Cherry SE (C3R) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Cherry SE Investor and Analyst 2024 Half Yearly Earnings Call. [Operator Instructions] 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's 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 & IT from the 1st 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 is going to run you through our major H1 and Q2 KPIs. Then Udo takes over and shares with you the current status of our restructuring as well as an update on our 3 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 3 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 5-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 keyboard 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 advance payment. This allows us to avoid our own warehousing and the associated inventory risk. Second, the components for the Digital Health & 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 & 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 controllings, we have more closely synchronized the 3 business segments of Cherry SE, which is Components, Gaming & Office Peripherals and Digital Health & Solutions. This leads to a coordinated research and development plan which prevents the application and the associated unnecessary costs of the past. These decisions are now better aligned cross functional which noticeably strengthens our position vis-a-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 segment, 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 personnel measures for the realignment have been implemented considering local legal requirements and the individual notice periods of the employees affected. Digital Health & 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 finally increased significantly. With our e-health 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 1st of August this year. Volker, please?

Thank you, Oliver. Good morning, ladies and gentlemen. Let me also thank you for your interest in Cherry SE 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 to 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 -- or that's EUR 1 million more versus quarter 1 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 2 is now 2.3 percentage points better than in the same period last year. We have, therefore, already significantly improved our operating profitability. Negative impact on our profitability in the first half of this year was, however, caused by some one-off cost, 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 & Solutions 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 the 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 Peripherals segment and the EUR 3.1 million in the Components segment in the first half of 2024 were more than offset by the growth in the Digital Health & Solutions 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% to 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 COO, Dr. Udo Streller will now provide you with the latest information on restructuring.

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 is 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 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 faced 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've once again realize reasonable margins on the market price. We will realize an annual savings of EUR 5.5 million by cutting 1 out of 5 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 3 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 & Office Peripherals division, the main focus was 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 volumes, we are preventing a dilution of our margin for these product ranges. At the same time, we have launched a program to produce 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 of office applications. There's an ongoing market and renewable need. As already mentioned by Oliver, the division mentioned next, Digital Health and -- DHS is currently our growth driver. Market demand has increased significantly due to the regulatory requirements and opportunities offered by digitalization. We manufacture our 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 electronic prescription 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're also manufacturing products for customers with special hygiene requirements, active key as a brand for hygienic keyboards in USA has already been mentioned or for data security. Well, in total, let me emphasize the second quarter was the most successful ever for these subdivisions. And with this, Oliver will give you the outlook.

Thank you very much, Udo. A lot of brokers in the 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 free float, 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 percent 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 50.2 -- 52.2 in May. And in the U.K., the composite flash 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 exasperated 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 forecast 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 3 other OEMs. This underlines our willingness to work together with manufacturers to develop innovative and specific solutions, and we are receiving positive feedback on our ULP and MX2 switches, including the first samples from our production in China that we shared 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. GE.ON, which is 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 & Office Peripherals 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 Dixon 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 MediaMarktSaturn. This includes inclusive 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 1.5 million in this segment in Europe. 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 & 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 older 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 markets, 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 that EUR [indiscernible] million in additional revenue in the second half of 2024, around [ EUR 25 million ] 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 surgery is a considerably 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 staffs. 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. Mathias Daehn 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 1 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 stable 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% to 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 head count reduction and startup 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 periods show large jumps, of course. However, please bear in mind that '23 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 to EUR 150 million and an adjusted EBITDA margin in the range of 7% to 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 you, Nicole.

Thank you, Oliver. Operator, back to you.

[Operator Instructions] The first question comes from 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 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 & 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? So that's my first question. Probably, we can go one by one.

Okay. First of all, we're not providing margin level on 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 friendly. If we look into the last 3 years of the company, we always fall -- 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 2 quarters. And when I say, like, margin is over volume, that also means, like, the major key metric for this year is the EBITDA margin. 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 gross margin guaranteed. And therefore, obviously, going through the entire balance sheet, our adjusted EBITDA margin is also guaranteed.

And how do you look at the fact that you might be losing some market shares by doing this, if that's a bit of a concern that you take on board with you?

Yes, 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 -- in a market share battle yet quite frankly, while we absolutely go in after 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. And that also should reflect on that we're not going to limit the size of the business with our distribution. We simply going broader and deeper into the market.

Got it. Okay. That's on the first one. And 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. And also, I think you said that the market itself -- so let's say the sum, in a way, stepped up because of this electronic patient records mandatory rollout from the government. Given that you already own such a large part of the market, and we know the revenue figure from you, so we can kind of, let's say, have an understanding of the total sum in Germany. I'm just wondering how much can you actually grow or in a way, you know, how much the market is growing, because if you already own the market, but the market doesn't really grow, then you know that this 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 2 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. And we 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 -- 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 the digitization of the medical sector, like the nurseries and the physiotherapists. And this is something that is, 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 business model to add more kind of cloud services on our platform as an ecosystem. And that's exactly what we're starting. So when I say, like, we have the first kind of services on license 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. And the fourth element, and you're absolutely right, I already shared it in one of the investor calls previously. It's very interesting to see that when, for instance, institutions from the United States look at the European markets 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. And then they say, like, if you have an agnostic technology that you can bribe me with, can we use that? And obviously the answer from us is yes. And that means, like, we can -- 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 Quadranti was selling the same products to the same type of audience. So the good news is that with the Digital Health & 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 basis, which is very promising from a future perspective.

