partners from UniCredit, both from a professional and also personal point of view. Talking about the keyword inventory.
A year ago, this had a value of around EUR 84 million. That was too high for a company like Cherry SE. When we reduced these inventories by 27% to the current figures of EUR 59 million. In our view, this is now a suitable and therefore healthy figure. In Q1, inventories were even lower, at around EUR 55 million.
The decisive factors for our inventory planning are the following: First, the MX2 assembly in China is based on final orders and partial advanced payment. This allows us to avoid our own warehousing and the associated inventory risk. Second, the components for the Digital Health and Solutions division come from our production facility in Vienna, Austria.
Here, we only have a lead time of around 4 weeks for production and delivery, which clearly limits the quantities of goods in stock. Third, the main inventory comes from Gaming and Office Peripherals . We are currently allowing ourselves a slightly higher inventory value here in order to compensate for the sometimes very challenging conditions caused by the unrest in the Red Sea region and to ensure the availability of goods.
The time between the start of production, logistics, and delivery is currently 4 months. Addressing sales and controlling. We have more closely synchronized the three business segments of Cherry SE, which is components, Gaming and Office Peripherals , and Digital Health and Solutions . This leads to a coordinated research and development plan, which prevents duplication and the associated unnecessary costs of the past.
Sales decisions are now better aligned cross-functional, which noticeably strengthens our position vis-à-vis our partners in distribution, retail, and online sales. This makes it easier for us to compensate for any sales shortfalls in one segment with additional sales in the other segments, thereby strengthening Cherry's revenue and margin resilience.
This also helps us to avoid having to enter into a low-margin deals at the end of the quarter. We see the positive development of the EBITDA margin in the first half of the year as the first success of our margin over volume policy. China.
Our restructuring project in the area of switch assembly is ahead of plan and will therefore reach the desired capacity for MX2 switch production before September 2024. Special thanks to our COO, Udo Streller, and our team in Zhuhai and Shanghai for making this milestone happen.
At the same time, we have adjusted capacities at our plant in Auerbach, Germany. All global personal measures for the realignment have been implemented, considering local legal requirements and the individual notice periods of the employees affected. Digital Health and Solutions .
This business area is currently giving us the most tailwind. Since the implementation of regulation for e-prescriptions in Germany at the turn of 2023/2024, sales have slightly increased significantly.
With our eHealth terminals and PIN pads approved by gematik, we are a partner for pharmacies and doctor surgeries that are innovative in terms of technology and design, and relevant to the market in terms of price.
With the introduction of the electronic patient file in January 2025, based on a new law by the Federal Ministry of Health, we expect a further boost of our business in this area, and this on a constant basis. Thanks to our software as a service offering for maintaining and updating devices, we also see the opportunity for recurring revenue outside of hardware replacement cycles.
We have also intensified the internationalization of our business with hygienic peripherals. The unique hygiene-oriented product portfolio of our Active Key sub-brand has met with great interest, particularly in the United States. Ladies and gentlemen, with this, I hand over to Volker Christ, our Interim CFO, who will become our new Executive Vice President, Global Finance and IT, effective from first of August this year. Volker, please.
Thank you, Oliver. Good morning, ladies and gentlemen. Let me also thank you for your interest in Cherry's interim quarterly report for the second quarter of 2024, and the first half of 2024. Let me start with the development of our sales. These total EUR 61.6 million for the first half of 2024, and are therefore slightly higher than in the same period of 2023.
With revenue of EUR 31.3 million, the second quarter 2024 showed a growth of 3.2 percentage points versus. Oh, that's 1 million more, versus quarter one in 2024. Without the postponement of an announced customer booking of EUR 900,000 in the components division from June 2024 to September 2024, this development would have been even more pronounced.
In the USA, new business has also started somewhat more slowly than expected. As already explained by the CEO, Oliver, we've also foregone sales that would not have met our margin requirements. This is reflected in our adjusted EBITDA margin. At 5.1%, this figure for quarter two is now 2.3 percentage points better than in the same period last year. We have therefore already significantly improved our operating profitability.
A negative impact on our profitability in the first half of this year was, however, caused by some one-off costs, such as additional audit costs by the auditors, RSM Ebner Stolz, for the audit of 2023 annual financial statements, the renegotiation of the existing loan agreement with UniCredit Bank, and the associated cost of legal advice.
As part of the new agreement with the bank, UniCredit has agreed to provide financing until June 29, 2026. As of June 30, this year, Cherry has EUR 25 million in borrowed capital from the business relationship with UniCredit Bank. Looking at the business divisions, the revitalization in the digital health and solution segment is particularly evident.
Revenue doubled to EUR 16.2 million in the first half of 2024, based on regulatory requirements already described by Oliver and product-related benefits. This trend is also evident in a comparison of the second quarter. Revenue of EUR 8.2 million was achieved here, compared to EUR 5.8 million in the same period of the previous year.
The declines of EUR 4.8 million in gaming, office, and peripherals segment, and the EUR 3.1 million in the component segment in the first half of 2024, were more than offset by the growth in the digital health and solution segment. I would like to emphasize once again, that it was primarily the discontinuation of low margin to unprofitable business, that led to the decline in sales shown.
Oliver will explain how we intend to grow here again and what measures we have introduced. The development of the top line is reflected in the analysis of EBITDA by segment. In addition to restructuring costs, we have also reduced our ongoing central costs and will continue to do so in the coming quarters. The aim is to achieve dynamic cost control, and thus enable our forecast of an adjusted EBITDA margin of 7%-8%.
