Dear ladies and gentlemen, welcome to Cherry's 2025 Analyst and Investor Conference, and thank you all for joining us today. Throughout today's recorded video call, until the question-and-answer session, all participants will be in a listen-only mode. In the room with me in Auerbach today are: Oliver Kaltner, our CEO; Dr. Udo Streller, our COO; and Volker Christ, our EVP, Global Finance and IT. Joining us virtually today for a deep dive is Alexander Hecker, SVP Global Peripherals. I am Nicole Schillinger , heading Investor Relations. Before I hand over, let me briefly run you through today's agenda. Oliver will begin with an overview of the first quarter, our latest restructuring measures, and the general state of play at Cherry. He will then hand it over to Volker, who is going to walk you through last year's main KPI, as well as Q1 2025 financials.
Udo will follow and share an operations and restructuring update with you. Then Alex will take you on a deep dive into peripherals. The presentation session will conclude with the outlook given by Oliver. After that, you will have the opportunity to ask questions. Please be aware, questions can only be asked via telephone connection. Now, over to you, Oliver.
Ladies and gentlemen, dear investors and capital market experts, dear participants, I would like to welcome you to our company's Analyst and Investor Conference. According to the relevant rules and regulations, we would like to give you a detailed insight into our preliminary 2024 lending figures and the measures we have taken for reshaping our business. We will go into detail about the actions we have already taken and those that will follow in order to achieve a sustained change of course. In 2024, we faced significant challenges that required decisive action. We experienced declining corporate and consumer spending, particularly in Germany, where rationary trends persisted. As you are aware, Germany has now entered its third consecutive year of recession, making it the laggard among G7 nations.
This economic stagnation has hit particularly the German so-called Mittelstand very hard, with many medium-sized businesses facing unprecedented pressure from rising energy costs, regulatory burdens, global competition, business decline, and cash flow challenges. The difficult competitive position of our components business and the Red Sea shipping turmoil further complicated our operating environment almost throughout the entire calendar year. These challenges are not unique to Cherry. Across the German electronics sector, we've seen companies struggling with similar headwinds, forcing many to reconsider their manufacturing footprint and supply chain strategies. In response to these challenges, we executed several restructuring steps. As announced in our November 14th, 2024, Corporate News, we implemented a comprehensive reorganization and restructuring that took effect on January 1st, 2025. With this, we established a new sales and marketing peripherals unit that brings together all finished goods and products in gaming, office, and hygiene.
This consolidation strengthens our sales strategies and creates a unified market position, enhancing brand consistency and ensuring that partners and end consumers and customers benefit from a clearly structured product portfolio with unified marketing parameters. At the heart of this reorganization is our exclusive 2025 partner program for peripherals. For distribution partners, we've significantly simplified contract structures, optimizing processes. This closer alignment ensures that our switch business is fully aligned now with our product goals, strengthening our market presence. This area is overseen by our COO, Dr. Udo Streller, sitting right next to me. Our digital health and solutions segment remains an independent unit to continue meeting the unique demands and security requirements of the healthcare sector. We aim to actively shape the digital health solutions market through targeted digital innovations and specialized products and services. These changes represent a complete reorganization of our company within Europe.
For both our components and peripheral segments, we've centralized product market management, sales and marketing, and realigned our distribution network across Europe with a distribution and fulfillment strategy. Despite these challenges, there were notable highlights. We achieved more than 70% market share in e-health new terminal sales, demonstrating our strong position in the digital health and solutions segment. We also saw sound post-pandemic demand for our hygienic keyboards. Through disciplined management, we achieved strong trade working capital reduction and maintained robust cost control measures. These actions reflect our commitment to addressing challenges head-on and positioning Cherry for sustainable growth. While we acknowledge the difficulties of the past year, we'll focus on the path forward and the strategic initiatives that will drive our future success. Let me turn now to our first quarter of 2025, which has truly been a quarter of contrasts, challenges, and solutions.
First of all, we need to inform you that our annual report will be rescheduled to end of May. The background to this is the occurrence of material post-balance sheet events related to the company's restructuring concept, which must already be addressed in the annual report 2024, but have not yet been fully assessed by the auditor. Looking into the regional performance, Americas, the order postponements from key customers in anticipation of new U.S. tariffs have impacted Q1 performance. Difficult stock mix led to order cancellation and postponements, actively addressing inventory management challenges in the U.S. market, establishing a new partner network to reactivate the U.S. business. The long-term fundamentals of the U.S. market remain strong despite current challenges. We remain confident about our U.S. market potential. Strategic importance of the American region remains unchanged for the entire group. Asia-Pacific, different picture. Overperformance against expectations.