Understood. And the final one. Yes, it's more, let's say, on the risk for the guidance, especially on the revenue side, a bit concerned with that. 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, how much visibility do you actually have in the revenue, because probably also had quite a good sense for the revenue in Q2, which unfortunately didn't really materialize 100%. But applying the same, let's say, [indiscernible] on Q3, and obviously Q4, implied revenue, just a bit, let's say where we do that, that could be of a challenge, especially in Q4. So the implied -- based on the Q3 revenue guidance, the implied revenue for Q4, it's EUR 44 million. Looking into my model, Cherry got to this figure only twice in the past at the peak demand of the market. So that is pretty much during corona times. So just not really a question, but I guess you can -- maybe you can try to kind of, let's say, comment a bit on this kind of concern from my side, and how do you actually look at this from within the company?

It's a good question and we were receiving -- and we were expecting that question. So, first of all, I would like to say that 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 say, 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 the 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 is our cost side on top of that. But it's the first time in 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 2 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 e-receipt 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 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 negotiation with Chinese players, it's completely new to the company, but we have kind of 2 parties helping the business head 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 mid-term, not on the short term. And then we're talking about Office & Gaming Peripherals. And again, very promising what we have learned yesterday from the call of Logitech, and also to see that everybody is now looking into more kind of focus on sell-out activities rather than sell-in, which, honestly, I could not more agree that's exactly the right thing to do. But if someone like Logitech is obviously expanding the entire market, then obviously that means like it's a revitalization of the market, which can be promising. While we are still conservative, that one here, it's for the same reason, like I stated before, we always missed 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's 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.

The next question we have is from Jorg Philipp Frey, Warburg Research GmbH.

Well, I would start a bit with the Components business. You mentioned 3 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 over the year? And if you can give us, I think, pricing wise, it's difficult to share something, but is this business, in terms of gross margin, how much dilutive is this Components business assembled in China for you? It'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? And 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, that it means like some of the engineering capacities will also be taken 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 and 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 cheap type of top class 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 I 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. So also here I would say like that we have a better positioning than before.

Sounds good. So just add on this one. Is there a difference in the right to market to use the Cherry co-branding regarding the assembled in China chips 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 response on some of the production is taking place in China. It's even vice versa quite friendly, because as you know, this is the volume that goes specifically with the larger OEM partners 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 solves 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 an 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 -- getting transported over to office. That means we don't have the duplication in R&D anymore. So all of this obviously quite a nice kind of extra aspect from the Project North, as we called it internally. And again, a lot of kudos to Udo and his team to really make that happen, not on time, but even obviously faster. And with all the measures that we have defined internally, hit all the measures by 100%. And this is also kind of showing that we know what we have to done -- 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 it 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. And would you attribute that mostly to the replacement of older terminals, to new user groups, what you alluded? Or do you think that the e-patient record has actually even played a role right now in a better outlook for H2 just...

Yes. It's a very good question, Jorg. First of all, obviously, we really see the rollout in the pharmacies, which are the ones, obviously, they really play the fundamental, important part when it comes to the e-receipt. It's a bit of a funny story. So in Germany, as you know, when we had the first 50 million e-receipts activated, we already have seen the big news in the magazines, wow, that's a disaster. Germany is not able to really get digitized. Now we have 2.5 million e-receipts 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 #1 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 -- 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. So we are very carefully managing our forecast and the e-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 4 weeks period in terms of producing and delivering more product, it's very clear that obviously we are clearly sell-out driven. When our parties 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.

Yes, indeed. And what also was very nice, 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 not EUR 5 million. Sorry, most probably I was a little bit not clear enough in my speech, but it's not EUR 5 million, obviously. And again, for me the most important -- yes, 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, and 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 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 digitalization of the medical sector. And 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 achieve.

Yes. And in this regard, I think you mentioned the telematic messenger or whatever the precise term then will be once the product is launched. So 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 a medical profession?

Which is still the number one standard, I have to admit, in hospitals, right. But there will be 3 messengers. Now, you know that we are in very close relationship, obviously, with the authorities, the legal authorities and the institutions there. And it's interesting because everybody was expecting 1 messenger standard. This won't be the case. What we're going to see is most probably 1 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 ecosystem, such a hospital. Well, having said that, all good for us, because obviously, if we can have licensed business based on 3 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 noted, from other app based services. But again, the more we are 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 Cherry. 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.