The impairment of intangible assets in the 2023 annual financial statements, and the reduction of inventories by 27% on the asset side, as well as the cash reduction due to restructuring costs and debt reduction on the liability side, have reduced our balance sheet accordingly.
For better comparison of the intangibles position, the slides show our balance sheet at the end of half year 1, 2023, and half year 2 for 2024. Our equity ratio in the first half of 2024 is therefore 56%. We consider this to be a healthy capital structure. Our CEO, Dr. Udo Streller, will now provide you with the latest information on the structure.
Good morning, also from my side. Let me now guide you through the current status of our restructuring measures, followed by a divisional update. Here's a brief summary of the rationale behind our relocation project to China.
As groundbreaking as the introduction of the first mechanical key switch by Cherry in 1983 was, the first generation of MX switches has lost their competitive edge over the good 30 years.
The MX2 switch family is certainly, once again, a leader in technology and design. However, it faces a different competitive environment, and must now also be able to compete commercially with the competitor variants, some of which are very inexpensive. Cherry can still command a certain price premium in the market, but it must remain within a realistic range.
Partial production and assembly in China is now helping us a great deal to shape our cost structure in such a way that we once again realize reasonable margins on the market price. We will realize an annual savings of EUR 5.5 million by cutting 105 jobs globally. This will take effect from August, September 2024, and will become fully cost-effective by 2025. We have safeguarded our quality standards.
We will continue to produce the most important metal parts in Auerbach and deliver them to China. Cherry switch production in China is mainly supplied to other keyboard manufacturers with final production in China. This means that only limited additional logistics costs are incurred.
With the next innovation step, we are introducing the MX Multipoint Inductive switch, as well as the particular quiet MX Silent Clear, and the particularly flat MX Low Profile 2.0. These technologies meet the current and future market requirements of the gaming scene and office users, and will once again make Cherry the technology leader with a premium claim. The first samples have already been delivered to manufacturers.
As a result, we have gained three new volume customers, Geon Machinery in Scandinavia, Keychron, and iKBC in China. In parallel with the improved inventory and cost management, we intend to revitalize our components division. In the Gaming and Office Peripherals division, the main focus is on the market presence and sales eagerness, in addition to cutting-edge technology, design, and excellent quality.
With this in mind, we have entered into additional distribution agreements in the retail business, thereby increasing our visibility towards consumers. At the same time, we are focused on the number of core markets. By dispensing country-specific variants with low sales volume, we are preventing a dilution of our margin for these product ranges.
At the same time, we have launched a program to reduce components and product diversity. In the final phase, we will have reduced the complexity of our product range significantly without any impact on our customers and our core markets.
Of course, this will also have an immediate impact on our stock levels and the associated costs. We see growth opportunities above all in wireless peripherals for office applications. There's an ongoing market and renewable need.
As already mentioned, by Oliver, the division, mentioned next, Digital Health and DH&S, is currently our growth driver. Market demand has increased significantly due to the regulatory requirements and opportunities offered by digitalization. We manufacture all devices for the relevant application at our production facility in Vienna.
Thanks to good quality, attractive pricing, and above all, reliable technology, we have already achieved a market share of over 75% in Germany for eHealth terminals. The associated replacement requirements for the future years and the digital maintenance software as a service, will ensure constant revenue streams without the need for significant new investment at present.
In this division, we also manufacture products for customers with special hygiene requirements. Active Key, as a brand for hygienic keyboards in the USA, has already been mentioned, or for data security. Well, in total, let me emphasize, the second quarter was the most successful ever for this subdivision. With this, Oliver will give you the outlook.
Thank you very much, Udo. A lot of progress in your area, indeed. Operations is in better shape than before, so this is really a fantastic step up. Ladies and gentlemen, what do we expect from the second half of this calendar year? Well, based on recent findings of the GfK Consumer Climate Institute, the recovery in consumer sentiment in Germany came to a standstill for the time being in June.
Today's reading for July is a bit more positive. However, this could be a pre-floor up, so we need to really look into this very carefully and constantly. The willingness to buy until July fell slightly compared to the previous month, and thus continues to stagnate at a very low level. The willingness to save, on the other hand, has increased slightly, consolidating its already high level.
Taking these developments into account, the consumer climate is declining slightly overall. In the forecast for July, the indicator falls by 0.8 percentage points, down to minus 21.8 points, compared to the previous month, which was revised to 21.0 points. In the Eurozone, Composite PMI was revised slightly higher to 50.9 in June 2024, from a preliminary of 50.8, compared to 52.2 in May.
In the U.K., the Composite PMI fell to 51.7 in June, the lowest in 7 months. Of course, that still is expansionary territory, but that's a shift from the more positive momentum earlier this year. However, the uncertainties and risk in the Red Sea area are naturally detrimental factors for the global economy.
This is exacerbated by a run of container capacity in the run-up to the U.S. elections, which is leading to significant price rises. All those parameters underpin the necessity of a very good cost management and margin steering, while we go after every possible chance to grow the revenue lines. Of course, we still want to expand our business and are sticking to our forecasts for 2024.
This is because in addition to the cost-cutting and efficiency measures described by Udo, we have also taken other decisive steps. Specifically, in components, we are about to sign supply agreements with three other OEMs. This underlines our willingness to work together with manufacturers to develop innovative and specific solutions. We are receiving positive feedback on our ULP and MX2 switches, including the first samples from our production in China that we share d just recently.