Good progress on inventory reduction in this region. Solid foundation set for quarters ahead. Digital health and solutions performed in line with budget. We made progress on SmartLink provider approval, which got announced on March 31st, 2025, and we have a starting point for a scalable e-prescription ecosystem. Component business underperformed due to weak demand. We see increasing competitive disadvantage in China-dominated switch volume business and implementing production shift to China to address challenges. You might have seen that we have a new shareholder. It's the UMI International Investment Group, which acquired a 4% stake in the course of Q1 2025. According to the latest notification, UMI currently holds 5.04% of the outstanding Cherry shares. I'd now like to discuss our further reorganization initiatives that are paving the path back to profitable growth at Cherry.
As announced on April 22nd, 2025, Cherry has entered into an agreement with UniCredit Bank GmbH regarding the extension of our existing financing facility, which has been updated to a total amount of EUR 23 million. The facility has been extended until December 31st, 2027, under adjusted financing terms. This specifically refers to the reduction of the loan amount from the current EUR 25 million down to EUR 23 million through repayments of EUR 1 million on June 30, 2025, and another EUR 1 million on February 28th, 2026, as well as to the adjustment of financial covenants. The interest rate will remain unchanged at a Euribor plus 3.75% per annum. The extension of this financing is based on restructuring plans submitted by Cherry. One of the most significant elements of this plan is the complete discontinuation of switch production at our Auerbach, Germany site, and its transfer to a partner in China.
Udo Streller will talk you through the operational details later. This decision, while difficult, is necessary to enhance our operational efficiency and cost structure. As we highlight in our February corporate news, we face increasing competitive disadvantages in the switch volume business, which is now dominated by China, a fact that must be accepted. In this context, jobs will also be reduced in a socially responsible manner in consultation with the Works Council. We are committed to implementing these headcount reductions with the utmost care and consideration for our employees. It is important to emphasize that the Auerbach site will be retained and is to be transformed into a development, logistics, and service hub for Europe. The strategic shift leverages the site's strength while positioning it for sustainable operations in the future.
As another highlight, the financing extension with UniCredit provides us with the stability and flexibility needed to execute our restructuring initiatives and strategic investments, supporting our path back to profitable growth. It also reflects our banking partner's confidence in our strategic direction and future prospects. With this, I hand over to Volker.
Thank you, Oliver. Ladies and gentlemen, dear participants, thank you for your interest in Cherry's Analyst and Investor Conference. Before we come to our quarter one figures, let me briefly summarize the financials of our fiscal year 2024 for you. Revenue came in at EUR 110.4 million, 13% below the previous year due to the weakness in components and the U.S. business, as well as lackluster sales in peripherals. Adjusted EBITDA stood at EUR -7 million. This is less than the adjusted preliminary EBITDA loss announced on February 11th, as we had to recognize close to EUR 5 million in inventory write-downs. On top of the inventory write-downs, there were also impairments on goodwill and other non-current assets amounting to EUR 23.7 million.
The full write-down amount of EUR 28.6 million burdened the fiscal year's EBIT, which now stands at EUR -44 million after EUR -131 million a year before. On the positive side, we managed to execute our strict cost-cutting program, saving us EUR 3 million in the last quarter. With regards to the divisional revenue split, 2/3 of the business, 65.7%, were achieved in peripherals, 28% in digital health division, and the remainder below 7% in components. I'll now continue with our preliminary quarter one figures before potential impairments. Given all macroeconomic aspects, we have planned the first quarter of 2025 conservatively so that quarter one 2025 came in in line with our expectations. At EUR 25.3 million, Cherry's consolidated revenue in the first quarter of 2025 came in approximately 16% lower than the prior year figure of EUR 30.3 million.
While Americas and components were below expectations, Cherry Asia-Pacific outperformed in terms of revenue and continued progress in reducing inventory levels. Peripherals as a whole were quite stable year over year with regards to revenue and profitability. The digital health and solutions divisions recorded a year-on-year decline in the first quarter, namely from EUR 7.9 million in quarter one 2024 to EUR 4.8 million in quarter one 2025. This is primarily due to base effect from the introduction of the e-prescription in January 2024 and the invoicing of a major order at Cherry Embedded Solutions last year. Additionally, the postponement of the electronic patient record, the EPA, rolled out from January to May this year contributed to that decline. Nevertheless, this division continues to hold positive growth prospects for the remainder of 2025.
In the first three months of 2025, Cherry SE recorded an adjusted EBITDA margin of -8% compared to quarter one in 2024 of 2.8%. As a result of the factors outlined above, profitability also fell short of the prior year levels. We managed to further reduce our inventories down to EUR 50.4 million by the end of March versus EUR 53.7 million at year-end 2024 and from EUR 55 million roughly as of the first quarter in 2024. Trade working capital stands at EUR 51.8 million, up versus the EUR 49.4 million at year-end 2024, but down versus EUR 70.4 million as of quarter one 2024. With this, over to you, Udo.
Thank you, Volker. Ladies and gentlemen, also from my side, a warm welcome to today's conference. Please allow me to present an operations update in more detail over the next few minutes. As mentioned by Oliver, as announced on April 22, Cherry SE has entered into agreement with UniCredit Bank regarding the extension of our existing financing facility. The extension of this financing is based on a restructuring plan submitted by Cherry. One of the most significant elements of this plan is the complete discontinuation of switch production at our Auerbach site and its transfer to partners, finalizing the remaining tasks within the already successfully established partnership with our new subcontinent China and our established one in Slovakia. Within these transfer activities, the ultra-low-profile switch product will be discontinued. This decision, very difficult, is necessary to enhance our operational efficiency and cost structure.
As we highlighted in our February corporate news, we're facing increasing competitive disadvantages in the switch volume business dominated by China, and the ultra-low-profile switch, besides providing attractive performance features, wasn't able to grow into the mass market. Both of these facts must be accepted. It's important to emphasize that the Auerbach site will be retained and is to be transferred into a development, logistic, and service hub for Europe. This strategic shift leverages the site's strengths while positioning it for sustainable operations in the future. Auerbach will be Cherry's multifunctional logistic and service hub for Europe, with an excellent geographical positioning in the heart of Europe. Our existing operating system setup and the building itself are ready for it and can be used instantly. In fact, already it's in full use, the building in Auerbach, for example, for our logistics for the e-terminals.
Further details for the development area will be provided in a minute. In this context, jobs also will be reduced in a socially responsible manner in consultation with the Working Council. The consultation started already by today, and allow me to reemphasize that we are committed to implementing these headcount reductions with the utmost care and consideration for our employees. As already highlighted by Oliver, the centralization and simplification of our global product lifecycle management and development is a big milestone of Cherry's journey towards connecting people to the digital world with continuous innovation. The renewed setup is straightforward and structured. Two core businesses with peripherals and digital health and solutions. Three main business processes: idea to concept, concept to product, and product to cash, governed and driven by a passionate global innovation community at four sites: Landskrona in Sweden, Auerbach in Germany, Vienna in Austria, and Zhuhai in China.
A central PMO project management office has been in place since last year, additionally supported by an external expert at CRO since the beginning of April this year. The combined product and technology team covers and focuses on three major technology areas: mechanics and switch, electronics and firmware, and the software and applications. The opportunity expression for the last area will be shared in my next slide. Despite millions in investment and decades of debate, the benefits of digitalization in the German healthcare system continue to fall short of expectations. Physicians still spend around 44% of their time on documentation, while more and more systems, portals, and applications are being introduced. The issue is not a lack of digitalization, but rather an excess of digitized bureaucracy. Processes are being transferred one-to-one into digital formats without being simplified. Fragmented systems, excessive security requirements, and unclear responsibilities only add to this complexity.
The result: high effort, low benefit for healthcare professionals and patients alike. Thus, digital processes must be designed with the people in mind, streamlined from a laboratory perspective, and built to technical interoperability. SmartLink, which received geometric approval four weeks ago, is the best example for a simple and effective solution. With this being said, I hand over to Alexander, our Senior Vice President, Global Peripherals, and his deep dive into our peripheral business. Please, Alexander.
Thank you, Udo. Good afternoon, everyone, and many thanks for the opportunity to speak directly to you by sharing a deeper dive into the peripheral business. Coming from leadership roles at Sonos, Microsoft, Sony, and a medical consumer startup called Aora, I know that sustainable growth needs more than ambition. It needs focus, excellence in planning and execution based on the right structures and processes. Now, after almost 90 days with Cherry, I'd like to share my key findings and will give a high-level view about what we are addressing: both opportunities and structural challenges in our peripheral business, especially in the European market cluster. One aspect of this business has not changed over the past decades. It is about precisely translating market demand into product planning and using very targeted measures to manage the sales of our goods with our partners, both in terms of sell-in and sell-out.
As you can see in the slide, we are facing strong momentum and a solid starting point, as we have realized marketing success in the keyboard category, which is the most relevant peripheral segment. We accelerated our keyboard market share gain significantly in Q4 of 2024. In the EU3 region, covering Germany, U.K., and France, we grew from 13%- 15%. Especially in Germany, we grow overall 4 % points year- over- year. That growth could mainly be fulfilled out of the high stock in the market. Taking a deeper look into B2B and consumer development, in Germany's panel market, we now hold 23% total revenue share. Our B2B share is strong at 30%, while we grow by 6 % points year- over- year. Our consumer business improved to 18%, equals 4% points year- over- year growth.