Please understand that such kind of collaborations take time, while we need to ensure maximum confidentiality throughout the process. We hope to close these agreements before the end of 2024. We will inform the capital market in detail as soon as the agreements have been concluded.
In order to fully exploit our new opportunities through the assembly in China, we will expand our Asian and especially Chinese sales partnerships with several new local keyboard manufacturers.
Our goal is to have at least 10 new partners with a sales volume of at least 2 million Cherry switches per month. Geon, which is a Geon Machinery Industrial, or iKBC, Beijing Handmusic Technology Co. Ltd. , are the first examples we can name so far. This is a strategic change compared to the past approach, which was more indirect.
In the gaming and office services division, we are intensifying our direct business with retail partners and continuing our optimization measures with our distributors in terms of joint sell-through measures. For example, we are planning to expand our cooperation with the British company, Dixons, plus across Europe, to significantly increase the presence of our products in their sales outlets, both offline and online.
The aim is to increase sales volumes in the next quarter through targeted promotion and training of sales staff. We have also agreed a more intensive cooperation with MediaMarkt and Saturn. This includes exclusive product offers and advertising campaigns. We expect sales to increase by 15% in the coming quarter.
From the fourth quarter, we will start specific production for the Chinese gaming market as planned. We plan to achieve a production capacity of over EUR 1.5 million in this segment. Let me underline that we are specifically focusing in that business segment on delivering not only the Q3, but also the Q4 sales, in conjunction with the planned margin level.
In our growth area, Digital Health and Solutions , we are doing everything we can do to make the best possible use of the momentum we have gained. We see a need to replace all the terminals from other manufacturers and opportunities in attracting other medical professions.
This means outpatient or inpatient care, as well as midwives. We quantify the potential with a further 10,000 terminals in the second half of 2024, which will enable us to successfully defend our market share of over 70%. At group level, we are focusing on the Cherry brand in addition to the cost reduction and cost control measures outlined above. This is because consumers accept the price premium for strong brands.
To underpin our premium positioning in the market, we are investing in our brand. With an upcoming brand relaunch, we will modernize Cherry and bring it back into the customer focus. In the area of software solutions, we expect to generate EUR 5 million in additional revenue in the second half of 2024, around 25% of which will be recurring. So for the first time, we are activating recurring revenue for the company.
Our terminal management system saves pharmacies and doctor surgeries a considerable amount of the usual maintenance costs. In addition to eliminating travel costs, maintenance and updates are now carried out efficiently and in line with the time using remote technology. With our SmartLink solution, you have probably seen our statements we made in corporate news. Patients and their insurance cards can also be authenticated via smartphone.
In the fourth quarter, we are also planning a messenger service in the medical sector to ease the data exchange between medical staff. Ladies and gentlemen, last Friday, July 19, 2024, Marcel Stolk, the Chairman of the Supervisory Board of Cherry SE, informed on behalf of the Supervisory Board that Cherry SE and CFO, Dr. Matthias Dehn, reached an agreement on early separation as of July 31, 2024.
On top of that, the Supervisory Board informed that this will not result in a direct replacement on the Executive Board of Cherry SE. From now on, the Executive Board will be represented by Dr. Udo Streller as COO and me as CEO.
As stated before, effective from August first this year, the responsibility for global finance and IT will be permanently transferred to Volker Christ, who has been serving as interim CFO already since February. In his ongoing role, Volker will be the Executive Vice President, Global Finance and IT, with a direct reporting line to me as the CEO.
According to the legal basis of an SE, decisions on the appointments and matters on the executive board are the sole responsibility of the supervisory board. I would therefore ask you to submit any questions on this topic to Nicole Schillinger in writing, so that we can have them answered by the supervisory board. A final comment from me: in the last few months, we have been able to optimize the structures and processes in finance.
The constructive cooperation with Volker has prompted Udo and me to give Volker Christ responsibility for global finance and IT as an EVP. After just a few months, Volker is already a respected leader and accepted member of the Cherry culture. This means that we are finally future-oriented now and systematically stab le in this area, too.
Let me provide you with an outlook with regard to Q3 2024. We expect consolidated sales of around EUR 35 million for the third quarter. This represents growth of around EUR 4 million compared to the second quarter of 2024. Based on the growth initiatives described above, we believe this is achievable despite the general economic headwind in Europe. Our target is an adjusted EBITDA margin range of 5%-6% for Q3 2024.
We believe this is achievable as well, having already achieved 5.1% in Q2, based on the cost measures described. However, some of these measures, such as the headcount reduction and start of production in China, will only have an impact on earnings for the first time in Q3. This will further reduce our cost base in Q3.
The comparisons with the respective prior year period show large jumps, of course. However, please bear in mind that 2023 was a year of transition and repositioning for Cherry SE. In terms of the balance sheet, we also had to get rid of some legal burdens. The comparison with the immediately preceding quarter of 2024, therefore, seems more meaningful to me and more suitable for making the trend of revitalization of Cherry SE transparent.
For 2024, the executive board continues to expect group sales of around EUR 140 million-EUR 150 million, and an adjusted EBITDA margin in the range of 7%-8%. In the medium term, the company is aiming to return to an adjusted EBITDA margin over 20% at group level. I'm now looking forward to your questions, and with this, obviously, I hand back to Nicole.
Thank you, Oliver. Operator, back to you.
Thank you very much. We will now begin the question and answer session. If you would like to ask a question, please dial nine star on your telephone keypad. If you find your questions answered before it is your turn to speak, you can dial nine star again to cancel your question.
The first question comes from Julian, from ABN AMRO. Julian, please, hand in your question.
Hello, good morning. I hope you can hear me. Julian, from ABN AMRO. I have a couple of questions on the presentation. And by the way, thanks for the elaborate details in the presentation.
The first one is on the margin over volume philosophy. So, I think you mentioned that the reason why revenue came slightly below your expectations is because of, you know, the exact philosophy. You're not really kind of willing to give a sharp discount on a, say, massive volume demand, just to kind of preserve, let's say, the high margin profitability in the business.
I was just wondering, so how much adjusted EBITDA margin do you actually target in the Office and Gaming Peripherals segment? And where do you draw the line, and how actually do you look at the risk of losing the market shares by doing this? That's my first question. Probably, we can go one by one.
Okay. First of all, we're not providing margin level on a segment level here, as we are just started this year with prognosis on quarterly level for the entire group. So please bear in mind, obviously, we're not going further than that one here.
What we really mean by that is, quite frankly, if we look into the last three years of the company, we always fell down in the last quarter, and we always fall down in the last month of the last quarter, Q4. Why? Because obviously, we trained and educated the market that obviously you only have to wait to really put in your latest purchase order to Cherry, because Cherry is always willing to give extra discount.
That's the part of education that we need to change, and we managed that very nicely, obviously, in the first two quarters. And when I say, like, margin is over volume, that also means, like, the major key metric for this year is the EBIT, EBITDA marg in. That's the most important metric here.
Does that mean, like, that we might suffer on the top line? There is no indication yet, but we only go on extra deals when we only, obviously, always have our cross margin guaranteed, and therefore, obviously, going through the entire balance sheet, our adjusted EBITDA margin is also guaranteed.
How do you look at the fact that you might be losing some market shares by doing this? Is it a bit of a concern that you take on board with you?
Yeah, very good point. Obviously, just referring to the numbers that got shared by Logitech yesterday. Very nice progression, very nice kind of development in the market, as you can see. But quite frankly, if we're going to start becoming a competitor in market share with companies such as Logitech, obviously, we're going to suffer even further on the margin side.
Quite frankly, we are very clear what is our size in the market and how can we go after even more. Second, we do this in a very profitable way, which is also very kind of favorable for all our shareholders. And the third element is, we still can gain margins in areas where we have not spent enough focus on, which is still market in the UK. We're talking about France, we're talking about Iberia, we're talking about Netherlands.
So we are not yet in a market share game and in a market share battle yet, quite frankly, while we absolutely going after the, the opportunities that we're facing in the market. What I would like to underpin in that context is, the more we go direct, like we have with Fnac in France, with Dixons in the UK, and obviously MediaMarktSaturn, the more we're going to polish our margin side as well. T hat also should reflect on that we're not going to limit the size of the business with our distributors. We're simply going broader and deeper into the markets.
Got it. Okay, thanks. That's on the first one. The second one is on digital healthcare. I think you mentioned on the slide that now you get to about 75% market share in Germany, which is quite impressive. So well done on that one. A lso, I think you said that the, the market itself, so let's say, the sum in a way, steps up because of this, electronic patient records mandatory rollout from the, from the government.
Given that you already own such a large part of the market, and, you know, we know the the revenue figure from you, so we can kind of, let's say, have a, an understanding of the total sum in Germany.
Just wondering how much can you actually grow, or in a way, you know, how much the market is growing b ecause if you already own the market, but the market doesn't really grow, then, you know, that's a bit kind of capping also the growth in digital health on your side. Do you have a bit of an understanding, let's say, how much the market is actually expanding in Germany, and if there is a way for you to also cross border into another region, maybe Austria?
Very, very good question. It's a very rich question, so I'm going to really put it into different brackets, if you don't mind. The first thing is obviously that in the already existing market, which is still not a saturated market, obviously, we have two kind of major competitors, and what we see is that some of the eHealth terminals that got launched before 2017, they are going to get replaced right now.
W e see a very, very nice traction in the market, that the ones that have been with the other, with the other player in the market, that are now looking into moving on with Cherry, which is kind of underlying the fact that from a technology perspective, but also design perspective, usability perspective, and even a pricing perspective, we are really leading here. That's fantastic.
Second thing is obviously that based on the government decisions here, we still have a lot of kind of parties that are supposed to really participate in that digitization of the medical sector, like the nurses and the physiotherapists, and this is something that just started. That means, like, in this, obviously, we see the market growing.
The third element, and this is the most important for us, quite frankly, how can we ensure that what all we do right now in terms of selling hardware and software solutions to the market is enabling us in the future, in the future business model, to add more kind of cloud services on our platform as an ecosystem? T hat's exactly what we're starting.
So when I say, like, we have the first kind of services on licensed business and the first kind of services on recurring revenue business, it's less about the size of the revenue that I'm currently looking at with the team, it's more about the fact that we are activating these type of services on our ecosystem, which is giving all of us, obviously, a very nice kind of, future orientation in terms of growing the existing ecosystem.
T he fourth element, and you're absolutely right, I already shared it in one of the investor calls, previously. And it's very interesting to see that, when, for instance, institutions from the United States look at the European market and the solutions from the European side, they always say, like, "Hey, guys, you are really kind of too tight and too strong in your data protection system." But having said that, they know that we are really good in terms of that certification process across the board, hardware, software, cloud.
Then they say, like, "If you have a, an agnostic technology that you can provide me with, can we use that?" And obviously, the answer from us is yes. And that means, like, we can... And we look into that, we can really look into extra opportunities, specifically in the United States. We just have recently hired someone in the Cherry Americas team to really go after that.