However, in the U.K. and France, we remain at low levels, 2.5% and 6% share, and we were flat year- over- year. This German number shows that we are outperforming the local market. There is a major untapped opportunity. If we were able to adapt our German success to the U.K. and France, we will be able to add EUR 20 million to the actual business. We also have strong consumer and cordless opportunities. As you see, cordless keyboards are already dominating 62% of the market, but Cherry's cordless share is only at 30%. Focusing on cordless product category is a key growth lever, as it also stands for higher revenues and margins per unit sold. Another key fact that indicates high potential is that 70% of the keyboard category is driven by consumers. We were able to grow further in this area through our Amazon EU market expansion.
The greatest opportunity will bring further retail and e-tail expansion, as our weighted distribution covers only 20% of the available market. Creating product focus, channel expertise, and programs will be continued growth drivers. Last call, you heard about quarter end deal pressure. As we are shifting towards sustainable demand generation, we will be able to create higher margins while reducing supply chain pressure through stop/limitation of quarter end deals. Previous deal dynamics. Our international expansion without local marketing foundation caused complexity and unhealthy inventory. Focus on a proper market readiness with a step-by-step approach by region will avoid that. Distribution strategy. Our preferred distribution concept is the right step, but needs a more aggressive sell-out orientation. Clear focus and pay-for-performance metrics will be the key for driving sales through rates. An outsourced EU centralized logistic hub will support that focus and reduce complexity and cost at the same time.
Progress achieved as we have already significantly reduced gray market volumes and stabilized price levels. Our focus on sell-out-driven conditions started to allocate the investment to partners where we will get benefits for. Focus markets. Instead of targeting all markets at once, we are now concentrating on EU3+. That means Germany, Switzerland, Austria, U.K., France, and Netherlands, where we have the highest brand equity and ROI potential as these countries representing the highest peripheral spends in the European cluster. Working on this way of simplification, we are reducing complexity, avoiding a spread of SKUs and country marketing efforts outside of the priority clusters. Our new focus is guided by some core principles. We started to split B2B and consumer business, as historically Cherry sold all products across all channels. That split will avoid pricing conflicts, channel cannibalization, packaging confusion, and needs dedicated go-to-market strategies.
Channel and customer separation led to cultivating the market in a targeted way. Portfolio optimization. We aim to reduce the total product portfolio by around 75%, focusing on top-performing products as well as required strategic expansion areas like cordless, gaming, mid-to-high-value products, while preserving tailored solutions via master order quantity-based customization. This is a significant change as we avoid holding today's 1,250 SKUs available. On top of that, this will ensure an increase in margin and profit for both our partners and us. Shift from sell-in to sell-out. We are moving away from push stocking at distributors towards true demand-driven sell-out models. This includes structured NPI processes, fade-outs, stock transparency, sell-out promotions, and customer acquisition cost control, thereby ensuring predictable growth and an efficient use of capital. Our master distribution model with centralized EU warehousing will improve speed, efficiency, and Cherry margin while simplifying operations and administration.
Combined with our new metrics organizational setup, which we implemented early 2025, we will place dedicated resources for B2B and consumer channel and marketing. The metrics structure ensures clear responsibilities moving ahead from silos and towards integrated market development with dedicated expertise. Further organizational optimization will continue in the next three to six months to harmonize structures and to drive digitalization. To finally summarize it, all that will help to lay the groundwork to unlock Cherry's full potential. To be clear, focus is not a part of our peripheral strategy. It is our strategy. We focus to scale what works, eliminate distractions, and build Cherry into a stronger, faster, and more profitable finished goods peripherals company.
Yeah. Ladies and gentlemen, what can we expect from the rest of the year 2025? As we look ahead, we must acknowledge the volatile business and political environment in which we are operating.
This is now a continuous phenomenon for the economy. Several external factors continue to create headwinds for our business. Right now, the political landscape in Germany is characterized by significant uncertainty and excessive bureaucracy. For years, we've witnessed an accelerating exodus of businesses from Germany, and now we too must discontinue our production in Germany. Political gridlock following the recent elections has only intensified the challenges facing medium-sized businesses. We still don't have a new federal government, although it should now only be a matter of days, ideally a few hours before this country has a new chancellor and a new team of ministers. The bureaucratic burden continues to stifle innovation and competitiveness, with German companies facing some of the highest regulatory compliance costs in Europe. According to the latest forecast from the International Monetary Fund, Germany remains in recession with zero growth projected for 2025.
The IFO Business Climate Index continues to reflect pessimism among German businesses, with expectations particularly gloomy in the manufacturing sector. As mentioned before, Germany is now the clear laggard among G7 nations, with structural issues hampering economic recovery. For all the reasons mentioned, consumer confidence remains weak. The latest GfK Consumer Climate Index shows continued hesitation among German consumers. We see this firsthand in our peripheral business, where distribution channels remain overstocked across all brands. This inventory situation is creating additional pricing pressure and affecting our ability to introduce new products onto the market. The U.S. tariff situation remains challenging and has recently intensified dramatically. The American government's tariff policy has reached historic proportions. The trade war between the U.S. and China seems like a crazy game of ping pong.