Second thing is obviously, it's also related to the strong demand on hygiene products from our Active Key brand. That all goes together because, quite frankly, we're selling the same products to the same type of audience.
So the good news is that, with the Digital Health and Solutions business, obviously, we're going to see a constant growth base, which is not only depending on the parameters that we receive from the German government, obviously, but we appreciate that. But we really can see, like, the more we get into that ecosystem principle, obviously, the more we can have recurring revenue on that, on that basis, which is, very promising from a future perspective.
Understood. Thanks. T he final one, it's more, let's say, on the risk for the guidance, especially on the revenue side, a bit concerned with that. You know, you look at the Q2, which is, let's say, kind of came slightly below your expectations, and we know the reasons for that.
So one question here is, you know, how much visibility do you actually have on the revenue? Because probably also had quite a good sense for the revenue in Q2, which unfortunately didn't really materialize 100%. But, you know, applying the same, let's say, philosophy on Q3 and obviously Q4 implied revenue, just a bit, let's say, wary to that, that could be of a challenge, especially in Q4.
So, you know, the implied based on the Q3 revenue guidance, the implied revenue for Q4, it's EUR 44 million. You know, looking into my model, Gerri, we got to this figure only twice in the past, at the peak demand of the market, so that is pretty much during corona times. You know, just not really a question, but, you know, I guess you can, maybe you can try to kind of, let's say, comment a bit on, on, on, this kind of concern from my side, and h ow do you actually look at this from within the company?
It's a good question, and we were expecting that question. So first of all, I would like to say, like, as we just mentioned and Volker mentioned that obviously, we have a postponement of a deal worth around EUR 900,000 in switches. That is going to happen, obviously, take place in September.
This could happen, but there is one kind of learning from this one as well, and we spoke to the teams, and we said, "Look, guys, it can happen that a deal is getting postponed from one quarter to the next quarter." All of this is fine, but we now are working on having an even kind of better outreach pipeline, so that we have more deals in the pipeline that we can then obviously activate. That's one thing.
The second thing is, and that's really important, now with Volker's involvement here, we have now the last month of a quarter. Obviously, we sit down together as a management team, looking into okay, where are we with regard to the outstanding sales? Where are we with the kind of deliveries? Where are we with the revenue needs to come in, and where's our cost side on top of that?
But it's the first time and that obviously, that we are linking, obviously, the revenue and the cost steering at the same time. And this is going to help us a lot, obviously, to really land on the cost side and the EBITDA margin side, as we prove now two quarters in a row.
Having said that, if I give you a bit of a kind of a picture, how we look at the upcoming months with regard to the different segments. We see upside potential still, obviously, in Digital Health. But having said that, you might remember that, Digital Health obviously had a kind of a ramp-up plan for the eReceipt already starting June 2023, and this is something that happened in November.
That means like, we still stick on the more conservative side, looking into the upcoming weeks and months, to see if we need to really adjust our forecast on that specific business segment. In terms of, in terms of components, the game is pretty clear.
We need to really reach out to even more players, different type of community, because if you're now going even into kind of negotiations with Chinese players, it's completely new to the company. But we have kind of two parties helping the business ahead, obviously, in achieving that.
It's on the one hand, obviously, Udo, because Udo has 12 years' experience in the Asia-Pacific region, living over there, and obviously also our Asia-Pacific team is going to support on that one here. Reaching out to the clients and making sure that obviously we are delivering very, very nice extra revenues on that one here. But at the same time, we have stopped sales in that segment second half of last year.
So we really have to be very cautious that whatever we do is kind of doing a good job on the midterm, not on the short term. Then we're talking about office and gaming peripherals, and again, very promising what we have learned yesterday from the call of Logitech. Also to see that everybody is now looking into more kind of focus on sell-through activities rather than sell-in, which honestly, I could not agree more, that's exactly the right thing to do.
But if someone like Logitech is obviously expanding the entire market, and obviously that means like it's a revitalization of the market, which can be promising. While we are still conservative to that one here, it's for the same reason, like I stated before, we always miss Q4.
So Q3 is kind of building the bridge into the entire year, and for the time being, obviously, our conservative forecast numbers are still remaining in that corridor that we have shared with you on a yearly basis. So that is why we say, like, no change.
I also have to say, like, the most important that we need to achieve as a company is quarter-by-quarter achievement, and then obviously making the Q4 numbers. That's the most important, as we also have to prove to you, as the capital market experts and the shareholders, that this company is able to really close a year on the numbers that we have shared with you.
Sounds very good. Thank you so much for your answers, and enjoy the summer, obviously.
Thank you, and you.
Good luck with the Q3. Bye.
Bye-bye. Take care.
Thank you for the question, Julian. The next question we have is from Jörg Philipp Kai, Warburg Research GmbH. Philipp, please go ahead.
Hi, Nicole. Hi, guys. Well, I would start a bit with the components business. You mentioned three new customers, and a volume of, if I'm not mistaken, 2 million switches. How is this going to ramp up? Is this more evenly split or over the year? And if you can give us a, I think, pricing-wise, it's difficult to share something, but is this business in terms of gross margin, how much dilutive is this component business assembled in China for you? That's the first one I would go one by one.
Okay, it's a good question there. So first of all, obviously, reaching out to Chinese manufacturers of keyboard is completely new, new to the company, as you might know, as we only have kind of dealt with the larger OEM partners. What we're still doing there? Second, obviously, the reach out obviously just happened. It's now taking place since we have the first samples of our MX2 generation that is produced in China.
What is very inspiring, I have to say, is that like, we receive a lot of kind of engineering ideas and creativity on the existing version, also from our own team and our partner there. That means, like, some of the engineering capacities will also be taking place in China itself, which is fantastic.
There is no dilution on the pricing because everybody knows that we still have a bit of a premium pricing there, which is fine, and we keep the margin. And also here, it's very important that whenever you come out with a new generation of product, and this is very much about the MX2, obviously, you should not go in discount mode at all.
So we still can ask for a certain kind of a premium price, but it's more in the 2x area than it used to be in the past 7x, but the 7x was always not really kind of market relevant, market realistic. To really revitalize that business, obviously, it's very clear that we need to have a very smooth type of rebuilding that business with the new partners.
If they look at us as being a producer of a cheap type of top-glass technology switches, then obviously we're not in the game. If they look at us obviously, in terms of, how can we achieve both parties, a constant margin-oriented and margin-secured business, then obviously we're going to really nail down the deal. That's the principle here.
What we also can say is that, we are facing some of the larger OEM clients, making a bit of a split. That is, say, like in some of the products, obviously, they're going to use the, Chinese MX2 production, switches, and then some others, they're going to use the ones from Auerbach, simply because they would like to use it for their marketing, while technology-wise, obviously there is no difference here. Also here, I would say, like, that we have a better positioning than before.
That sounds good. So just add on to this one. Is there a difference in the right to market to use the Cherry co-branding regarding the assembled in China switches to the made in Germany switches, obviously?
No, not at all, obviously. The ones that would like to obviously use that made in Germany, they can use that as long as this, product volume comes from Germany, as this is also kind of a legal requirement. But we didn't have any kind of negative, negative response on, some of the production is taking place in China.
It's even vice versa, quite frankly, because as you know—this is the volume that goes specifically with the larger OEM parts, and all of their production on keyboards is also taking place in China. So from a logistic perspective, but also very much from an ESG perspective, they're very pleased that we now have the MX2 production also in China, as this is going to—that's also a lot of ESG issues, I can tell you. What we also see currently, it's a very nice trend.
Obviously, ULP has a momentum, and you know that ULP is a standalone product of Cherry, so we're not in terms of any price comparison here, we're not in a price competition. And it's kind of underpinning the fact that some of the technologies developed in the gaming area are now going to really get transferred over to the office keyboards and notebooks.
As people are working more and more on their notebooks and their keyboards, and they're really asking for even a kind of a ultra-low, flatter type of switches, but it must be high performance. Also, here we can see that we're going to make some savings in the R&D space, as some of the gaming parts is going to get transferred over to office. That means that we don't have duplication in R&D anymore.
So all of this, obviously, quite a nice kind of extra aspect from the Project North, as we call it internally. Again, a lot of kudos to Udo and his team to really make that happen, not on time, but even obviously faster. With all the measures that we have defined internally, hit all the measures by 100%. This is also kind of showing that we knew what we have to do in this area, obviously, and we did it quite carefully, and we did it with a long-term vision.
Sounds good. And then, switching to digital health, which obviously was your star performer in the quarter, and I understand that you are not really afraid of some kind of dip or so in the business, now that we are beyond the initial rollout of the e-prescription.
W ould you attribute that mostly to the replacement of older terminals to new user groups, what you alluded, or do you think that the patient record has actually even played a role right now in a better outlook for H2? Just a v ery good investment.
It's a very good question. First of all, obviously, we really see the rollout in the pharmacies, which are the ones, obviously, that really play the fundamental important part when it comes to the eReceipt. It's a bit of a funny story, though, in Germany, as you know, when we had the first 50 million eReceipts activated, we already have seen the big news in the magazines. "Well, that's a disaster. Germany is not able to really get digitized." Now, we have 2.5 million eReceipts per day.
So, it's a bit of a typical German story there. The good news is that obviously, we've been in that game as we are the ecosystem, and we are the number one ecosystem. That means, like, everything that is going to take place in the future, cloud-based services are going to really become part of our ecosystem.
And that's why we say, like, we are very carefully looking into incremental hardware and software sales. Again, it's not a stupid piece of hardware, it's very much incorporated software, you can imagine. And it's all developed by us, that means, like, it's we are owning our own software, which is amazing. But we need to move fast.
But we also have to ensure that obviously we're not creating a certain kind of a punctual stock, because that immediately would lead into that market that is very much kind of managed by distribution and system house partners. They would immediately look into this and, "Oh, does it mean that we see lower demand on the other side?" Which is not the case, we see higher demand.
We are very carefully managing our forecast and the product delivery, and obviously, we are very, very intensively working together with our partners to see what they have on stock. That means, like, since we only have this kind of four weeks period in terms of producing and delivering more product, it's very clear that obviously we are clearly sell-out driven. When our partners say, like, "I'm running out of stock," obviously, we can really ensure that we have an extra delivery, which is very, very nice business model, as you can imagine.
Yeah. Yeah, indeed. W hat also was very nice, but, and I'm not sure if I got it right. You mentioned software revenue of, I think, EUR 5 million in Q4, of which 25% would be recurring. Was that correct?
No, it's 0.5. Sorry, most probably, I was a little bit not clear enough in my speech, but it's 0.5, obviously. A gain, for me, the most important-
Oh, 0.5, okay.
Yeah, yeah. For me, the most important is that we prove to the market that recurring revenue models in the medical sector are absolutely the next stage to take. And that also means- I like that piece of conversation here specifically, because that's not a hardware conversation anymore. It's an ecosystem conversation. But we, as Cherry, as we are the market leader, obviously, we have to prove that this is possible.