In March 2025, the U.S. administration increased tariffs on products manufactured in China, with mice now facing tariffs of close to 150% and keyboards around 125%, respectively. It seems that only the sky is the limit. These significant increases from the previous rates represent a substantial burden for our industry. According to industry analysts, these tariffs could reduce profit margin by 15%-20% for companies without alternative manufacturing locations. Major competitors like Logitech and Razer have already announced plans to shift production to Vietnam and Malaysia in response. These trade barriers create substantial challenges for our business model and supply chain strategy. There is no guarantee that the high tariffs will not also affect other Asian countries. These factors create a challenging backdrop for our operations, particularly in our home market of Germany.
However, we're implementing targeted measures to navigate these headwinds, which I'll outline in the following slides. Despite the challenging environment I just outlined, we've implemented several strategic initiatives to mitigate these headwinds and position Cherry for future growth. I'd like to highlight our operations in China, which have become increasingly important to our overall strategy. The relocation of our switch production to China represents a significant step in our global manufacturing footprint optimization. This move not only allows us to benefit from cost advantages, but also positions us closer to key Asian markets where we see substantial growth potential. Our approach aligns with what we are seeing across the German manufacturing sector, as mentioned. According to the latest German-American business outlook, fewer German companies are reporting manufacturing growth at their German headquarters, instead coupling their growth to international operations.
We always maintain maximum flexibility with regard to production locations, but we will not submit ourselves to the twists and turns of current political collective bargaining disputes. China's importance to Cherry extends beyond manufacturing. With a 22nd anniversary campaign planned for Q2 in our Asia-Pacific region, we expect a positive effect on sales momentum. This campaign, particularly strong in Korea, should help drive growth in a region that has already shown promising performance in Q1. Beyond our China initiatives, we're implementing several other measures to navigate the current environment. As outlined in our February corporate news, we're executing a SKU reduction and implementing a new business-to-consumer approach to streamline our product portfolio and enhance our direct-to-consumer capabilities. We're maintaining strong cash and cost control to preserve financial flexibility during this transition period.
In our digital health and solution segment, we're capitalizing on new professions and replacement demand to drive growth. As announced on March 31st, the provider approval of our SmartLink solution marks a crucial milestone in our digital healthcare strategy. As I mentioned earlier, our extended financing facility until December 2027 provides the stability and runway needed to execute our strategic initiatives and transformation plan. The activation of cloud-based additional services serves to expand the service portfolio, create new revenue streams, and continuously expand our market position. These measures collectively demonstrate our proactive approach to addressing current challenges while positioning Cherry for sustainable growth. Let me briefly highlight a specific example of our product innovation, the CERRY XTRFY H3 wireless gaming headset, our first multi-platform wireless gaming headset. This premium product delivers crystal clear sound and full precision audio, essential for competitive gaming.
It's both wireless with low latency and Bluetooth compatible, offering gamers flexibility in how they connect. With up to 100 hours of use on a single charge, it provides exceptional battery life. The endorsement from Emil Christensen, eight-time world champion in Counter-Strike, underscores the product's quality and its relevance. This product exemplifies our continued commitment to innovation in the gaming peripheral space, even as we navigate challenging market conditions. For 2025, we have established clear priorities across our business segments to drive growth and improve profitability. In our digital health and solution segment, we aim to strengthen our market share as replacement demand for terminals accelerates. We've achieved a significant milestone with a provider approval for Cherry SmartLink, which marks the starting point for a scalable e-prescription ecosystem.
The certified solution is immediately available to all e-prescription providers and allows for secure and user-friendly redemption of e-prescriptions via NFC-enabled smartphones without media disruptions. This development comes at a particularly opportune time as Germany's healthcare digitization efforts are gaining momentum despite the broader economic challenges. The upcoming government coalition has signaled strong support for accelerating digital healthcare initiatives as part of efforts to modernize Germany's infrastructure and improve efficiency in public services, which is definitely needed, required, and wanted. According to industry analysts, the e-prescription market is expected to be one of the few areas seeing significant investment growth in Germany's otherwise stagnant economy. We'll expand our telematics infrastructure reach by onboarding new healthcare professions, creating additional revenue streams.
We're also focused on accelerating adoption of our telematics infrastructure module solution, particularly by winning tenders from large hospitals and leveraging the tailwind from new professions for our trust management service offering. A particularly exciting opportunity lies in our SmartLink solution, which will allow us to unlock recurring software-as-a-service revenue in an annual electronic prescription market worth over EUR 500 million. For our Cherry Europe business, we're implementing a master distribution model and product allocation policy to optimize our go-to-market approach and improve revenue and margin growth. As highlighted in our February corporate news, we've already achieved significant success in drying up the gray market, with street prices on volume items increasing by more than 50%. This approach aligns with strategies being adopted by other German Mittelstand companies facing similar pricing pressures and distribution challenges.
In Cherry Americas, our focus is on accelerating revenue and margin growth by expanding peripheral sales through our new partner network, encompassing both hardware and software solutions. The establishment of an adequate partner network forms the basis for reactivating the U.S. business in the current year. The strategy becomes even more critical in light of the escalating tariff situation, which is forcing many electronics companies to fundamentally rethink their U.S. market approach. These priorities reflect our strategic focus on high growth, high margin opportunities across our business segments, with particular emphasis on leveraging our strong position in digital health and solutions while improving, obviously, performance in our peripheral business headed by Alexander Hecker. Let me conclude the presentation with a financial outlook for the 2025 financial year. The economic situation in Germany is still tense and uncertain, and U.S. tariffs in amount and volatility are an additional drag.
Having said that, we expect 2025 group revenue of EUR 105 million-$120 million and an adjusted EBITDA margin at around 3%-6%. This implies that despite the challenges from tariffs, our restructuring initiatives, improvements in our peripheral business, and growth in our digital health and solution segment will collectively drive our return to profitability. Cherry's course for the year 2025 is clear, and we are convinced that we will succeed in defying the geopolitical challenges and finally returning to a growth path. Ladies and gentlemen, I will now hand it back to Nicole for starting the Q&A session.
Thank you, Oliver. Ladies and gentlemen, we will now begin the question and answer session. If you are dialed into the conference call and have a question for the speakers, please press nine, followed by the star key on your telephone keypad. Now to enter the queue.
Once your name has been announced, you can ask a question. At this time, questions can only be asked via the telephone connection. If you find your question is answered before it is your turn to speak, you may press three, followed by the star key to cancel your question. Ladies and gentlemen, please press nine star now to state your question. The first question comes from Oliver Frey, Bankhaus Metzler.
Maybe starting with the weaker DHS business. You already mentioned some reasons why you saw a year-over-year decline, but could you maybe follow up on that? Because when we look quarter over quarter, DHS was also a bit weaker. Is it a postponed replacement cycle? Maybe if you can get some details on the phasing, this would be appreciated. The second question would be on the restructuring.
Could you also quantify the impact of the discontinuation of the ULP switches, the impact of the potential FTE reductions, and when those impacts would hit, or when we should expect those? Maybe as a last question on the margin, Q1 was at - 8%. If we look at the midpoint of the guidance, and if my math is correct, we should be in the double-digit range for the margin for the rest of the year. Can you maybe give us also some info on the phasing and what needs to happen to achieve those margins? Thank you.
Okay. I'm going to take the DHS question. I'm going to hand over for the restructuring to Udo, and Volker is going to address the margin, if you don't mind. DHS, obviously, we're looking to a market that looks like becoming even bigger than we ever projected two years ago.
This is the kind of positive news. There's almost no negative news, quite frankly, because our performance in the market is really outstanding. We also have seen that when it comes to churn of terminals, obviously, that we win over competition, which is great. Specifically, the system that got established in the market between 2015 and 2017 is now in churn mode. All of this is positive. Quite frankly, this market is also, I would say, depending on two major factors. It's really all about the election. Again, we don't have the coalition yet, and everybody's waiting until the ministry is going to be in place. This will have an impact because all the public sector investments are going to really be back on budget and being open for investments.
The second element is obviously the slight delay in the EPA, obviously, is also kind of, let's say, makes it necessary to explain that digitization in the medical sector is still the only way to go, quite frankly. For the total year, obviously, we're still looking into an upside compared to last year, and we are very, very confident with regard to not only adding new services to the system, but obviously increasing our installed base on terminals. Would on restructuring?
For the restructuring on your first part of the question for the ULP, it's well under control in the way that for the remaining volume where we have still the materials on hand, we will basically use it up. This still we will continuously deliver in the remaining lifetime of the product.
It means there's no scrap or something in such not a critical, so to say, way. That's well under control for the ULP phase out. It means the phase out placement is already, the main customers are informed, so they're aware of this. This we have all basically had well under control. For the second part, for the cost side, also there, we have already the framework in place about potential severance cost. Nevertheless, of course, the negotiations with the working council started so far running professional and in a controlled and reasonable manner. Therefore, also this is already planned, so to say, or there is make the reserve in the financial planning. That's also well under control and for the margin then for the ULP.