But that also means like... And SmartLink is a good example because a lot of people say, like, "Oh, Oliver, but SmartLink, obviously, you're going to have an in-house competition with your PIN pads."
Well, the thing is like, the more solutions we have related to a business model where Cherry is kind of in the, in the core, I'm fine, even if that's going to take place on smartphones, as this is going to really enrich the entire kind of business model in the digitization of the medical sector. The more we have to offer here, the more we can also look into opportunities outside the German-speaking market.
So we have reached a certain kind of a step as a company, that I am more convicted than ever, that honestly, our kind of key mission to become a hardware, software, and a cloud company, is something that we're going to, that we're going to achieve.
Yeah, and in this regard, I think you mentioned the Telematics Messenger or whatever the precise term then will be once the product is launched. So that can we consider it as a kind of firm launch date in Q4? Because I think that sounds really interesting, this application, more or less going against the fax machine in the medical profession.
Which is still the number one standard I have to admit, in hospitals, right? But there will be three messengers. Now, you know that we are a very close relationship, obviously, with the authorities, the legal authorities, and the institutions there. And it's interesting because everybody was expecting one messenger standard, this won't be the case.
What we're going to see is most probably one messenger that you can use peer-to-peer, that means from doctor to doctor. The second one will be more from doctor to patient, and the third one will be in ecosystems, such as hospital. Well, having said that, all good for us, because obviously, if we can have licensed business based on three different messenger principles, we are very pleased. We should not expect to have a standard messenger out there.
It will be a certain kind of an open corridor, as we also know that from other app-based services. But again, the more we're going to let everybody know in that ecosystem of medical responsibility people, then obviously they know exactly that. Whenever they're going to choose for a certain solution, obviously, they should speak to Gerry.
Yeah.
In terms of the timing, allow me to really keep that out of the Q2 call, because I would like to really nail it down whenever we have it. But then, obviously, you can expect something that is going to really put us on a different kind of level now.
Yeah, but I pick you one more, if I may.
Yeah. Have fun.
Should that be more considered as than as a subscription-based business, which I would consider more sensible, or do you have other distribution models in mind?
It's definitely a subscription-based or license-based. That means like, if we're going into collaboration model, then we would have a kind of a revenue share. But the basic, the basic idea of the revenue coming in is revenue-based. It's recurring based, yeah.
Sounds good. So with that, thank you for your elaborate answers, and all the best.
Thank you. Appreciate it. Have a lovely summer period.
Thank you very much.
You as well. Thank you.
Thanks for your questions. We have another question coming in from Marie-Thérèse Rübner, Hauck Aufhäuser Investment Banking. Marie-Thérèse, please go ahead.
Yes, good, good, good, good morning. I hope you can hear me well.
Bonjour, we can hear you absolutely fine.
Bonjour.
Yep.
Thank you. So I do have 4 questions, and I will ask them one by one, if you don't mind. The number 1 being regarding the margin, the implied margin for the second half. Obviously, this is gonna be a focus point, and I was a bit surprised to see 5%-6% for Q3.
Y ou know, just maybe I don't understand this correctly, but Q4 should be a Gaming and Office Peripherals heavy quarter, right? With all the Christmas business and all the stuff. So that means... I mean, if 5%-6% is your Q3 margin, that means that your Q4 margin has to be much higher to make the guidance. Can you explain, you know, how we can get to such a high level of margin compared to the rest of the year in Q4, considering the business mix that we expect to see in Q4?
Mm-hmm. Good question. So basically, obviously, having the 5-6 percentage points on the Adjusted EBITDA in Q3 is going to lead us to the 7.8 on the total year. One thing that you should consider, obviously, that we have done by far better in the first quarter on the Adjusted EBITDA than prognosed, because prognosis was around 2.00, and obviously we achieved 2.8.
Second thing is, it's exactly the point here. Of course, we have the high season in Gaming and Office Peripherals in Q4. I mean, that's a no-brainer with all the kind of different events that we're going to face there.
But based on the fact that we have kind of renegotiated some of the contracts, that we have kind of redefined our relationship with some of our distribution partners, we are going to see an increase in our margins, both in gaming and office as well. And this is exactly the point where the major kind of impact in changing that margin model with our retail partners needs to really land in Q4.
Second element is that obviously, we also see a very, very nice kind of way to really sell eHealth terminals, obviously in Q4, which are also generating a very, very nice margin to our business. So our calculation, and again, we are and, honestly, I would, I would like to re-stress that, we know we are more on the conservative side, but we also know that this company always, always missed Q4.
That means like, we remain on the conservative side, as long as we can see that we have kind of deals in the pipeline that are absolutely guaranteed. And with this, obviously, I can say that from a pure calculational perspective, we are we are doing very good with a 5.6% in Q3. If we're going to overachieve, everybody will be happy.
But again, please understand that we're going into that kind of, quarter by quarter, step-by-step mode right now. The total volume in terms of revenue that we need to achieve in Q4 is absolutely possible, based on the kind of, positive impact that we receive from the market. So, we are very much in line.
Having said that, there will be a call on Q3, obviously, and everybody's going to expect us to either saying, "Yes, we're going to really keep the year, the annual, prognosis, or we're going to do some adjustments." For this, obviously, we then have the Q3 completely in our books, and obviously, with this, obviously, we give the final statement on the year.