Of course, and with regards to the margin, please notify that the portfolio in the digital health and solutions business in the first quarter, which will be basically caught up then in the next quarters, that has an impact on the margin. That is why also that is triggering the minus 8%. In quarter two, where we basically expect a big catch-up, and also in the following quarters, the margin should basically recover and turn into positive. We do expect then also with a stronger second half, we always have the seasonality to basically catch up with the margin towards our estimate of 3-6%.
Thank you for your question, Oliver. The next question comes from Jörg Frey, Warburg Research. Jörg, please go ahead.
Hi. I would go on one by one if it's okay. Probably first one technically.
Can you elaborate a bit on the covenants you've agreed on with UniCredit? Is this net debt to EBITDA based or absolute debt levels or anything like that? Some details on that one.
Of course. We no longer have a net leverage ratio covenant with the bank. We did agree to basically focus really on liquidity. We have liquidity measures in place and certain milestones based on the restructuring program, which we basically initiated and basically set as a basis for the loan financing until 2027. That is basically what we did agree with the bank.
Much more prepping room, basically.
Definitely. Quite frankly, it's a major step forward for the company as we have less restrictions and it's underpinning the quality of our partnership with UniCredit Bank and the team over there.
It is also based on the quality, not only the number, but also the quality of data points that we could share. I would like to give a special kudos to Volker and his team. They did a tremendously important job over this period of time to make Cherry Finance becoming a real serious partner also for the bank. Honestly, this is one of the major milestones that we have achieved in the last two and a half years.
Sounds good. On the components business, if I remember it correctly, just over EUR 1 million sales and with all the structural changes there, a bit strategically, well, how much funds can you actually allocate to such a business for R&D and really for gaining back lost territory, particularly if you justify using funds in this business compared to your digital health business?
Just a bit, the question of the right of existence for you of this business.
I like the question, Jörg. The company got stock listed in 2021 based on a component story. It took us two years to try to do everything to make this business line not only survive, but putting it into the right corridor of success. Now we can say we either failed or there was no market anymore. Quite frankly, there is no market anymore because, as we said, it is really dominated by China and not on low cost. That would be a completely wrong assumption. It is really that the engineering power in terms of quality of engineering and speed is something that we cannot honestly match here in Germany anymore.
Quite frankly, just looking at what happened to the business lines of larger automotive companies such as Volkswagen and Mercedes just announced the results today, I would be more than worried that we are in the same kind of box here. Having said that, and you know that I have kind of put my personal effort also into the ultra-low-profile technology because I really believed in from my OEM Microsoft background that this is exactly the right kind of technology to go with. Now, having said that, that part of the notebook market is not really in that growth path that was projected by that industry. Now, having said that, that's part of our deal that we really need to make some kind of conscious decision in which we're going into R&D investments.
Basically, obviously, what is also part of that restructuring, and it's been part of the restructuring that we already kind of executed end of calendar year 2023, is that the cost structure of this company overall as a group was very much based on and surrounded on the component business. Now, taking production out, it's not only one thing, obviously. It's about what are we going to do with the quality management that is related to that, the R&D costs and the R&D functions. All of this will become part, obviously, of reshaping the company. Fortunately, and this is really something that we have to admit despite the fact that people are involved, fortunately, we have two strong business segments with peripherals business in which we simply have to do a better job management-wise, from planning through execution, from planning through execution.
I know, Alexander, you're still on the call. Planning and execution excellence. While DHS is all about kind of enriching the ecosystem. This is exactly where we need to unlock the overall prove from everything that was built around components to really focus with resources, energy, people, investments into peripherals and into digital health. Anything to add, Udo,
for the technology? Let me try to add a set. It is structured, centralized, and the switch, so to say, is not anymore something, I don't know, which is somewhere independent of what I discussed. No, the switch with the mechanics, with the keycaps, with everything is the whole system. Of course, you have to develop. You have to be innovative with the switch, with the keycaps, with the firmware, with the software, everything around of the keyboard. The product is the keyboard.
This is, of course, where we're looking into, and this is what we're selling to the customer. The switch itself, the technology is an important part, but as long as it's not a standalone product, so to say, anymore. The innovation, of course, you can ensure really well cross-functional. We have really moved into this. We have so-called, we call this innovation innovative communities. A lot of people contributing, but you don't need basically specifically anymore an organization where you say, I park 10 people somewhere in the building and they do nothing else than develop a switch from the beginning to the end. No, it's a switch technology. We're doing this with our global community, and we're also including partners. We take a lot also out of our partnership with our China partners. We do co-development, etc.
You can do it much cheaper, much faster, and much more directly to what really what the customer in the end on the keyboard would like to see with the switch.
I like cheaper and faster. Adding on that, going directly actually to peripherals. Obviously, if you look over your lifetime as a listed company, there's actually been, for me at least, a positive surprise apart from obviously the last couple of months basically. I think there are so many low-hanging fruits, particularly if looking that your brand is still well recognized, but you more or less lack a clear positioning. I think the best example of that is your high-end premium product with the ultra-low-profile switch, which has a recommended selling price of twice the Logitech product and is doing very poorly in reviews on Amazon also.
On the other hand, your low-end product is good reviews. Where do you want to position the brand in the future? I think you need a credible product in particularly compared to MX Keys. How long will it take you to really have on the product side an answer to basically to Logitech's positioning?
First of all, if you're going to apply for a job in my peripherals unit, just let me know. We make it fast. In fact, it sounds like you can really provide a lot of extra to that. Look, I agree. I agree. I would not overestimate the brand thing here, quite frankly, because we're talking about a consumer community that is lacking loyalty. At the same time, we also see like we only have a kind of a certain number of brands that are really making the difference.
I'm quite optimistic here, and I'll tell you why. If we look into our product portfolio, and Alexander was addressing that, we cut down by 75%. We simply have too many SKUs that we still carry. This is just crazy. Why? Because there is no focus in terms of how we make our go-to-market happen and how we kind of structure our investments. Second, and my team knows that, and they should really hear the audio file afterwards. Why do we have a KC1000 product in Amazon? That is just crazy. I mean, that's the worst entry product that we can put into the consumer market as this is only dedicated to public sector companies, which is fine. There was a mix in the past where we put fewer public sector products into the market for consumers.
This is exactly where we see a dilution on the brand. We see a dilution on the price competitiveness and all of this. Having said that, in the already existing portfolio, we have strong innovative product there. We simply need to focus on that rather than going with the ones. Obviously, they deliver high volume in terms of quantities, but not good in terms of revenue per unit and obviously margin per unit. There are some kind of very, very relevant innovations coming up in the upcoming months. I would say like the cleanup in that specific segment, and you have seen that we have kind of a market share increase and all of this is fine. It is very clear that we need to really push more on cordless. We need to focus on less products.
We need to focus on the right products, and we need to really go into Hero. At the same time, it's very clear that our ambition to be price-wise closer to a company such as Logitech needs to become a realistic approach. Why? Because we all think that the Cherry brand is even above Logitech. If you're really looking to what we have put into market in terms of products on the price level, we have kind of been by far under the level of Logitech. Again, it's all about planning and execution. We have it. I tell you, we have it. We just need to become better. Having said that, we became already better in the last four to five months. I am quite optimistic that we can get there.
The most important, I can tell you, also underpinned by Alex in this page, different work of cooperation with our distribution partners. As simple as it is. Everybody would like to make some money as we would like to make some money. That's exactly the point. If there is a deal where we cannot make any money, why should we make the deal? That's exactly the way of talking that we have in all the business talk right now. Still a good brand, but we need to ensure that everybody is kind of agreeing and making the purchase on the right product, which should carry the Cherry brand.
As only a short add from my side, the crucial point is the portfolio.
It's the portfolio review and the portfolio cleanup and the, so to say, clear focus in the portfolio on the different specific customer groups.
And again, if you would like to apply for the job, just do. No one needs to know that. Just send it on my email.
Thanks for the offer, but I hope you make it.
You c an't deny the third try, okay?
You know, it's always easier to be the critic on the sideline than doing the job.
Yeah, yeah. I know what you're talking about. Thank you.
Thank you, Jörg. Once again, if you would like to ask a question, please press nine followed by the star key on your telephone keypad. There are no further questions at this time, and we're running out of time anyway. I hand it back to Oliver for his closing comments.
I would like to say thank you very much to my team. Running a machine like this based on very strict cost management, liquidity management aspects is challenging because everybody would like to look into innovation, into doing investments, into growing, but this was all about getting the nuts and bolts done. The inventory down management, we're going to see even further decline. By the way, we started with EUR 84 million inventory in 2023, mid of 2023. In a certain way, we did a pretty good job here, but still, we need to keep pushing here. The extension of the partnership with UniCredit, I think that's a major milestone. I already expressed my warmest regards and my warmest thank you to the finance team. It was amazing, but also General Counsel did a fantastic job. Thank you very much on that one here.
It will remain an intense journey given the macroeconomic effects. Again, I'm not using that as an excuse. It's not even apologizing. It's really explanation. It's crazy when you wake up early in the morning, the first thing is obviously you read the breaking news. Okay, what is the next tariff that we can face there? Then it's back and forth. That's my only kind of final comment on that one. I really ask everybody that is in politics, you got to work on the framework that we have as a continuum and obviously that we ensure that we can make our business. Changing the rules on it on a daily basis is just crazy. Again, we manage it the best way and we know what we need to do and we are absolutely dedicated to really get this done.
We are all on the same mission here. I really like to say thank you again to my team for being with me on that journey. You must be crazy, but I love that craziness. Thank you very much for being on that call. Talk to you soon.
Thank you.
Thank you.