Okay. Good. So that explains it. Second question is on Digital Health. Q2 margin was phenomenal, Adjusted EBITDA level at about 40%. Is that due to Active Key?... you know, being strong or is this really the underlying margin for your, for your-
It's really the combination of both, Marie-Thérèse. Obviously, we are so stable in that market, and again, since we are so sell-through driven in that business segment, and by the way, that's even my kind of expectation to become even more sell-through driven in Gaming and Office Peripherals . What does it mean?
We are going to start sell-in the more we're going to see more demand, and that means like we are managing our stock throughout the different type of channels, by far the best in Digital Health. And this is a bit like the internal blueprint. And we're already kind of using these type of experiences obviously, also to really ensure that we get even better with the other business lines.
So it's definitely the fact that we have a very solid margin business there, but we are not in discount mode, which is also very important. So, yeah, I guess, like, honestly, we're going to really take the next step now in, in Gaming and Office Peripherals .
A gain, allow me to refer again back to Logitech. Look at their numbers, and you can see that they also kind of changed their model very much from sell-in into sell-out, because it's better for everybody that is becoming a party in your business line.
Okay. Yeah, I mean, with Logitech, we clearly saw there was another improvement, and we saw very strong growth in gaming and combos, r ight? W hich are your comparable segments?
I tell you, in that business unit, internally, the heat is on since yesterday, I tell you.
I know. No, but, I mean, at the same time, you know, I think at this point in the year, it's fair for us analysts to assume that this is a bit sell-in driven, and the truth will come, yeah, maybe in Q3, Q4.
Yeah.
I think the margin level was quite encouraging on the growth margin side.
Yeah, agreed.
I completely subscribe to your philosophy of privileging margins over volume. Yeah, it's obvious for an investor, it's the more relevant point. My last question has to do with your level of inventories slash free cash flow.
I mean, we were prepared to see some inventory ramp up in the second quarter, and your free cash flow has been, is a bit, you know, deeper in the negative in Q2 versus Q1. Can we consider Q2 to be the trough both on the free cash flow and on the inventory level, or could Q3 still be even worse?
I'll let Volker give you an answer, and I'm going to have an add-on at the end.
So Marie-Thérèse you're right, this is first quarter. We basically went to the level of EUR 59 million, but compared to basically where we have been one year ago where we had more than EUR 80 million, we are way better.
H ere, basically some seasonality is in there. Also, Oliver mentioned the issues in the Red Sea, so we need to make sure that we are protected from an inventory point of view. The offsetting item in working capital, you see basically also the payables, where we went up to more than EUR 16 million. So all in all, we are okay on the working capital, especially on the free cash a ssociated with it.
W hen you see and look into it from a first half point of view, we used operationally, roughly EUR 10 million of cash, versus roughly EUR 30 million a year ago. So basically, we are okay. We expect further declines in working capital throughout the third and also the fourth quarter, in order to make sure that we deliver on our cash performance.
Marie-Therese o ne more thing, obviously, most of the current inventory obviously is Gaming and Office Peripherals , and here's a real challenge I have to admit, because we have a lot of new products in the pipeline, and some of the new product volume is still on the containers. And I'm still wondering why this is not a kind of a key topic for the other companies as well, because it's really kind of a challenge to really manage that on a four-month basis.
So that's why we decided internally to allow a higher inventory, but on specific SKUs. That means, like, we're not going to see all of the assortment. And by the way, we also kind of reduced the size of the assortment by obviously reducing the number of SKUs significantly.
But it's really the challenge to ensure that we have the right new product, obviously ready for the back to school, for the Black Friday, and obviously for the Christmas season. That, that's exactly the reason for that one.
Okay. So, Q3 could still be a bit worse.
Yeah.
- based on what you say?
No, no, no, no. I would say, obviously, we are right in the range right now. What we can see right now, and we have a fantastic person who's really managing that in logistics. But obviously, it's more that we are in the peak situation right now because we know exactly what's coming in, and that's the helpful thing.
So what's coming in obviously is equal to, at least equal to what needs to really get sold. So all of this, I would say, like, it's in pretty balanced shape. Yeah, it's very under control. Allow me also to add this. It's really under control.
Okay. And then one final specification. So EUR 0.5 million on the software side for digital health. That was for H2, not for Q4?
That's correct. Yeah.
Okay, good. All right, well, I think that's, that covers it from my side. Thank you very much.
Thank you, Marie-Thérèse, looking forward to see you participating in the AGM, I would guess.
Yes, but I will not ask questions.
But spend the day with Terry, okay? Promise me.
Okay.
Okay. Bye.
Thank you, Marie-Thérèse, for your questions. Unfortunately, we have to make a hard cut now, as we have to head to our AGM. Sorry for this, Oliver Pfeil from Bankhaus Metzler. Please send in your question in writing to me as an email, and we will get back to you. So thank you-
All of our apologies, but honestly, we have to move to the other room now.
Thank you, everyone, for participating, and back to Oliver.
Thank you so much. Obviously, again, we know exactly what we have to do, that's exactly what we promised beginning of the year. We need to deliver quarter by quarter, by quarter by quarter. So far, obviously, a big hand to the team, a big hand, obviously, specifically to both Udo and Volker, to really help me to really not only shape, but even more steering the business.
But again, first half means we're going to really focus now on the second half, and specifically, obviously, Q4 needs to get delivered. Okay? Thank you very much also for the good quality of the questions, I really appreciate that. And again, we're now heading back to another room, doing the AGM, and looking forward to speak to our shareholders there. Thank you very much. Take good care. Thank you and-
The conference is no longer being recorded.